Alimentation Couche-Tard: My core Consumer Defensive + Carrefour assessment

The market does not like the idea of Couche Tard buying Carrefour. A common reason is that Couche Tard is stepping away from it’s roots to tackle the grocery business. Second, and the only reason that matters in my view, is that Couche Tard’s target of 15% EBITDA growth moving forward might be challenged in a low-margin grocery environment. But hold on just a second. Couche Tard has roughly 14000 global convenience stores. Did you know Carrefour has almost 8000 – which would increase Couche Tard’s convenience store footprint by over 50%?

In fact, Carrefour’s focus on convenience was made clear years ago in their FY15 presentation:

The theme continued in their FY16 presentation, with the goal of opening 9000 convenience stores by 2019:

You’ll note that compared to the FY20 stats, the total number of convenience stores is only up 10% since 2017 and short of their 9000 mark, but still growing. In their 2017 Annual Report they continued on the theme, noting the synergies between supermarkets and c-stores:

In 2018, Carrefour re-iterated its outlook on c-store growth:

In their FY19 report, management noted the strongest growth in their universe being the c-store space:

And in their FY20 report, management continues to highlight growth of c-store space and outlook to 2022.

One note of consideration here is that the convenience store space that Carrefour speaks of is not pop and chips style gas bars (although they have those too); the convenience space is all about the urban worker grabbing a quick lunch or making a pit stop for essentials before heading home – lower overall basket cost but higher frequency of purchases. The logistics that underlie Carrefour convenience stores is a rather small structural leap for Circle K, the main difference being product offerings (some fresh foods, home essentials, etc.) and store setup. Assumption and operation of Carrefour’s line would not be a major structural shift for Couche Tard. The essence of convenience across both banners remains the same – but COVID undermines this thesis in no small measure if WFH policies continue to weigh on urban activity. However, Carrefour has also innovated with their e-commerce business, realizing 3x growth since 2017 and will continue to materially benefit with structural changes in the e-commerce space.

Furthermore, Brazil (and Latin America) is a double-digit driver of Carrefour’s growth profile:

Organic growth across their banner realized 2.6% CAGR from 2012-2017, with a lull in 2018 and continued growth in FY19 to today. As Couche Tard is looking to achieve a growth profile of 50% Acquisition / 50% Organic Growth, a Carrefour takeover and transformation will look to accelerate organic growth in tandem with their Circle K line. Couche Tard typically targets 30-50% EBITDA lift post-acquisition and despite its growth-by-acquisition history, it enjoys ROE of 25.7% and ROIC of 17.3%. Carrefour’s growth is far below this threshold, hence market concern.

Let’s not forget, however, that synergy creation and EBITDA drive is Couche Tard’s specialty.

Lastly, a Carrefour deal would diversify Couche Tard’s global footprint:

Here is Carrefour, providing greater access to South America and Southern Europe + France:

Given the fallout from the Carrefour news, it seems unlikely this deal goes through in the future, especially if the valuation premium becomes too rich. We know Couche Tard is looking for a transformative move away from – or adjacent to – its fuel business. I think we should give credit to the company for thinking outside the box yet within their scope as a “Consumer Defensive” name as their sector profile reminds us. Sure, the EV lab in Norway might offer some growth prospects in the global auto energy business (some clarity from management on this pipeline would be nice), and their stake in Fire & Flower is well positioned for growth in the retail cannabis industry. But I am still bullish on a potential Carrefour deal down the line or another foray into the grocery market in tandem with the c-store and e-commerce space. For the remainder of 2021, the company will benefit from material increases in fuel consumption and in-store sales this summer as local road trips and staycations grip the globe with people exploring and enjoying their own backyards.

2 thoughts on “Alimentation Couche-Tard: My core Consumer Defensive + Carrefour assessment

  1. Saw this on reddit and I learned a lot. Fantastic stuff and I appreciate you putting this out there

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