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Couche-Tard misses expectations even though Q3 profit soars 64.2 per cent

MONTREAL – Alimentation Couche-Tard says it will keep “an eye on growth opportunities” as it continues to digest a its takeover of Statoil Fuel & Retail in Europe that boosted its profits by 64 per cent to US$142.5 million in the third quarter.

The Quebec-based owner of convenience stores and gas stations said its profit amounted to 75 cents per diluted share, or 81 cents on an adjusted basis.

Couche-Tard (TSX:ATD.B) said it had achieved its own targets, but the results fell short of analyst estimates of 87 cents per share in adjusted earnings or 93 cents per share of net income.

The miss was mainly due to lower than expected U.S. fuel margins, which nonetheless increased nearly 20 per cent to 17.8 cents, and higher depreciation.

Revenue for the 16 weeks ended Feb. 3 was US$11.5 billion – about US$470 million above the consensus estimate – and an increase from US$6.6 billion a year earlier.

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The big increases mainly reflected the addition of Scandinavia’s Statoil Fuel & Retail last summer as well as smaller purchases in the United States during the third quarter.

European assets contributed US$562.7 million in gross profits and more than US$4.4 billion of revenues.

“We continue to improve our network by adding quality stores, while divesting some stores that do not meet our profitability criteria,” Couche-Tard chief executive Alain Bouchard said in a statement.

“Despite the difficult and uncertain conditions in some markets, we grew the organic contribution, both in terms of merchandise, service and motor fuel. With respect to Europe, we are making good progress on identifying and implementing opportunities to improve efficiency and increase revenues.”

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The US$2.58-billion acquisition of Statoil Fuel & Retail was Couche-Tard’s first major foray beyond North America, where it operates under various banners including Couche-Tard and Mac’s in Canada and Circle K in the United States.

Excluding acquisition costs and a foreign exchange loss in the quarter, Couche-Tard would have earned US$153.2 million, up $64.3 million or 72.3 per cent and diluted earnings would have been 81 cents per share.

“Since the acquisition of Statoil Fuel & Retail, we have achieved the goals we had set for ourselves from Day 1 and we remain confident regarding synergies to come,” said chief financial officer Raymond Pare.

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The company affirmed its goal of finding $150 million to $200 million in cost savings by September 2015. In the first 40 weeks after the acquisition, it recorded $17 million of savings before taxes from delisting Statoil, renegotiation of some supplier agreements, lower store costs and department restructuring.

The quarter included a $13.6-million foreign exchange loss, mainly due to exchange rate fluctuations on inter-company balances and conversion of European sales in local currencies to U.S. dollars.

Merchandise sales in existing stores – same store sales – grew by 0.8 per cent in the U.S. and by 1.7 per cent in Canada. Same-store fuel sales grew by 0.8 per cent in the U.S. but decreased by 0.9 per cent in Canada.

Couche-Tard’s fuel margin increased by nearly 20 per cent to 17.8 cents per gallon in the U.S., was 10.46 cents per litre in Europe and increased 13 per cent to 5.88 cents Cdn per litre in Canada.

Analyst Derek Dley of Canaccord Genuity said the company continues to deliver on its growth plans, especially high-margin food services and fresh food, and synergies in Europe.

“The stock is trading off because they missed the consensus but I think the quarter was actually in terms of looking at what really drives the stock in terms of their core growth initiatives it was actually quite strong,” he said in an interview.

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Dley said he expects the results will be volatile over the next couple of quarters as it continues to integrate Statoil.

With US$1.3 billion in available cash and credit, he also believes Couche-Tard will be “opportunistic with acquisition opportunities.

“Couche-Tard’s long-term growth strategy is to be one of the primary industry consolidators and they have the balance sheet to do it so I expect that they might be looking at something quite active over the next six to 12 months.”

The company operates 8,467 locations in the U.S., Europe and Canada, including nearly 2,500 added in the past 40 weeks. It also has about 4,150 Circle K stores operating under licensing agreements in several countries in Asia, Mexico and the United Arab Emirates.

Couche-Tard shares slipped 79 cents or 1.4 per cent to C$54.80 at the Toronto Stock Exchange in midday trade.

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