Earnings call transcript: Arko Corp Q2 2025 sees EPS beat, revenue miss

Arko Corp (ARKO) reported its earnings for the second quarter of 2025, showcasing a mixed financial performance. The company posted an earnings per share (EPS) of $0.16, surpassing the forecast of $0.12 by 33.33%. However, revenue came in slightly below expectations at $1.99 billion, compared to the forecasted $2.04 billion, resulting in a revenue surprise of -2.45%. Following the earnings announcement, Arko’s stock price increased by 1.97% in after-hours trading, closing at $4.14. According to InvestingPro analysis, the company currently trades at a high P/E multiple of 159x, though it maintains a strong free cash flow yield of 30%.

Key Takeaways

• Arko’s EPS exceeded expectations by 33.33%, marking a positive surprise.
• Revenue fell short of forecasts, with a miss of 2.45%.
• The company’s stock saw a 1.97% increase in after-hours trading.
• New store formats and loyalty programs are part of Arko’s strategic initiatives.
• Arko continues its dealerization program, aiming for operational efficiency.

Company Performance

Arko Corp experienced a mixed quarter with strong earnings but a slight revenue shortfall. The company’s adjusted EBITDA for Q2 2025 was $76.9 million, down from $80.1 million in the previous year. Despite this, net income rose to $20.1 million from $14.1 million, reflecting improved operational efficiency. The retail segment’s operating income decreased to $80.4 million from $87.9 million, while same-store sales showed a decline, partly due to ongoing inflation and changing consumer behavior. InvestingPro data reveals the company maintains healthy liquidity with a current ratio of 1.55, though its gross profit margin stands at a modest 14.57%. For deeper insights into Arko’s financial health and detailed metrics, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Financial Highlights

• Revenue: $1.99 billion, a decrease from the forecasted $2.04 billion.
• Earnings per share: $0.16, exceeding the forecast of $0.12.
• Adjusted EBITDA: $76.9 million, down from $80.1 million YoY.
• Net Income: $20.1 million, up from $14.1 million YoY.

Earnings vs. Forecast

Arko’s EPS of $0.16 surpassed the consensus forecast of $0.12, resulting in a 33.33% positive surprise. However, the revenue of $1.99 billion fell short of the expected $2.04 billion, marking a 2.45% miss. This mixed performance indicates a strong bottom line despite top-line pressures.

Market Reaction

Following the earnings report, Arko’s stock rose by 1.97% in after-hours trading, reaching a price of $4.14. This movement reflects investor optimism driven by the EPS beat, despite the revenue miss. The stock remains within its 52-week range, between $3.51 and $7.84, indicating room for growth amidst market volatility. InvestingPro analysis indicates the stock is slightly undervalued at current levels, despite experiencing a significant 36.54% decline over the past six months. The platform’s Financial Health Score rates Arko as ’FAIR’ with a score of 1.98, offering valuable context for investors.

Outlook & Guidance

Arko projects Q3 2025 adjusted EBITDA to range between $70 million and $80 million, with full-year 2025 guidance set at $233 million to $253 million. The company anticipates a modest decline in same-store sales for Q3 but remains focused on its dealerization and store transformation efforts. Future guidance revisions include a projected EPS decline in subsequent quarters, with a significant improvement expected by Q2 2026.

Executive Commentary

CEO Ari Kotler emphasized the company’s strategic priorities, stating, "We are entering the second half of the year with clear priorities and a focus on creating lasting value." CFO Rob Giamatteo highlighted positive trends, noting, "We are seeing month on month sequential improvement in the comp sales trend."

Risks and Challenges

• Inflation: Persistent inflation could impact consumer purchasing power.
• Market Saturation: Increased competition in the retail fuel sector.
• Consumer Behavior: Shifts towards value-based purchasing may affect sales.
• Fuel Volumes: National retail fuel volumes are down, posing a challenge.
• Operational Costs: Managing costs amidst dealerization and store transformations.

Q&A

During the earnings call, analysts inquired about the impact of the loyalty program on customer engagement and future fuel margin expectations. Executives responded positively, highlighting increased customer engagement and strong fuel margins, which are expected to continue.

Full transcript - Arko Corp (ARKO) Q2 2025:

Conference Operator: Greetings. Welcome to Arco Corp. Second Quarter twenty twenty five Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jordan Mann, Senior Vice President, Corporate Strategy, Capital Markets and Investor Relations.

Thank you, sir. You may begin.

Jordan Mann, Senior Vice President, Corporate Strategy, Capital Markets and Investor Relations, Arco Corp: Thank you. Good afternoon, and welcome to Arco’s second quarter twenty twenty five earnings conference call and webcast. On today’s call are Ari Kotler, Chairman, President and Chief Executive Officer and Rob Giamatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10 Q for the 2025 as filed with the SEC are available on Arco’s website at www.arcocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2024.

Before we begin, please note that all second quarter twenty twenty five financial information is unaudited. During this call, management may make forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward looking and cautionary statement section at the end of our second quarter twenty twenty five earnings release for various factors that could cause actual results to differ materially from forward looking statements made during our call today. Any forward looking statements made during this call reflect our current views with respect to future events and Arco is under no obligation to update or revise forward looking statements made on this call, whether as a result of new information, future events or otherwise, except as required by law. On this call, management will share operating results on both a GAAP basis and on a non GAAP basis.

Descriptions of those non GAAP financial measures that we use, such as adjusted EBITDA, and reconciliations of those measures to our results as reported in accordance with GAAP are detailed in our earnings release or in our quarterly report on Form 10 Q for the quarter ended 06/30/2025. Additionally, management will share profit measures for our individual business segments along with fuel contribution, which is calculated as fuel revenue less fuel costs and exclude intercompany charges by our subsidiary GPMP. And now, I would like to turn the call over to Ari.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Thank you, Jordan, and thank you all for joining. Like many in our industry, in the second quarter, we continue to navigate challenging microenvironment marked by geopolitical events, persistent inflation, mixed consumer sentiment and restrained personal consumption. Through it all, our team remained focused and executed with discipline as reflected by our financial performance this quarter with adjusted EBITDA above the midpoint of our guidance. In this environment, we have seen more price sensitivity, greater reliance on loyalty driven offers and continued movement towards value based purchasing. We stayed grounded by focusing on execution, merchandising discipline, loyalty led engagement and controlling expenses, including smarter labor scheduling and tighter cost management at the store level.

We expanded merchandise margin by 80 basis points year over year, driven by category mix, effective promotions through the work our team is doing with our suppliers, and our continued optimization of assortment through back bar resets and loyalty target offers, all while being responsive to evolving consumer needs. We were pleased with improved performance in most of our core categories, and we believe performance reflects the effectiveness of our promotions and our focus on driving growth in key categories. While the second quarter reflected many ongoing pressures, we saw consecutive improvement from May to June, and we are seeing further improvement as we enter the third quarter. Through late July, early third quarter trends in both same store gallons and inside sales have been more favorable than what we experienced in Q2, with same store sales growth for July, excluding cigarettes up slightly year over year. Total merchandise same store sales trend in July was three percentage points better than total merchandise same store sales for the second quarter, which was the best comp performance we’ve seen in the last eighteen months.

It’s still early, but we are encouraged by what we’re seeing so far. Our team remained focused on executing our core transformation strategy, which include advancing our dealerization program, investing in our retail stores by bringing our new format store and our Foodservice Fast Grade brand to life. In addition, we are applying targeted promotions both in stores and at the pump to deepen customer engagement. These efforts are enabling us to navigate today’s operating environment, while positioning the business for sustainable long term growth. Dealerization remain a central component of our long term transformation plan.

We continue to focus on converting select company operated stores to dealer locations, where we believe the long term economics are more favorable for those stores under our Wholesale segment. Since launching this initiative last year, to date, we have converted more than 300 stores and we currently have approximately 200 additional sites that we expect to convert under a letter of intent or a contract for conversion with a further meaningful pipeline for conversion ahead. As previously disclosed, once fully scaled, we continue to expect this program to deliver a cumulative annualized operating income benefit of more than $20,000,000 before G and A. As our dealerization efforts continue, we have identified more than $10,000,000 in expected annual structural G and A savings as we fully scale this program. We continue to believe that by transitioning select stores to dealer locations, we are unlocking long term value.

We previously noted that our dealerization program will facilitate targeted capital investment into our retail stores. As part of this, we are very excited to introduce a new format stores, which include a bold and innovative remodel design to elevate the customer experience and better reflect our commitment to foodservice, convenience, efficiency, and community connection. We developed this new format over many months with our internal team and outside consultants, including learning from customer focus groups. This new format includes a complete remodel inside and outside the store, a modernized layout, and we have introduced our new food and beverage concept, Fast Crave, which elevates our food and beverage offering to grow food service as a differentiator across our network. We opened our first new format store on June 25 in Ashland, Virginia.

And while it has only been open a short time, we are pleased with its initial performance. Early results show outperformance in foodservice and dispensed beverages, as well as key categories like candy, packaged beverages and alternative snacks relative to the rest of our stores. Our second new format store opened this morning in Mechanicsville, Virginia. Importantly, we have identified the next tranche of stores to be remodeled in the new format, focusing on improved customer experience and with foodservice as a focus, which we believe is a critical area of opportunity for ALCO. We are in various stages of engineering designs and layout on this next tranche of stores.

Turning to our new to industry stores. Last week, we opened our second new location this year. This NTI in Kingston, North Carolina incorporates almost all elements of our new store format. We continue to advance the other NTIs in our pipeline and have begun working on three more of these NTI stores, of which two are expected to open in the 2025. In addition to executing our dealerization program and remodel investments, we’re beginning to see the positive momentum across other core initiatives for this year.

This includes focusing on high margin categories like OTP and food and enhancing our loyalty ecosystem to better engage customers. Our Fueling America’s Future campaign continues to engage customers and drive improved loyalty enrollment growth, trip and basket size. This program provides up to $2 per gallon in fuel discounts up to 20 gallons to enrolled loyalty members who purchase qualifying in store items. Average daily enrollment in our Fast Rewards program increased more than 50% from the period prior to the campaign. When utilizing the Fueling America’s Future promotions, our enrolled loyalty members made an extra trip per month and spend on average more than 15% more than our typical enrolled loyalty member during the second quarter.

Importantly, we are seeing improved sales on our qualifying items that are tied to our Fueling America’s Future promotions. Turning to our loyalty program as a whole. During the quarter, enrolled Fast Rewards members spend on average approximately 50% more in the 2025 and visited an average approximately three more trips per month compared to non members. Overall, we added more than 38,000 new members in the quarter, bringing total enrollment to approximately 2,350,000 members, up 10% from the end of Q2 last year. These results underscore the effectiveness of our loyalty platform in an environment where consumers are looking to stretch every dollar, and this is why we continue to focus on enrollment initiatives like Fueling America.

Our team is continuing to optimize promotional offers and sharpen messaging to drive even deeper engagement. Diving deeper into OTP, our stores are benefiting from expand assortments, revised space allocation, high value promotions, and a more effective visual merchandising strategy, which has been significantly improved by our back bar refresh and incentive program for discrete and store managers. OTP remains a key growth lever for in store margin and customer engagement. Over the quarter, OTP was one of our top performing categories for same store sales growth and same store contribution growth. Taking all our strategies as a whole, they are guided by experienced leadership and brought to life every day by a dedicated operation team focused on enhancing the customer experience.

Turning to fuel, industry wide demand remained soft in the second quarter with national retail fuel volumes down approximately 4% and our volumes reflected that trend. While gallons declined, our CPG margin increased compared to the prior year period, reflecting the benefit of our scale and our strategic pricing. This margin performance helped offset some of the impact of lower volume on retail fuel contribution. As I mentioned before, we saw consecutive improvement in same store gallon growth from May to June, and this improvement continued into July. Our Wholesale and Fleet segments continued to perform through a combination of our dealerization program and robust fuel margin as compared to the prior year.

These two segments continue to provide stable and reliable cash flow for our business. We continue to believe our stock is an attractive investment. In the second quarter, we repurchased 2,200,000.0 shares. We believe that our disciplined capital allocation strategy, aligned with strength of our transformation plan and consistent operational execution position us well to deliver long term shareholder value. I will now turn the call over to Rob to review financial results for the second quarter and review our thoughts for the third quarter and full year 2025.

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: Thank you, Ari. Good afternoon, everyone. Turning to second quarter twenty twenty five results. Adjusted EBITDA was $76,900,000 for the quarter compared to $80,100,000 in the year ago period with the decrease caused primarily by lower retail merchandise contribution. At the segment level, our retail segment contributed operating income of approximately $80,400,000 compared to $87,900,000 in the year ago period.

Same store merchandise sales excluding cigarettes were down 3% versus the year ago period, while total same store merchandise sales were down 4.2%. Same store margin rate was up approximately 50 basis points versus the prior year. Same store fuel contribution was down approximately $800,000 with a 6.5% decline in gallons, mostly offset by an increase of $0.26 per gallon. Same store fuel margin was $0.45 per gallon for the quarter. Same store operating expenses were down approximately 0.8%.

Turning to our Wholesale segment. Operating income was $23,200,000 for the quarter versus $21,300,000 in the year ago period. Fuel margin was $0.01 $01 per gallon versus $9.9 in the year ago period. Gallons were up 3.9% for the quarter driven by our channel optimization program, which contributed more than 19,000,000 gallons for the quarter or almost 8% of total wholesale gallons. Excluding channel optimization, gallons were down approximately 4.1% at comparable wholesale sites.

We continue to be pleased with the impact of our channel optimization program, which has driven approximately $4,500,000 in incremental profit contribution for the 2025. As Ari mentioned, we continue to expect that at full maturity this program will deliver in excess of $20,000,000 in incremental operating income across our combined retail and wholesale segments. This outlook excludes additional G and A efficiencies we expect over time as we transition to a smaller retail segment footprint. Moving on to our Fleet segment, operating income was $13,100,000 for the quarter versus $13,700,000 in the year ago period with total gallons down 6.8% to the prior year. Fuel margin was very strong for the quarter at $0.49 per gallon, up from $45.9 in the year ago period.

Total company general and administrative expense for the quarter was $40,700,000 versus $42,400,000 in the year ago period. Net interest and other financial expenses for the quarter were $19,500,000 compared to $21,400,000 in the year ago period with the decrease primarily related to lower average interest rates in the 2025 and higher interest income generated. Net income for the quarter was $20,100,000 compared to $14,100,000 for the year ago period with the increase driven primarily by a non cash gain related to the expiration of a purchase option received in 2021. Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA. Turning to the balance sheet, excluding lease related financing liabilities, we ended the second quarter with $916,400,000 in long term debt.

We maintained substantial liquidity of approximately $875,000,000 including $294,000,000 in cash on hand at quarter end along with remaining availability on our lines of credit. Total capital expenditures for the quarter were $45,300,000 which included the purchase of 22 fee properties at favorable terms. Turning to third quarter guidance. We expect total company adjusted EBITDA to be in the range of 70,000,000 to $80,000,000 based on the following key segment assumptions. First for our retail segment, we expect our third quarter average retail store count to be approximately twelve twenty sites.

On a per average store basis, we expect merchandise sales to be up mid single digits reflecting the higher productivity of retained stores versus the year ago period, partially offset by same store merchandise sales performance which is positioned down modestly. Again on a per average store basis, we also expect gallons to be up mid single digits reflecting the higher productivity of retained stores versus the year ago period partially offset by same store gallon performance which is positioned down low to mid single digits. We are modeling total retail fuel margin in a range of $0.04 $25 to $0.04 $45 per gallon. For our wholesale segment, we expect mid to high teen percentage operating income growth in the third quarter driven by our ongoing channel optimization work. And finally, for our Fleet segment, we expect third quarter operating income growth to be up low single digits with gallons roughly in line with the prior year on higher expected cents per gallon.

We are maintaining our full year total company adjusted EBITDA guidance in a range of $233,000,000 to $253,000,000 And with that, I’ll hand it back to Ari for closing remarks.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Thanks, Rob. I’m proud of the way our team continues to deliver in the face of ongoing challenges. We’re deepening customer engagement, our promotional efforts are yielding results and we’re making progress on our transformation roadmap. We are entering the second half of the year with clear priorities and a focus on creating lasting value. We will now open it up to questions.

Conference Operator: Thank you. We will now be conducting a question and answer session. Our first question is from Bobby Griffin with Raymond James. Please proceed.

Bobby Griffin, Analyst, Raymond James: Good afternoon, everybody. Thanks for taking my questions. I guess, Ari, first for me, I wanted to maybe dive into your comments on July. Pretty notable change there at least through the one month of the new quarter. Curious if you can unpack it further on what’s maybe driving that industry trends versus the channel optimization, some of the new programs coming on because to your point, don’t think we’ve seen ex cigarette merchandise sales close to flat in a very long time and even gallons seem to be getting a little bit better.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Yes. Good afternoon, Bobby. Yes, you are absolutely correct. I mean, saw improvement from basically from May to June, June to July, but this is probably the best improvement we’ve been seeing over the past eighteen months. We don’t know if this is just because all of the sudden something turnaround, but what I can tell you is probably that I think the value and the messages that we’re sending out there with Fueling America, I believe our offering, our assortments, our promotions are very, very, very strong.

And we see them driving trip frequency. I mentioned for example the loyalty trip frequency. So just to put dollars and cents, we’ve been we are talking about going from $73.83 to $110 which is almost 50%. We’re talking about trips up almost three trips basically per month between loyal members and non loyal members. We see an increase in customers purchasing the qualified product of fueling Americas.

And as you can imagine, all of those products are products that have a higher margin. I mean, I’ll give an example, just something that we’re actually promoting this month. If you buy two candies for $6 you get zero five zero dollars off per gallon. I mean, this is, Skittles and M and M for example. I mean, this is huge.

Another one, if you buy Marlboro, two packs of Marlboro, $0.02 5 off per gallon. Hope that this is a result of what we’ve been doing over the past few months, but this is absolutely was very positive and of course we’re going to take it.

Bobby Griffin, Analyst, Raymond James: Absolutely. Thank you. And then Rob, maybe just switching gears to the channel optimization, kind of a two part question. I don’t think you guys want to give a full number of how many stores you think you can move to dealer, but maybe to help us think about it, are you identifying more stores today than you maybe identified six months ago? And if the program does run through ’26, do you have to wait until 2026 or do we have to wait until ’20 to see some of the G and A savings start to flow out or can that start to flow out earlier, and you could view the program at scale sooner?

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: Yes. Thanks, Bobby. So, no, I think the program store lift, as we said, we’re not putting out the full number yet, but it’s been defined for a good period of time now and it’s now about execution. Ari had in his prepared remarks what is under contract and then there’s a substantial amount still after. So, I think we know what that number is, we know what that number is and we’re executing on it.

In terms of G and A savings, now we already are seeing savings in G and A in the second quarter. You can see the total G and A number was down. That number is inclusive of a certain amount of the restructuring expense that it is. So we are seeing it already. So things that are directly related to stores, field leadership, things that are directly one to one related, we’re going to see real time things that are like prepaid annual software licenses, we will see we get into 2026.

So again, pace of G and A will accelerate as we continue, but we are seeing some of it already. I would estimate we’re probably 25% to 33%, maybe a third of the way through the first tranche of savings. And I do believe that there’s going to be more. So again, this is just the first tranche that we see. And as we get deeper into the smaller footprint, we will continue to look for opportunities on that front.

Bobby Griffin, Analyst, Raymond James: Okay. And then lastly for me, just CapEx, the 22 fee properties. I mean, we saw the absolute dollar number step up year over year meaningfully and up sequentially. So any color just on how big of the 22 fee properties were in driving that? And just thoughts on exactly kind of what that is for the business and help me understand that better?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Are you referring to the 22 properties that we purchased?

Bobby Griffin, Analyst, Raymond James: Yes. Just yes, and the CapEx. I’m just trying to understand I’m trying to kind of get at a run rate for core CapEx and you had this quarter it stepped up sequentially, but you also called out you purchased 22 properties. So just trying to better understand what’s normal and what was part of that property purchase?

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: Bobby, that number for the property is about $22,000,000 So when we talked about at the beginning of the year, we kind of talked about the prior two years full year CapEx was about 110,000,000 to $115,000,000 And while we don’t provide guidance for CapEx, if you back out that $20 ish million twenty two million dollars from where you are, you’re kind of on that similar pace from the past two years. So again, that was those are opportunistic at good cap rates for us to buy and we look for those opportunities as they develop. That is a kind of a one time we financed it with M and T. So again, it doesn’t impact our cash position. We offset that with financing.

Bobby Griffin, Analyst, Raymond James: Perfect. Yes, that’s exactly what I was looking at. Thanks, Rob, and thanks guys for the details. Best of luck here in 3Q.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Thanks, Bobby. Thank you,

Conference Operator: Our next question is from Daniel Guigliumalo with Capital One Securities. Please proceed.

Daniel Guigliumalo, Analyst, Capital One Securities: Hi, everyone. Thank you for taking my question. The first one, you all mentioned macro headwinds and shifting consumer spending in the press release, but the July commentary was positive. For the guidance next quarter and the full year, what type of macro and consumer spending environment are you all assuming? Just trying to get a sense of what’s kind of built in there for your assumption.

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: Yes. So as we’ve talked about in prepared remarks, we have the merchandise sales for the third quarter positioned same store sales position down modestly. So again, this is on higher productivity stores. Again, the stores were keeping higher productivity, but we do see again a macro. We are cautious and we’re at a negative modest same store sales performance.

We’re not talking about the fourth quarter yet, Daniel. There’s as we look sequentially on as Ari mentioned, we’ve seen since February with the exception of a little blip in May, we’ve seen month on month sequential improvement in the comp sales trend on the merch side. And so that is a question in terms of does that continue going deeper into the back half of the year or does it stay where it is? That’s something again, we have a little more confidence near term in Q3 because we’ve seen July, we see where we are right now. Fourth quarter, we’re going to see as we get deeper into the third quarter what that looks like and we really guide the forward quarter at this point.

Daniel Guigliumalo, Analyst, Capital One Securities: That’s really helpful. Appreciate that color. And then the second one is on the transformational plan. We’ve seen it kind of drive down the site operating expenses line. And I know labor is a big piece of that line, especially kind of with demand increases in the summer.

How have wages trended this summer versus last summer kind of when thinking about the business?

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: Yes. We’ve seen consistent wage performance up in that 3% range and that’s been consistent quarter on quarter for some time now since we got clear of the pandemic. So that’s kind of a baseline inflationary pressure that we’re seeing about 3%. So as you think about the operating expense itself being down, the decreased hours as our field organization deals with lower top line demand, we do reduce hours and that is partially offset by the increased rate that we’re seeing.

Daniel Guigliumalo, Analyst, Capital One Securities: Appreciate that. And then just as a follow-up to that, what you said, as you continue through the transformation plan, kind of you’re going at kind of low hanging fruit, it feels like. Do you expect kind of less of a benefit as the kind of the later stores are taken out? Or how are you thinking about that?

Conference Operator: I

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: don’t think we’re expecting a lower benefit. I mean, Ari, I don’t know if you have a point of view on that. I think each deal is different, it depends on go ahead.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Yes, let jump in if you don’t mind. Listen, there is a direct expense associated with the stores that you are dealerizing. I mean, I’ll give an example. When we dealerize 10 stores, by definition, you are eliminating discrete managers. And this is just one example, okay.

We have people in the back office that do accounting work, let’s call it two per 10 stores, for example. We have when you get to 80 stores, you’re eliminating all of the sudden the regional manager. So again, is a of position tied directly with the operation. So as you remove stores by definition you’re going to reduce G and A that’s part of the outcome.

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: And Ari, I think he’s looking to tease out as we get deeper into the optimization program. Do we see the deals getting less favorable? So again, I think there’s no reason to expect that.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: No, no. We are sharpening our pencil all the time. I mean, at the end of the day, if you think about it, the plan that we put together over here, we’re talking about 500 stores in around a year to eighteen months. I mean, this is a big project. This is a big project for us.

And I think the reason we are moving forward very successfully is because we have the second segment, which is the wholesale segment, which help us tremendously over here. But so far, like I said, so far we are very, very pleased with the traction. And like Rob said, I mean, we expect to continue to see benefit just ramping up further over here.

Daniel Guigliumalo, Analyst, Capital One Securities: Great. Thank you. Appreciate all the color.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Thank you.

Conference Operator: Our next question is from Anthony Benadio with Wells Fargo. Please proceed.

Anthony Benadio, Analyst, Wells Fargo: Yes. Hey, guys. Thanks for taking our questions. So I wanted to start out with fuel margins. I know you guys had another strong quarter on that front, but I think industry days maybe been a little softer than one might think just given breakeven dynamics and how soft gallons have been.

So can you guys just talk a little bit more about what you’re seeing out there competitively on the fuel side and whether you’ve seen any change there as the years progressed?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: I’ll start and then I’ll let Rob maybe finish with some remarks. So if you’re looking on the industry in Q2, the national demand was down 4%. That’s the national demand. I understand we were a little bit down than the national demand. We are very, very competitive, very, very competitive.

I think the software and the system that we have in place helping us to just to optimize and maximize gross profit dollars over here, making sure that we continue to be competitive. And as you can see this particular quarter we were basically trending close to basically $0.45 So, think we see an improvement in fuel margin. We see so far July, the same thing goes to July. We saw improvement month after month, but July, we basically saw a decline that is basically up for what we saw in Q2. So not only that we were able to expand margin, we also see an improvement in basically in fuel gallons, a decrease in July.

And we hope that that’s going to be sustainable. That’s what we hope.

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: Anthony, CPG can pop significantly when there’s volatility. And I think we saw one month, specifically April in the second quarter, where we had a $07 increase year on year. And that drove significant profitability into April. Those things, I mean, we’re in an uncertain macro environment right now, geopolitically everywhere and that those sorts of things, those trends, even though there could be some pressure on gallons, uncertainty certainly can be supportive of higher CPG.

Anthony Benadio, Analyst, Wells Fargo: So it sounds like people sort of behaving rationally still?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Well, I think people have the same issues with trends. If you are 4% or 6%, you still have a trend down. And I think when you have trend down, people need to pay the smaller guys are probably like everybody else need to pay their bills. And in order to pay the bills, the only way to make it happen, you need to increase margin. And that’s what we’ve been seeing.

I mean, listen, the margin is up almost $0.35 in Q2 and we continue to see strong margin going into July, very similar margin going into July. So, we expect we expect or we hope that margin will stay strong for the remaining quarters.

Anthony Benadio, Analyst, Wells Fargo: Okay. That’s helpful. And then I just wanted to touch on, OTP or Alt Nicotine. I think there was some rhetoric, out of the FDA recently on increased focus on the illicit market. So can you just talk a little bit more about what you’re seeing in that category?

And just any thoughts on a potential crackdown there and how you guys might be positioned to benefit from that?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Yes. So if you remember, Anthony, at the beginning of the year, I made a big remarks regarding to our back bar refresh in basically in many of our stores in almost 1,000 stores. Since that, I can just tell you that OTP was a very, very strong basically category for us in Q2. OTP was up two point basically 2.6% in sales. And at the same time, our margin was up 170 basis points.

So this is a category that at least for us, we are paying a lot of attention to this category. And I think those crackdowns can only help us against competition. Some of the competitors I can tell you, I’ve been seeing that for a long period of time that some of the competitors selling some illegal OTP product. We of course selling only legal product. And I think it’s about time that we start to see some enforcement over there.

But regardless, like I said, OTP for us was a very successful story since we refreshed the back bar or from all variety. And like I said, I mean, it’s big success and it’s a big contributor to the gross profit dollars over here in Q2.

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: And thanks, Anthony. Just the OTP penetration is 10% of the total assortment versus cigarettes and more in the 26%, 27% range. But the contribution margin from OTP was essentially equal to cigarettes. So as we continue to comp positive there, it’s going to contribute more and more as we go forward to really mitigate some of the downside with cigarettes, the structural decline in cigarettes.

Anthony Benadio, Analyst, Wells Fargo: Got it. Thanks guys.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Thank you.

Conference Operator: Our next question is from Benjamin Wood with BMO Capital Markets. Please proceed. Hi, how are doing?

Benjamin Wood, Analyst, BMO Capital Markets: Hey everyone. This is Ben on behalf of BMO and Kelly Bania. Just wanted to circle back on the dealerization and just try to understand is the pace of dealerizations going in line with the original plan? I think you’re targeting now more than 500 stores, but mentioned dealerizations are expected into 2026. So is the message that the total number is consistent with the long term or with the prior communications, but is this maybe a slower pace?

Also just trying to understand is this total number, is that all part of the $20,000,000 in savings target or should we expect you to update that savings as you guys get deeper into this?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: I’ll let Rob discuss the $20,000,000 and then I basically give you my 2¢ regarding to the pace. We are very pleased with the pace, but I’ll let Rob jump in.

Rob Giamatteo, Executive Vice President and Chief Financial Officer, Arco Corp: Yes. Ben, the number that we shared in excess of $20,000,000 is the fully executed program. So while we haven’t shared the total store count that is inclusive of all the stores. So again, in excess of $20,000,000 but you should not expect us to be offset updating that number. That’s consistent with what we’re seeing so far in terms of run rate and that’s where we expect to end up.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: And regarding to the pace, Ben, regarding to the pace, as I mentioned earlier, just think about it, 500 stores in eighteen months, this is unheard of. I mean, it’s going in accordance to our plan. Like I said, we are very, very pleased with that. What sometimes take a little bit longer is just getting licenses I mean, we want to make sure that all of the dealers that are taking over some of those stores, they are fully equipped and fully licensed.

We don’t want to be in a position that God forbid they are losing the license and they are losing sales. For us, this is a long term play and we want to make sure that those guys continue to make money and we want to make sure that they get all of their licenses order to continue to operate from the minute that we stop operating.

Benjamin Wood, Analyst, BMO Capital Markets: Okay. That’s great. And then could you just provide some details on this new store format for the NTIs and remodels? How does the square footage compare to the average store in your portfolio? And then what about the labor needed?

How many employees will run it versus your store average? Trying to understand the complexity of it versus with this new foodservice versus kind of the other store base you’re running.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Sure. So most of we opened the first one last week sorry, last month, last month on June 25. At this particular store, we did not change any of the square footage that was a large enough store, over 3,000 square foot. So we basically just added Beer Cave and some other features in of course in addition to that all of the food service equipment over there we had a deli before. So we just converted the deli to our new concept.

We remodeled the store from the inside and the outside. So in this particular case, did not add any square footage. In the store that we opened this morning, we were able to add additional square footage to the basically to the original store. So this is something that we did. In terms of labor and we’ll share some picture later on, but in terms of labor, we have a share labor model, which means we need one person literally to operate the food service concept that we put in place over here.

Benjamin Wood, Analyst, BMO Capital Markets: Okay. That’s super helpful. So then is it kind of correct to assume that or maybe I’ll ask you this is what percentage of the remaining store base after you’ve gone through this dealerization do you think would qualify for this kind of full remodel?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Well, the we are in a phase of structuring and engineering and but the stores that we are planning on keeping, we believe that the majority of them basically can fit. Remember when we actually put this plan together, we put the plan together based on the fact that we have different type of stores, different type of square footage and we want to make sure that we can customize in most of those stores the food service concept that we put together. So this is something. But right now at the moment, we already identified another tranche of basically of stores. It’s approximately 25 stores that we already identified in the same geography that we started.

We started over here in the Virginia market, in the Richmond market. And the plan is basically to finish this tranche But again, we believe that the stores that we are planning on keeping as part of our retail segment, we will be able to customize in the majority of those stores, the food service concept and everything that we did in the last two stores, last prototype that we just the new format that we just opened last month and this morning.

Benjamin Wood, Analyst, BMO Capital Markets: Great. Thank you guys very much.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Which by the way that was one of the decision of dealerizing some of the stores that we didn’t feel will fit with this concept or with this new format that we brought to market. Think we lost Ben. Thank you, Ben.

Conference Operator: Our next question is from Hale Holden with Barclays. Please proceed.

Hale Holden, Analyst, Barclays: Hi, good afternoon. I just had two on other tobacco products. I was wondering, I did hear those comments at the beginning of the year and I was wondering where you are in the bar rollout and or how much more work you had to do to get the allocation space allocation to the product or if you were fully built out at this point?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: We are fully on the stores that we are keeping and like I said, it’s over it’s around 1,000 stores that we have out there. We already invested and finished our work on the back part. We completed this project. This project was completed by the end of Q1, beginning of Q2. So we are we’re done.

Now it’s just a matter of adding additional assortment to the mix of the year.

Hale Holden, Analyst, Barclays: Okay. And then on the store conversions that Ben was just asking about, any thoughts are in what constitutes a success in terms of either merchandise sales lift or same storage lift versus maybe where the control group is?

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Sure. First of all, One of the reasons behind that of course is making sure that we increase traffic. Success will turn to be an increase inside margin because adding foodservice over here by definition the gross margin on foodservice is much higher than basically what we saw before. So, the success for us will be increased food traffic, increase the basket size associated with that, expand our food service. So far get very nice results.

I can tell you that the store that we opened just last month on June 25, just in the month of July, that is excluding cigarettes in that particular store are up 6% compared to prior year. So, that’s for us so far we are very, very pleased on what we’re seeing over here.

Hale Holden, Analyst, Barclays: Great. I’d love to see some pictures in the next quarter deck. It’s hard for me to see them from the satellite photos outside.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Yes, no problem.

Hale Holden, Analyst, Barclays: Thank you.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: We’ll do that. Thank you.

Conference Operator: We have reached the end of our question and answer session. I would like to turn the conference back over to Ari for closing remarks.

Ari Kotler, Chairman, President and Chief Executive Officer, Arco Corp: Thank you for joining everyone. We are focused, we are on track and we are excited on what’s ahead of us. Have a great evening.

Conference Operator: Thank you. This will conclude today’s conference. You may disconnect at this time and thank you for your participation.

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