MUSA
#So, on the raze and rebuilds, these are locations where we have very small kiosks where we have significant available land underneath that to expand and the economics warrant a complete raze and rebuild as opposed to just a refresh.
We started with some of the highest volume returns that were just simply underpumped.
I mean we had stores that were delivering 500,000, 600,000 gallons out of four to six pumps.
And so with a larger number of dispensers, diesel at every pump, coupled with that 1200-foot small store versus the kiosk, you basically have gone in and replaced everything.
The returns on those are going to be more in the 20% to 30% unlevered after-tax range because they are just fantastic stores.
And if you went out and built ---+ found a location that looked just like those today and built a store, you would get exceptional returns as well.
Obviously, there is a finite number of those where all the conditions around the current format, the available land, the baseline economics to do reinvestment add up.
We are going to do those in a ratable, and we have talked about doing approximately 20% next year.
I think the returns that we have shown in our pro formas on the analyst report, et cetera, are in that 12%-plus range on an after-tax unlevered basis.
I will add, none of those returned metrics include our products ---+ any product supply in wholesale uplift associated with that.
So, if you allocated the $0.025 to $0.03 margin that we get across our network on average to one of those stores, you would have significantly higher returns than that.
So we know that we need to continue to add new stores, and there's opportunities and we are going to do those with our independent growth plan in markets where we can generate those high returns, but we have got to continue to reinvest in our network, and raze and rebuilds is just a part of that.
Sure.
And, by the way, if you noted the $0.059 on a retail equivalent to basis compared to $0.05 last year, which was above the trend, and so, look, I think this is one of those areas in which I would ask everyone to remember to do two things.
One is, always look at it over any rolling 12-month period because you are going to have the rising and falling price environments.
And so when a rising environment the way inventory transfers to cost of sales creates a positive benefit, just like it did last year and you typically see a rising environment in Q2.
You typically see a falling environment in parts of Q3 and Q4 and in Q1 a rising environment.
So you can't just look at a quarter.
You have got to look across any 12-month period.
The second thing I would say is, after relationship between RINs and the spot prices in the market and the wholesale prices in the market need to be considered together.
The spot to wholesale price differential has decreased during this period of higher RINs on a pretty significant basis where the difference in the two is sort of the net that we are looking at.
So people shouldn't get overly excited in our earnings if RINs are at $0.90 versus $0.50 because you see that impact in the trade-off because spot prices are higher, and that is something, I think, the EPA and RSS anticipated.
So we haven't been ---+ even though we track them separately and report them separately for transparency purposes, we have consistently encouraged people to not look at those as purely additive.
So you have to look at all of that in combination.
Our transfer to retail kind of absent the impact of the RIN does benefit from periods of tight market conditions, and so we saw more pipeline maintenance activity in allocation along Colonial in Q2.
We saw the ARBs open more in Q2.
And so that tight supply environment does positively impact our business in those proprietary barrels as well.
And so that was more favorable in Q2 than in the prior year period.
And so this is one of these topics we could just keep going on.
There is a lot of (multiple speakers) there.
But I think the key is, look at it over any 12-month period, on a rolling basis, and look at it in its totality.
I can speak to ASaP.
As you know, we are currently in year two of our three-year timeline, and some of the benefits from ASaP were already embedded in the 2016 guidance and also in our corporate goals.
And we are already starting to see those appear in the quarterly results, and those should be amplified as we go through the third quarter and through to the end of the year.
So we are still expecting to generate approximately $50 million of recurring benefit this year, primarily from the rollout of Core-Mark, that transition, as well as the store labor model.
And then we also, on top of that, expect to reduce working capital by about $15 million throughout our chain by implementing more efficient inventory practices.
So that guidance remains consistent, and you won't see that appearing all in one place.
It will be reflected in expansion of merch margin merchandise, reduction in site labor costs, as well as an expansion of our anticipated fuel margin.
So it is not all in one place, but it is all embedded within our annual guidance.
Yes.
One thing I will add, on labor rates, we have actually been able to hold total rates fairly constant in part because of mix.
And so with the store labor model, we optimized the number of assistant store managers.
We have lead cashier positions that we are creating.
And so we are balancing that out across the roles, and that is helping on that front.
In terms of over time, if you're speaking to the specific FLSA regulation that is kicking in December, we do not expect a material change in December overtimes.
And then, as we develop our plan, for 2017, at present we would expect that any increase associated with that can be offset by other improvement levers that we have available to us.
To answer your second point, I would repeat what I told ---+ answered <UNK>'s question.
If we have continued high RIN prices, we would expect to see it continue to offset the differential between the spot and rack prices in that part of the business.
And so it is going to be ---+ there is a positive net increase for that.
We have got to continue to evaluate what that is and how much of that is just invested in additional capital.
That goes into adding E-85, E-15 dispensers, et cetera, to support renewable fuels.
In terms of the timing, we were clearly aggressive in the prior quarter coming out of the launch of the independent growth plan and put a major dent with the $150 million share repurchase.
And so we took a more measured approach.
We started the program late in May, so there were not ---+ there wasn't as much time in the quarter for that.
But we continue to be in the market with the program and set parameters.
And, clearly, if the stock has had a major run up, if you set some of the parameters, you may not be buying as many shares under certain tranches of the program.
For those of you on the call who don't have <UNK>'s benefit of getting to Little Rock or Arkansas, for that matter, on a regular basis, this is going to be a 3450-square-foot store.
And so, as we said before, we are building a handful more of those a year in selected markets.
You typically have seen those in Arkansas, Louisiana, Colorado and a few other markets.
And so we continue to do that in markets where we think that offer can be distinctive and competitive and meet consumer needs, and frankly, it keeps a foot in the door on the bigger box model.
The predominance of the Express stores you should expect to see are the 1200-square-foot models within the halo effect of this demand aggregator of price-sensitive consumers, and that will be the predominance of the mix.
So, won't hazard a guess on future prices.
I will go back to the discussion we had in February around the guidance where we gave guidance of $0.30 to $0.50 on the RIN, but we also gave guidance, I believe, of $0.25 to $0.45 on product supply in wholesale.
And if we said if RIN prices were above that, we would expect our contribution from product supply and wholesale to be lower because there's direct offsets there and we continue to see that with elevated spot prices and the spot to rack price differential being compressed.
And there are days where that spot to rack differential is negative several cents.
And it encompasses 100% of the RIN value at that time.
So, again, want to be very, very clear, the guidance holistically gets you to about $0.025 to $0.03 incremental contribution from our proprietary sourcing and spot contract barrels.
And we could just put that in our fuel margin instead of reporting $0.11 margins this quarter.
We could have reported $0.16 margins, but we had broken that out historically.
We did that at the spin.
We continue to do that from a transparency standpoint, but there are offsets within that.
And so, if we continue to see higher RIN prices, we would expect to see higher spot prices and compression in the spot to rack differential that becomes the basis of the transfer price.
So we are three days into it.
I will tell you that the number of card applications is ---+ on a daily basis is greater than what it was on a monthly basis before because it had not been a priority to promote that when we had a very attractive cents off program with the prior card that was available.
Our market research shows that more consumers that shop at our stores prefer an immediate cents off discount, and so we would expect to see those consumers gravitate towards that card and that offer, which will be great and continue to drive traffic to our store and the store behind it as well.
So, basically, replacing an offer that was there, while maintaining other cards that provide different types of discounts.
So we do expect to see some uplift there, but it is really too early to tell.
If you think about consumer behavior, there are some consumers that will always say, I am going to drive out of my way two or three miles to get an extra $0.01 or $0.02 off.
And those dedicated, loyal price-sensitive customers are loyal customers, and we can kind of count on them day in and day out.
If the differential to the surrounding area in a rising price environment compresses and the reason it would compress is that the branded marketers are only selling one or two tanks of fuel a week because they are high-priced low-volume stores.
And so not having their tanks replenished as often, meaning their cost of inventory in the tank is lower than someone who is turning their tanks every single day like Murphy USA or other high-volume retailer, and so being aggressive and holding a $0.10 differential, say, to the state average in a rising price environment would mean that you would be given away significant margin with little volume upside, it would be an economic to do that.
So, as that as that differential closes, you maintain your very loyal customer, but there is a customer on the margin that says, I am going to go out of my way to buy the lowest price, but you know what, if prices get within some range, I am not going to be as price-sensitive on the margin.
The other thing we note is in very high price environments, the number of price-sensitive customers goes up, and in very low price environments, people don't go as far out of their way on the margin.
So, if you break it down into the relative price sensitivity of customers, you can explain and see how in a rising price environment, you shed a little volume.
The cents per gallon you would have to put on the street to keep that volume would be lost on every customer, and it would not be economic to do so.
In a falling price environment, where you are typically starting with very large margins, you can afford to put an extra $0.02 to $0.03 on the street and pick up the additional volume across the stores and the customer base.
And so that is how we think about it, and we look at a month like June when we have same-store comps that are positive in every region.
That kind of reinforces the view that you shed a little on the way up, you pick it up on the way down.
As it relates to total market share, we have been consistently growing total volume at the network level at or above the level of total volume growth in the markets that we are in.
It is largely done by adding new stores.
And so, as we add new stores, we are taking volume away from competitors, but other advantage retailers add new stores as well, and they take some volume away from us as the high-volume retailer opens within a mile of one of our stores.
But, from a market share standpoint, we have been consistently growing market share year over year.
So the journey toward E-85 has been very steady.
It has obviously started with a small base, but it is continuing to grow.
It is growing more in certain states where there are maybe additional incentives or in the corn belt in those areas.
There are a number of retailers out there that, including Murphy USA ---+ that have been adding E-85 and E-15 to their stores, and if you look at any of our new stores, they have the flexibility to add enhanced renewable fuels, including the bio diesel at every dispenser.
And so that is one of the things that we continue to look forward to.
Consumer adoption varies in different geographies, and I think that is another thing, when you talk about the value of the RIN, depending on where ethanol is priced relative to gasoline, if ethanol is higher than the price of gasoline, the way you will consistently drive volume towards E-15 and E-85 is to use that RIN value to lower the street price to create adoption.
And so an E-85 where there is lower energy density needs to be priced below an E-10 on a consistent basis to drive that consumer adoption, and that is what we do.
So the promotion's effectiveness really cuts across every single category, including fuels.
It is just taking a much more analytical-based approach to our promotions.
And so having built that capability last year, it is just a new mindset towards evaluating on the front end, what is the expected breakeven of the promotion, how should we think about pricing it, what is the level of vendor funding to make it attractive, what might be incremental labor be associated with that product, damages, signage costs, et cetera.
And so it is just taking a much more analytical and comprehensive view of it.
And when you think about, for example, some of our candy promotions, they may drive anywhere from a 500% to 1000% uplift on units.
So making sure that the pricing and the inventory availability and all that is there in place to make it an economic program versus just driving more units and volume is key.
So that has been pretty systematic, and it has been improving contribution $2 million, $3 million, $4 million a year to the bottom line.
So that is kind of an example of that.
Around pricing, again, it is just being more systematic with some of the talent we have been able to hire and some of the tools we have been able to develop to just measure elasticity and cross elasticity across individual items and baskets to get better overall economics from that.
And so if you look at the total year-over-year improvements we have had, a portion of that is obviously from new stores, and a portion of that is obviously from Core-Mark and other investments like Super Coolers.
But a significant amount of it still remains from pricing and promotions, merchandise mix, optimization that we do.
And we believe we still have more opportunities on that front.
So we get data and it lags from various agencies, et cetera, that give us a really good sense of this at the state level, being able to break it down to specific store levels as pretty difficult.
We do have models that help us understand relative performance across those markets.
And so, for example, some of the variables we look at are population density, population growth, et cetera.
And so if you evaluate those markets using census data, if you know the population is declining and becoming less dense and other factors in rural areas are negative, you would expect to see that market declining in volume.
Now, we may actually pick up volume because a couple of very weak stores end up closing on the margin, and we pick up that volume.
So we understand it the state level and the changes there, but getting it down to a local market area would be pretty difficult.
Well, we are growing market share on average across the states we are in.
There are certain states that have a greater level of competitive intensity.
In those states, depending on the number of stores you add, you may actually be losing share in those markets.
If you are not growing in certain Midwest states at the same rate in the future and others are growing maybe with a different type of model that is less fuel dependent, they may pick up share in that market relative to you.
Certainly, in markets like the Southwest and Southeast that are very, very strong markets for us, we see very positive trends there across our stores and the states as a whole.
It is a really good question, <UNK>, so there are two things that we talked about.
One was the timing of the new build.
We had 44 locations open in Q4.
Q4 is not a great time to open stores for us.
It is kind of lower volume.
It is typically going into Q1 and Q2.
It is a rising price environment.
It is harder to be more aggressive with your introductory price.
And so having in the future more control over the timing of when we can start construction on a store that we will have with our Express stores, as well as them being able to load level those throughout the year will result in a favorable comp because in the future because we will have more stores opening in Q3, which is typically a falling price environment, and so you are just going to be further along in your ramp up in the future.
So that is kind of point one.
There is a timing impact there on the USA sites where you had more constraints about when you could open versus the Express model where you have a much greater degree of control.
The second point is the mix.
And so when we took a portfolio approach towards the stores, you are going to have in your mix great stores, good stores, average stores, weak stores and some very weak stores.
The 2015 build class had a lot more Midwest stores, which historically have underperformed.
In that 44, 22 were in the Midwest.
And so there are some great stores in the Midwest, and out of those, we opened some great stores.
But with our Express model, we know what are the markets and the geographies and the conditions that separate good and great performers from weak and very weak performers, and we will not be acquiring on our own in the Express independent growth model weak or very weak locations.
And so the rationale that we provided this quarter about the timing and the mix should have an equal and opposite effect in future years under our independent growth strategies.
So there's a couple of ways to look at it.
One is, our business model is simpler than take one of the big-box store models that has 7000-square-foot stores.
I ventured a guess that every manager that would fall under this regulation who is a potential exempt employee at a big-box store is making well over $47,000 a year in salary.
And so I would think those exempt store managers at those bigger stores are probably less affected than we would in our simple model.
That said, the majority of our store managers are within a breath of getting to that number when you think about changes like the annual merit increase and reallocation of other benefits that we pay out in cash form that are not considered salary.
So we have got levers that can get the majority of the stores very close to that.
What we have that is probably different than many of the competitors is a high number of kiosks in rural geographies where the average wage rate is 5% to 7% to 10% below the national average.
And so the number established by this regulation doesn't take into account geographic pay models.
And so there is a subset of our stores where there is a gap, and that is where we are evaluating what is the best approach to do that.
What I will say is our store manager turnover rate is exceptional in part because we have benefits like 401(k) and others that many other retailers do not have.
And so I think we have been, as a Company, able to have good retention because of benefits.
Unfortunately, some of those benefits don't count in the way this regulation is designed.
So we want to be thoughtful about how we comply, both from a cost and economics standpoint, but even more importantly, from an employee engagement and retention standpoint.
I will tell you there are other levers that we have that have nothing to do with salary or pay related to face the next wave of store labor optimization.
That could more than offset any incremental costs that we have.
And so there may be some incremental costs.
We think it is going to be in the low single digits under any scenario, and we believe we have the ability to offset that through other levers that don't impact employee engagement and retention.
I assume you want both the expense side and the capital side, so I will give you both.
For the second quarter, we spent approximately $1.7 million, which was expensed, and another $1.6 million that was capitalized for a total of $3.3 million for the quarter.
And that brings us program to date spending of around $26.5 million, of which $16 million we have expensed and another $10 million that we capitalized.
So my knowledge and understanding of the Walmart Express stores that were closed were that they were stores that were kind of in that 10,000-square-foot range.
They were in very, very rural markets.
When we do our market cluster analysis, they were in kind of our seventh and eight out of eight clusters in terms of the makeup of the markets.
And they would have been kind of the markets generally we would have not gone in because of the population density growth and other parameters.
So I would ---+ if I had to classify them, they are very rural dollar store competitors, and I think that was the intent of the model.
And so if they put ---+ if they acquire a few of them, they have gas in front of them, I don't think it is going to have any significant impact at all.
I don't see the dollar stores getting into gasoline in a material way for just core economics focused capability reasons.
Great.
Well, thank you for your support.
We are really proud of this quarter.
We are excited about the initiatives and the ongoing work our engaged team has going on, and we will look forward to speaking to you in another quarter.
Thank you very much.
