Canadian Rate Cut Winners: ATD, Can the fuel sales giant seize growth opportunities amid the interest rate cut?

As one of the largest convenience store operators in Canada, ATD operates in 24 countries and regions worldwide, with about 14,300 stores, of which about 9,295 are in North America. The company has won the favor of global consumers with its innovative business model and deep understanding of customer needs.

ATD's main business can be divided into the following aspects:

（1）Road Transportation Fuel: ATD not only provides convenience store services but also engages in the retail of road transportation fuel. It has gas stations in multiple countries and regions, providing convenient refueling services for drivers, which is an important part of its business.

（2）Merchandise Services: ATD's convenience stores offer a variety of products, including food, tobacco products, magazines, lottery tickets, and other daily consumer goods. These merchandise services meet the immediate needs of customers and are key to attracting customers to convenience stores.

（3）Other Services: In addition to traditional convenience store products and fuel sales, ATD also provides a series of value-added services, such as ATMs, phone card sales, ticketing services, etc., to increase customer convenience and enhance the customer experience.

Chart: Main Business Composition

Through the acquisition of TotalEnergies, ATD has welcomed four new countries, nearly 22,000 new team members, and 2,175 sites to join the Couche-Tard family. The company has not only expanded its business to new geographical areas but also further enhanced the company's market competitiveness and store network coverage.

The company's senior management stated that the acquisition of ATD is expected to achieve about $187 million in synergies within the next five years. Currently, ATD has achieved good results from the current integration process, successfully reshaping the first two Circle K stores and rebranding in Berlin and the Netherlands.

As of the end of March 2024, ATD has implemented the Inner Circle plan in more than 4,000 stores, and the company has also expanded three new business branches at the beginning of March, bringing the total number of shopping categories for Inner Circle members to 10, with a member network covering more than 30 states in the United States.

In the third fiscal quarter, the company further expanded the number of Inner Circle members through measures such as fuel and food rewards. According to the company's announcement, the Inner Circle plan currently has 1,600 members, including nearly 5 million official members in the United States, nearly doubling the total number of members at the end of the last quarter, which was 8 million; at the same time, 25% of ATD's current store transactions come from Inner Circle members, who visit the store more frequently and spend more. Thanks to the growing number of members, the company's total store revenue in the third fiscal quarter reached 6.83 billion Canadian dollars, an increase of 1.7% year-on-year.

In the latest fiscal quarter, ATD leveraged B2B business to expand the global fuel supply chain and cooperated with the Musket subsidiary to sign purchase agreements with multiple fuel suppliers to reduce fuel procurement costs and further improve the company's fuel sales profit margin.

According to the latest financial data, ATD's fuel sales business revenue in this quarter was 19.4 billion Canadian dollars, an increase of 18% month-on-month, and the company's fuel sales gross profit margin in North America even reached 58.52%, showing the company's excellent performance in the fuel business.

1.Strive to maintain stable performance under short-term headwinds

In ATD's latest financial performance for the third quarter of the fiscal year 2024, the company's total revenue was 26.6 billion Canadian dollars, a year-on-year decline of 2%; the adjusted net profit was 846 million Canadian dollars, a year-on-year decrease of 15.5%, indicating that the company's performance is still in the stage of headwind development.

The poor performance of the company is mainly due to the recent economic headwinds, the rise in oil prices leading to an increase in the cost of the fuel industry, and the continued weakness in cigarette category sales, such as in the Hong Kong market, ATD's performance has declined by about 4% due to a significant increase in cigarette taxes and the continued weakness of the tourism industry.

Chart: Fuel Prices (USD)

The company stated that it will take a series of measures to ensure the company's performance development in the adverse environment. In the US market, ATD has developed the Inner Circle into a membership growth plan through measures such as fuel rewards and food rewards, and has also cooperated with nicotine suppliers to launch personalized tobacco sales plans for different age groups; in the Scandinavian Peninsula, ATD has implemented a new grading concept, starting from user visit peaks for marketing activities, to promote store traffic; in addition, in the European market, ATD has exclusively launched Red Bull Purple cans and other products to stimulate revenue growth in the European market.

At the latest performance meeting, the company's senior management stated that ATD will continue to maintain the stability of fuel supply and trading capabilities through a series of measures. In Europe, ATD's newly built fuel supply and trading capabilities (headquartered in Geneva) are advancing, integrating the fuel supply chain by expanding supply paths; in North America, the company will continue to invest in the development of B2B products, providing fuel self-service solutions in gas stations, and increasing the number of diesel truck stations on highways.

In addition to traditional fuel business, ATD has also made significant progress in the field of electric vehicle fast charging networks. Currently, the company has more than 2,400 charging points worldwide, covering four new European countries, and has added 50 heavy truck charging points in Sweden, demonstrating the company's active response to new energy trends and forward-looking layout for future market demand.

On June 5, the Bank of Canada announced that the Canadian interest rate would be reduced from 5% to 4.75%. For ATD, this interest rate cut policy will reduce the company's borrowing costs, improve the company's financial flexibility, help the company's future expansion plans, and enhance ATD's ability to reinvest in existing businesses.

In addition, the interest rate cut is also expected to reduce the company's weighted average cost of capital (WACC) and loan interest expenses. The former is beneficial for improving the assessment of the company's net present value, and the latter is beneficial for increasing the company's cash flow, both of which help to enhance the valuation of ATD.

Overall, since more than 70% of the company's profits come from fuel sales, ATD's performance will still be affected by the rise in crude oil costs in the short term and cannot achieve rapid growth. At the same time, as the global economy has not fully recovered, the development of tourism and consumption in various markets is also relatively flat, and the company's retail business is also difficult to welcome growth opportunities in the short term.

However, it cannot be denied that ATD is an excellent fuel and food sales company. In the face of adverse circumstances, the company still adopts a series of measures such as mergers and acquisitions and the development of new energy businesses to develop and strive to maintain its own business profitability.

In the long term, as the global macroeconomy recovers after the epidemic and the interest rate cut stimulates people's consumption willingness, the company's performance may usher in development opportunities; more importantly, if crude oil prices fall in the next few quarters, the company's cost of purchasing fuel will drop significantly, directly driving up the company's fuel sales profit margin and further bringing the company's performance back to the growth range. Therefore, for investors, paying attention to crude oil prices and choosing the right buying time is the key to earning investment returns.