Susser Holdings: The Full Plate Club
Susser Holdings Corp. (Nasdaq: SUSS) wants to take a Texas-sized bite out a growing and vulnerable market. What with re-branding, expanding, adding restaurants and hunting for acquisitions, the Corpus Christi-based convenience store and gas distributor is positioning for a feast.
Reasons for the hullabaloo are clear. Susser Holdings operates mainly in the bounding economy of south Texas, as well as north to Oklahoma, and in a developing, fragmented business. The U.S. convenience store industry is expected to increase to $559.9 billion in 2009, from $474.2 billion in 2005, for a compound annual growth of 4.2%. Small operators with 50 or fewer stores made up about 74% of all convenience stores run by retailers in 2005, according to the company’s annual report.
Susser has a history of exploiting the patchwork convenience store business, having completed nine acquisitions in the last 17 years, adding 326 retail stores and 234 motor fuel dealers. When current CEO Sam Susser joined the company in 1988, it ran five stores and had revenues of $8.4 million. Susser now has 325 stores and revenues of $1.9 billion. The company went public in October 2006, pricing 6.5 million shares at $16.50. Shares were trading Wednesday at $16.30, giving it a market capitalization of about $274 million.
To strengthen its identity, profitability and flexibility, Susser has dropped its deal with Circle K stores and has re-branded its own stores with the Stripes name. It also in 2006 agreed to a long-term contract with Valero fuel, as opposed to CITGO; Susser is the largest non-refining motor fuel distributor by gallons in Texas. Those transformations are virtually complete, with the changes coming at a whirlwind pace. Next course: Adding 18 to 22 new large format stores in 2007, each with a Laredo Taco Restaurant, and putting more of these restaurants into existing stores.
The restaurant, a high margin business, complements the strong Texas Hispanic demographic. While just offering breakfast and lunch now, Susser is trying out dinner service at select restaurants. There are more than 150 Laredo Tacos, and the company wants to put 30 to 45 more in current stores, as well as into all new outlets.
Susser believes the restaurant will drive growth in profits and same-store sales. So do analysts, although timing expectations vary. Of the three that follow the company, one rates it a “hold,” another “market perform” and the third—Dean Haskell at Morgan Joseph and Company—a “buy.”
Haskell notes that Susser’s range of convenience store selections emphasizes higher-margin beverage selections, a large coffee bar, and foodservice--pointing to the Laredo Taco Company--versus lower margin cigarette and motor fuel sales, which is typical of most convenience stores.
Haskell said in a May18 note after first quarter results were released that he believes the company deserves an above-average enterprise value/EBITDA multiple of 9.0X, resulting in a price target of $21.00. Susser’s peer group carries an EV/EBITDA multiple closer to 6.3X. EV/EBITDA is a measure that the Susser and analysts use to evaluate profitability.
Haskell cites, among other factors, the rapidly growing economy of south Texas and management’s proven ability to integrate acquisitions. More than that, Susser earlier this month held its first analyst meeting. Haskell told SmallCapinvestor.com: “I was impressed with the integrity of the management and their knowledge of this business,” two top factors in assessing companies.
Even Timothy Allen, analyst at Jefferies and Co., who has a “hold” on the stock, put a bullish tone in his research note of May 18. He said Susser “appears well-positioned to take market share in many high population growth markets of Texas and is likely poised to double its EPS over the next couple years.”
Allen, though, cautioned that higher upfront costs as Susser rolls out larger stores and the restaurants will dampen earnings in the near term. Risks also include narrowing fuel profitability and any delays in new store expansion.
John Lawrence, analyst at Morgan Keegan, also sees significant longer-term opportunities for Susser, considering the number of convenience stores in Texas and favorable demographic trends. But he said in his note that current valuation puts him in near-term neutral, and he rates the shares a market perform.
For its part, Susser has some factors other than restaurants, demographics and size on its side. To some extent, convenience store gas sales are cushioned against high fuel prices. “A lot of our customers buy gas at ten dollars a time,” said CEO Susser on the company’s first-quarter conference call May 17. “If prices go up, they just come back more often.” Return trips give people added chances to fill their own tanks on tacos, sodas, donuts, coffee.
The same with cigarettes, which make up 19% of Susser’s merchandise sales—well below the high-30% sales makeup for the industry. A hike in taxes in Texas dimmed sales in the first quarter, particularly for cartons. But smokers who buy by the pack already have come back. Susser makes more money on pack sales than cartons anyway.
Acquisition talk flew on the conference call. CEO Susser said the company is “very seriously committing time and energy to trying to develop those opportunities.” He added: “We feel capable of handling a very significant acquisition.”
Susser’s annual report says there are about 20,000 convenience stores in Texas, Arkansas, Louisiana, New Mexico and Oklahoma, a region under intense competitive pressure from hypermarkets and other supermarket operators, making it ripe for continued consolidation.
“If we can’t double the size of the company in the next few years, it will be a personal disappointment to me, I assure you,” CEO Susser said.
Susser’s plate is full, yes. But, barring a spill, it seems just a matter of before the company cleans it.
