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| SUSS > SEC Filings for SUSS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. Additional discussion and analysis related to our company is contained in our Annual Report on Form 10-K, including the audited consolidated financial statements for the fiscal year ended December 28, 2008. Our fiscal year contains either 52 or 53 weeks and ends on the Sunday closest to December 31. All references to the third quarter of 2008 and 2009 refer to the 13-week periods ended September 28, 2008 and September 27, 2009, respectively. EBITDA and Adjusted EBITDA are non-GAAP financial measures of performance and liquidity that have limitations and should not be considered as a substitute for net income or cash provided by (used in) operating activities. Please see footnote 2 under "Key Operating Metrics" below for a discussion of our use of EBITDA and Adjusted EBITDA in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and a reconciliation to net income and cash provided by (used in) operating activities for the periods presented.
Forward-Looking Statements
This report, including without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection under the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by use of phrases such as "believe," "plan," "expect," "anticipate," "intend," "forecast" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs, anticipated capital expenditures, expected cost savings and benefits are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:
• Competitive pressures from convenience stores, gasoline stations, supermarkets, restaurants, drug stores, dollar stores and other non-traditional retailers located in our markets and other wholesale fuel distributors;
• Currently unknown liabilities in connection with the acquisition of Town & Country;
• Wholesale cost increases of tobacco products or future legislation, regulation or campaigns to discourage smoking;
• Litigation or adverse publicity concerning food quality, food safety or other health concerns related to our restaurant facilities;
• Intense competition and fragmentation in the wholesale motor fuel distribution industry;
• The operation of our stores in close proximity to stores of our dealers;
• Changes in economic conditions, generally, and in the markets we serve, consumer behavior, and travel and tourism trends;
• Seasonal trends in the industries in which we operate;
• Unfavorable weather conditions;
• Cross-border risks associated with the concentration of our stores in markets bordering Mexico;
• Inability to identify, acquire and integrate new stores;
• Our ability to comply with federal and state regulations including those related to environmental matters and the sale of alcohol and cigarettes;
• Dangers inherent in storing and transporting motor fuel;
• Pending or future consumer or other litigation;
• Our ability to insure our motor fuel operations;
• Dependence on one principal supplier for merchandise;
• Dependence on two principal suppliers for motor fuel and one principal provider for third-party transportation of substantially all motor fuel;
• Dependence on senior management and the ability to attract and retain qualified employees;
• Acts of war and terrorism;
• Risks relating to our substantial indebtedness;
• Dependence on our information technology systems;
• Changes in accounting standards; and
• Other unforeseen factors.
For a full discussion of these and other risks and uncertainties, please refer to "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the year ended December 28, 2008, and in each subsequent quarterly report on Form 10-Q, including this filing. The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of the date hereof. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available in the future.
Overview
We are the largest non-refining operator in Texas of convenience stores based on store count and we believe we are the largest non-refining motor fuel distributor by gallons in Texas. Our operations include retail convenience stores and wholesale motor fuel distribution. As of September 27, 2009, our retail segment operated 527 convenience stores in Texas, New Mexico and Oklahoma, offering merchandise, food service, motor fuel and other services.
For the nine months ended September 27, 2009, we sold 906.1 million gallons of branded and unbranded motor fuel. We purchase fuel directly from refiners and distribute it to our retail convenience stores, contracted independent operators of convenience stores ("dealers"), unbranded convenience stores and other commercial users. We believe our combined retail/wholesale business model, scale, market share, and food service and merchandising offerings, combined with our highly productive new store model and selective acquisition opportunities, position us for ongoing growth in sales and profitability.
In August 2009, we acquired 25 Quick Stuff convenience stores in Texas and Louisiana from Jack in the Box Inc. The acquisition included leaseholds for 24 stores and the real estate underlying one property. Our wholesale segment was already supplying fuel to 11 of the 25 stores. Four to seven of the Texas stores will be operated by the retail segment and rebranded to our Stripes brand, with the balance of the stores sold or sublet to independent dealers in our wholesale segment, along with long-term fuel supply agreements. Terms were not disclosed. The acquisition was funded with cash on the balance sheet, and the net cash outlay, after giving consideration to proceeds received from the conversion of most of the units to wholesale dealers, was not material to our balance sheet.
During the third quarter of 2009, we added 12 stores to the retail segment, including four newly-constructed stores, one acquired and remodeled store and seven acquired Quick Stuff stores. Up to three of the Quick Stuff stores may be converted to wholesale dealer operations in the future. We added 17 dealer sites to our wholesale segment and discontinued eight, for a total of 381wholesale dealers at the end of the quarter.
Our total revenues, net income attributable to Susser Holdings Corporation and Adjusted EBITDA were $882.1 million, $6.5 million and $33.1 million, respectively, for third quarter 2009, compared to $1,214.2 million, $6.9 million and $31.8 million, respectively, for third quarter 2008. Our total revenues, net income attributable to Susser Holdings Corporation and Adjusted EBITDA were $2,386.0 million, $7.7 million and $77.3 million, respectively, for the first nine months of 2009, compared to $3,445.3 million, $10.2 million and $80.1 million, respectively, for the first nine months of 2008. Our business is seasonal, and we generally experience higher sales and profitability in the second and third quarters during the summer activity months and lowest during the winter months. For a description of our results of operations on a quarterly basis see "Quarterly Results of Operations and Seasonality".
After experiencing record-high energy prices in mid-2008, the cost of crude oil fell from $145 per barrel in July 2008 to under $40 per barrel early in the first quarter of 2009. While still well below mid-2008 levels, the cost of crude oil was on an upward trend throughout the first half of 2009, reaching just over $70/barrel, and was relatively more stable during the third quarter, averaging just under $70/barrel. We generally experience lower fuel margins when the cost of fuel is increasing, and higher fuel margins when the cost of fuel is declining.
The economy in Texas, Oklahoma and New Mexico continued to fare better than many other parts of the nation, partly buoyed by a relatively stable housing market, a healthy regional banking market and relatively strong population growth. However, our markets have experienced a sharp increase in unemployment and reduced economic activity in the most recent months. In spite of the current economic trends, our business has been more resilient than many other retail formats, and during the first nine months of 2009 we still experienced positive comparable merchandise and fuel volume results over the prior periods.
The tightening in the nation's credit markets has affected our lenders and the real estate finance markets we relied on in recent years to finance significant acquisitions and new store development. We have been able to access alternative sources of financing, and completed two sale/leaseback transactions during the third quarter, for proceeds of $5.2 million. We believe we have adequate liquidity and financial flexibility to continue to operate and grow our business, but we are exercising caution in our capital spending program until we see an improvement in the economy and in the capital markets. As of September 27, 2009, we had $3.9 million drawn and $22.1 million in standby letters of credit issued against our $120.0 million revolving line of credit. As of September 27, 2009, our unused availability under the revolver was $69.7 million. We have no significant maturities of long-term debt until November 2012.
Key Operating Metrics
The following table sets forth, for the periods indicated, information
concerning key measures we rely on to gauge our operating performance:
Three Months Ended Nine Months Ended
September 28, September 27, September 28, September 27,
2008 (1) 2009 2008 (1) 2009
(dollars in thousands, except motor fuel pricing and gross
profit cents per gallon)
Revenue:
Merchandise sales $ 189,272 $ 201,190 $ 545,913 $ 583,049
Motor fuel-retail 619,692 427,603 1,757,527 1,142,269
Motor fuel-wholesale 396,952 240,874 1,114,725 629,536
Other 8,253 12,433 27,170 31,130
Total revenue $ 1,214,169 $ 882,100 $ 3,445,335 $ 2,385,984
Gross profit:
Merchandise $ 65,966 $ 66,307 $ 187,050 $ 195,219
Motor fuel-retail 36,402 34,613 88,824 82,806
Motor fuel-wholesale 8,888 6,388 21,897 15,668
Other 7,921 12,453 25,859 31,055
Total gross profit $ 119,177 $ 119,761 $ 323,630 $ 324,748
Adjusted EBITDA (2):
Retail $ 26,274 $ 26,080 $ 67,119 $ 64,984
Wholesale 6,889 8,272 17,531 16,356
Other (1,350 ) (1,245 ) (4,535 ) (4,065 )
Total Adjusted EBITDA $ 31,813 $ 33,107 $ 80,115 $ 77,275
Retail merchandise margin 34.9 % 33.0 % 34.3 % 33.5 %
Merchandise same store sales
growth 4.8 % 4.0 % 6.7 % 4.8 %
Average per retail store:
Merchandise sales $ 371.6 $ 387.6 $ 1,076.1 $ 1,131.9
Motor fuel gallons 325.9 343.8 997.3 1,051.9
Motor fuel gallons sold:
Retail 163,399 175,317 497,825 532,616
Wholesale 122,318 125,205 360,757 373,506
Average retail price of motor
fuel $ 3.79 $ 2.44 $ 3.53 $ 2.14
Motor fuel gross profit cents per
gallon:
Retail 22.3 ¢ 19.7 ¢ 17.8 ¢ 15.5 ¢
Wholesale 7.3 ¢ 5.1 ¢ 6.1 ¢ 4.2 ¢
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(1) 2008 reflects reclassifications in operating expense, other revenue and other gross profit.
(2) We define EBITDA as net income attributable to Susser Holdings Corporation before net interest expense, income taxes and depreciation, amortization and accretion. Adjusted EBITDA further adjusts EBITDA by excluding non-cash stock based compensation expense and certain other operating expenses that are reflected in our net income that we do not believe are indicative of our ongoing core operations, such as significant non-recurring transaction expenses and the gain or loss on disposal of assets and impairment charges. In addition, those expenses that we have excluded from our presentation of Adjusted EBITDA are also excluded in measuring our covenants under our revolving credit facility and the indenture governing our senior notes.
EBITDA and Adjusted EBITDA are important measures used by management in evaluating our business because:
• Adjusted EBITDA is used as a performance and liquidity measure under our existing revolving credit facility and the indenture governing our existing notes, including for purposes of determining whether we have satisfied certain financial performance maintenance covenants and our ability to borrow additional indebtedness and pay dividends;
• Adjusted EBITDA is used by our management for internal planning purposes, including aspects of our consolidated operating budget, capital expenditures as well as for segment and individual site operating targets; and
• Adjusted EBITDA is used by our Board and management for determining certain management compensation targets and thresholds.
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as measures of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations include:
• they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
• they do not reflect changes in, or cash requirements for, working capital;
• they do not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments on our existing revolving credit facility or existing notes;
• they do not reflect payments made or future requirements for income taxes;
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
• because not all companies use identical calculations, our presentation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA:
Three Months Ended Nine Months Ended
September 28, September 27, September 28, September 27,
2008 2009 2008 2009
(in thousands)
Net income attributable to
Susser Holdings Corporation $ 6,862 $ 6,503 $ 10,164 $ 7,737
Depreciation, amortization, and
accretion 9,828 11,484 30,909 31,996
Interest expense, net 9,955 9,444 29,307 28,533
Income tax expense 4,331 3,823 7,131 5,430
EBITDA 30,976 31,254 77,511 73,696
Non-cash stock based
compensation 1,058 923 2,888 2,509
Loss (gain) on disposal of
assets (196 ) 884 (45 ) 1,042
Other miscellaneous (25 ) 46 (239 ) 28
Adjusted EBITDA $ 31,813 $ 33,107 $ 80,115 $ 77,275
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The following table presents a reconciliation of net cash provided by operating activities to EBITDA and Adjusted EBITDA:
Nine Months Ended
September 28, September 27,
2008 2009
(in thousands)
Net cash provided by operating activities $ 6,542 $ 50,086
Changes in operating assets & liabilities 36,883 (7,221 )
Gain (loss) on disposal of assets 45 (1,042 )
Non-cash stock based compensation expense (2,888 ) (2,509 )
Noncontrolling interest (37 ) (29 )
Deferred income tax 153 (9 )
Amortization of debt premium 375 457
Income taxes 7,131 5,430
Interest expense, net 29,307 28,533
EBITDA 77,511 73,696
Non-cash stock based compensation 2,888 2,509
Loss (gain) on disposal of assets (45 ) 1,042
Other miscellaneous (239 ) 28
Adjusted EBITDA $ 80,115 $ 77,275
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Refer to Note 14 of the accompanying Notes to Consolidated Financial Statements for a description of our segment reporting. The following tables present a reconciliation of our segment operating income to EBITDA and Adjusted EBITDA:
Retail Segment Wholesale Segment All Other Total
Nine Months Ended Nine Months Ended Nine Months Ended Nine Months Ended
September 28, September 27, September 28, September 27, September 28, September 27, September 28, September 27,
2008 2009 2008 2009 2008 2009 2008 2009
(in thousands)
Operating income (loss) $ 40,001 $ 35,962 $ 14,118 $ 12,724 $ (7,719 ) $ (6,929 ) $ 46,400 $ 41,757
Depreciation, amortization, and
accretion 27,236 27,974 3,343 3,638 330 384 30,909 31,996
Other miscellaneous - - - - 239 (28 ) 239 (28 )
Noncontrolling interest - - - - (37 ) (29 ) (37 ) (29 )
EBITDA 67,237 63,936 17,461 16,362 (7,187 ) (6,602 ) 77,511 73,696
Non-cash stock based
compensation - - - - 2,888 2,509 2,888 2,509
(Gain) loss on disposal of
assets and impairment charge (118 ) 1,048 70 (6 ) 3 - (45 ) 1,042
Other operating expenses - - - - (239 ) 28 (239 ) 28
Adjusted EBITDA $ 67,119 $ 64,984 $ 17,531 $ 16,356 $ (4,535 ) $ (4,065 ) $ 80,115 $ 77,275
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Third Quarter 2009 Compared to Third Quarter 2008
The following discussion of results for third quarter 2009 compared to third quarter 2008 compares the 13-week period of operations ended September 27, 2009 to the 13-week period of operations ended September 28, 2008. During 2008, we constructed or acquired 12 stores of which 5 opened after the third quarter of 2008 and therefore those stores did not contribute to results in the third quarter of 2008. In addition, we have opened or acquired 15 stores during 2009, of which 12 were added during the third quarter.
Total Revenue. Total revenue for third quarter 2009 was $882.1 million, a decrease of $332.1 million, or 27.3%, from 2008. The decrease in total revenue was driven by a 31.0% decrease in retail fuel revenue and a 39.3% decrease in wholesale fuel revenue, both due to the lower price of motor fuel, as further discussed below.
Total Gross Profit. Total gross profit for third quarter 2009 was $119.8 million, an increase of $0.6 million, or 0.5% over 2008. The increase was primarily due to the impact of new stores constructed or acquired during 2008 and 2009 ($2.4 million of growth in gross profit) and the increase in other gross profit of $4.5 million, offset by the decrease in fuel margin and other reasons as further described below.
Merchandise Sales and Gross Profit. Merchandise sales were $201.2 million for third quarter 2009, an $11.9 million, or 6.3% increase over 2008. Our performance was due to a 4.0% merchandise same store sales increase, accounting for $7.5 million of the increase, with the balance due to new stores built or acquired in 2008 and 2009. Merchandise same-store sales include food service sales but do not include motor fuel sales. Key categories contributing to the merchandise same store sales increase were cigarettes, packaged drinks, and beer.
Merchandise gross profit was $66.3 million for the third quarter of 2009, a $0.3 million, or 0.5% increase over 2008, which was driven by the increase in merchandise sales, slightly offset by a decrease in gross profit margin from 34.9% to 33.0%. The decrease in gross margin was attributable to the Federal tax increase on cigarettes effective April 1, 2009, aggressive promotional strategy and to consumers trading down to lower margin items in categories such as packaged beverages and food service. Our reported merchandise margins do not include other income from services such as ATM's, lottery, prepaid phone cards and car washes.
Retail Motor Fuel Sales, Gallons, and Gross Profit. Retail sales of motor fuel for 2009 were $427.6 million, a decrease of 31.0% from 2008, driven by a 35.7% decrease in the average retail price of motor fuel offset by a 7.3% increase in retail gallons sold. We sold an average of 0.3 million gallons per retail store, 5.5% higher than last year. Retail motor fuel gross profit decreased by $1.8 million or 4.9% over 2008 due to a decrease in the gross profit per gallon, partly offset by the increase in gallons sold. The average retail fuel margin decreased from 22.3 cents per gallon to 19.7 cents per gallon for 2008 and 2009, respectively. This reduction in fuel margin decreased retail fuel gross profit by $4.4 million. After deducting credit card fees, the net margin decreased from 17.1 cents per gallon to 15.8 cents per gallon from third quarter 2009 to third quarter 2008.
Wholesale Motor Fuel Sales, Gallons, and Gross Profit. Wholesale motor fuel . . .
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