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Alimentation Couche-Tard (ATD.B) Stock | TSX: ATD-B.TO

The Convenience Empire

Corporate Profile:

Alimentation Couche-Tard Inc. ("ATD") operates a network of convenience stores across North America, Ireland, Scandinavia, Poland, the Baltics, and Russia. The company primarily generates income through the sale of tobacco products, groceries, beverages, fresh food, quick service restaurants, car wash services, other retail products and services, road transportation fuel, stationary energy, marine fuel, and chemicals. In addition, the company operates more stores under the Circle K banner in other countries such as China, Egypt, and Malaysia. Its operation is geographically divided into U.S., Europe, and Canada. Revenue from external customers fall mainly into three categories: merchandise and services, road transportation fuel, and other.

Growth

56

Valuation

96

Quality

40
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Where Are We Now

Updated on: 11/12/2021

Conviction Score

5

Brick-and-mortar is dead…or is it? Couche Tard is taking the other side of that bet. While other retailers struggle against online retailers, Couche Tard’s on-the-go products and convenience store model will never go out of fashion. We think Couche Tard today still has a huge runway as it navigates the extremely fragmented US market and other markets that have bigger players selling off their assets.

  • Couche Tard is all about value creation through smart acquisitions. It is operating almost 14,000 locations around the world. In the latest quarter, Couche Tard added another 261 retail, fuel, and dealer locations.

  • Couche Tard printed 40% revenue growth in the latest quarter, but much of this increase is coming from increased fuel prices. The company is definitely growing at much lower “normal” rates than 40% but it is still a quality and growing acquirer.

Investment Thesis

  1. Alimentation Couche-Tard, an owner and operator of convenience stores, is a growth by acquisition company who meticulously optimizes their retail experience.

  2. Locations are able to perform well due to the vices they cater to providing quick convenience for customers. Popular vices such as cigarettes and “on-the-go” foods are offered in ATD’s stores, bringing in a consistent returning customer base.

  3. The growth of electric vehicles is a risk to store traffic, but presents opportunities in larger basket sizes and seeing positive results from building charging infrastructure across locations.

  4. ATD has had an early investment in the retail cannabis industry with companies like Fire & Flower, posing as a positive tailwind as the industry continues to grow and gain popularity.

The Basics

Alimentation Couche-Tard is a company that manages a chain of convenience retail stores across the United States, Canada, and other European countries. The company holds three brands: Mac’s (known as Couche Tard in Quebec), Circle K, and a European-exclusive, Ingo. Their main goal is “to make everyone’s lives a little easier” through their ease of access gas pumps and convenience stores. 

 The stores carry common items such as snacks and drinks, referring them to as “on-the-go foods” in addition to cooked items such as pizza and hot dogs. Outside of their stores, most locations have pumps to fill up gas, while also having electric vehicle chargers in select European locations.

Alimentation Couche-Tard’s main business model includes:

●      Merchandise and Services

●      Road Transportation Fuel

●      Other Revenues

Alimentation Couche-Tard Revenue by Segment (Q1 2022)

Source: Alimentation Couche-Tard Investor Relations

Alimentation Couche-Tard Revenue by Region (Q1 2022)

Source: Alimentation Couche-Tard Investor Relations

Commencer Avec Un Dépanneur (Starting with One Convenience Store)

Alain Bouchard, a businessman, opened up his first convenience store in Laval, Quebec, in 1980. This was a basic store to give consumers quick access to items at any time of day.

Five years later, Bouchard went on to acquire 11 more stores to merge with his current store, creating a company called “Alimentation Couche-Tard”. These stores were spread out through different parts of Quebec, specifically in Quebec City, Montreal, and Laval.

He then went on to purchase even more companies, buying out the retail store chain 7 Jours. To date, Bouchard has not merged 7 Jours with ATD and has kept it a separate chain.

Alain Bouchard’s main strategy with Alimentation Couche-Tard was growing by acquiring convenience store chains. In order to grow the presence of his stores, Bouchard purchased smaller stores, and consolidated them into one brand, Couche-Tard.

In 1994, the company acquired La Maisonneé and Mac’s, giving them a significant market share of all convenience stores across Quebec.

In the early 2000s, Alimentation Couche-Tard expanded its business outside of Quebec, starting with Johnson Oil Company, acquiring 172 branded convenience stores across America.

In 2003, ATD acquired Circle K, a gas station/convenience store chain with locations in different parts of the United States and Canada.

By the end of 2015, Alimentation Couche-Tard decided to adopt the Circle K name across all of its stores for brand recognition reasons but kept their stores in Quebec as “Couche-Tard”.

The Global Footprint

Alimentation Couche-Tard has a global footprint which spans across 13 different countries and over 15,000 stores.

The company utilizes its acquisition strategy to buy out smaller chains and use its location to insert their brand.

ATD continues to use their brand awareness when opening up new locations in the United States and Canada, as Circle K has grown to be one of the most popular convenience stores across both countries.

ATD's Global Footprint on a mapSource: Alimentation Couche-Tard Investor Relations

A Look at Acquisitions

Overview

Alimentation Couche-Tard is known for its growth by acquisition model, dating back to when the company first started. They have an excellent track record of buying out smaller chains of stores and rebranding them into the companies’ select brands. 

Acquisitions are selectively chosen for their real estate as ATD prioritizes select stores and chains which are popular and receive lots of traction.

The management team is obsessed with excellence.

Historically, the company has shut down many of their stores because of lower sales. In 2010, ATD shut down 300 of its locations because they were not in ideal zones and had low sales figures. 

This decision was made to allow other nearby locations to continue to do well and prosper. 

The company is constantly looking to refine their store locations, holding a standard of excellence, to ensure each of their stores are performing well and generating growing figures.

Alimentation Couche-Tard Revenue ($M) (Q1 2022)

With this in mind, Couche-Tard is always looking to make the right acquisitions which fit their needs geographically and financially. Their most recent acquisitions have been in regions that their brands are currently not in, helping to further expand their business and global footprint.

The Acquisition in Asia

At the end of 2020, Alimentation Couche-Tard completed an acquisition to buy Convenience Retail Asia, an asian convenience store holding company, giving ATD the rights to over 400 stores in Hong Kong and Macau. This was a big step for the company as the acquisition was an entry into the asian convenience store market.

The Strategy

After meticulously selecting specific chains and locations, Alimentation Couche-Tard utilizes a strategy of taking on some debt to go through with an acquisition. This is the reason for their emphasis on finding the right acquisitions at the right places. Their plan is to build a location that is successful, generate positive free cash flows and use that money to pay back the debt over time.

This is how the company is able to be so active with their acquisitions. They use acquisitions to fuel and fund even more acquisitions to continually grow their empire, creating this positive feedback loop.

Alimentation Couche-Tard Free Cash Flow ($M) (Q1 2022)

Investing in Cannabis

Since 2017, ATD has had a keen interest in retail cannabis and has been investing in its opportunities.

Once Canada legalized the usage of recreational cannabis in 2018, ATD jumped to the occasion, saying it had great potential and was something to not ignore. 

By 2019, the company had invested in the cannabis retailers, Fire & Flower and Canopy Growth Corporation.

FireFlower Logo x Couche TardSource: Tabacco Business Magazine

Alimentation Couche-Tard currently holds a 15% stake in Fire and Flower. Both companies have come to an agreement to operate select stores adjacent to one another. The two Fire and Flower stores recently opened in Grande Prairie and Calgary, Alberta sit right beside Circle K.

This stake could help Couche-Tard as the legalization of cannabis has had positive tailwinds on the industry with more potential to grow.

Catering to Vices

The concept of the convenience store is simple. It is usually a mid-journey store to fill up on gas and grab a few items quickly. Compared to typical retail stores, convenience store trips are usually less than 10 minutes. 

Since many locations serve gasoline, customers can stock up on goods quickly when getting gas.

What stores like Circle K and Couche-Tard capitlize on during your 10 minute trips are vices. These are bad habits and addictions that provide people with quick dopamine hits. 

Some examples of vices include cigarettes, alcohol, and unhealthy foods. 

For convenience stores, they are the go-to stop for consumers to get quick access to these vices without going to a large retailer. 

Alimentation Couche-Tard is able to maximize on consumers cravings by giving them easy access. It is simple to walk over to a Circle K, grab a pack of cigarettes or chips, and head back home in a matter of minutes.

ATD takes advantage of these vices and as long as consumers keep craving, stores will keep supplying.

A Push Towards Electric

Alimentation Couche-Tard is a convenience store, but some locations also have gas pumps. 

In Europe, ATD pushes for a more electric approach instead of gas pumps, by providing more electric charging stations with their locations.

EV Chargers in NorwaySource: News.abb.com

In Norway, there is an extremely high demand and presence of electric vehicles. To supply this need, Circle K has installed over 4,200 electric vehicle chargers throughout its various locations. They are known to have the most charging stations in all of Norway.

Circle K has taken it a step further by having a dedicated electric vehicle lab situated in Norway, to study and experiment on electric vehicles and future sustainability.

Risks

Growth by Acquisition Strategy

As mentioned, Alimentation Couche-Tard primarily grows by acquisition. The company strategically levers up the balance sheet by taking on some debt when buying a company and paying it off with the free cash generated from the new locations. This is then used to fuel more acquisitions. The strategy has worked well and has a proven track record of success, but it may be risky if ATD makes a poor decision with the company it acquires.

A weak acquisition could result in a lot more debt for the company if the location does not perform as well as planned. They take on the risk of incurring debt, which may not always be the best idea.

Monopolistic Activities

On the other hand, having too many acquisitions may also pose a threat. Any sort of monopolistic activity may raise a flag with the government, and they are able to easily shut it down. 

In the beginning of 2021, Couche-Tard was in talks of an acquisition with a French grocer called Carrefour. Very quickly, France’s finance minister shut down the proposal as it would have created a powerhouse of a company as ATD has a sizeable north american market while Carrefour had a strong presence in European countries.

Investors should be weary of Alimentation Couche-Tard’s future acquisitions while keeping track of their financial statements, especially their debt figures.

Tobacco Decline

A big part of why convenience stores do well is because of the vices they supply to. One of the most popular vices are cigarettes, as convenience stores and gas stations are the go-to for these products.

Till now, tobacco products have done well, especially because of the pandemic, but the overall trend of tobacco has been on a decline. More people are either quitting them completely or switching to e-vapourizers. 

Despite providing a solution to this risk, ATD is still losing interest in one of its biggest markets. Investors should keep an eye on the tobacco market and its usage.

Charging at Home

In European countries, charging stations are very prominent among many Circle K locations. 

The risk lies in the growing number of people deciding to charge their vehicles at home. Statistically, 80% of electric vehicle users charge their vehicles at home as opposed to charging at a station. 

Alimentation Couche-Tard capitalizes on the idea of encouraging bigger basket sizes and welcoming customers who either want to fill up gas or charge their car. These customers tend to pick up small items to purchase in addition to their fuel. 

When more consumers are opting to charge their vehicle at home, they will be visiting ADT locations less frequently, which may hurt the business.

The Bottom Line

Alimentation Couche-Tard has been a powerhouse when it comes to convenience stores. Their three well-built brands of Couche-Tard, Circle K and Ingo have translated into a growing number of stores across North America, Europe and now Asia.

ATD’s growth by acquisition strategy may be risky, but it has done well up until this point. Taking on debt per acquisition to then pay it off through successful cash flows has allowed the company to expand its business while generating growing top line revenues and free cash flow.

This acquisition strategy has also allowed the company to grow its global footprint. 

Despite majority of their stores residing in North America, they continue to seek new opportunities, such as their recent acquisition to enter the asian convenience store market.

What Alimentation Couche-Tard does well is supply the needs of consumers’ vices. These convenience stores give quick access to goods such as cigarettes and junk food. As long as people are craving, the stores are supplying.

The biggest risks that stand in Alimentation Couche-Tard’s way are poor acquisitions and the government. As their business model is heavily dependent on growing through acquisitions, any poor decisions may have a harsh impact on the business and their financial statements.
On the flip side, too many acquisitions pose a threat from the government as they can easily shut down to agreement for monopolistic activity.

Many consumers are also opting to charge their vehicles at home which may pose a risk to the number of customers that enter the store.

Alimentation Couche-Tard has grown tremendously over the years and will continue to flex their global presence and capitalize on vices. As they look to expand their business for new opportunities, they will continue to build their brand and grow their convenience store empire.

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