Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Susser Holdings (NYSE:SUSS)

Q1 2013 Earnings Call

May 08, 2013 11:00 am ET

Executives

E. V. Bonner - Executive Vice President, General Counsel and Secretary

Sam L. Susser - Founder, Chief Executive Officer, President, Director, Chief Executive Officer of Retail Division and President of Retail Division

Steven C. DeSutter - Executive Vice President, Chief Executive Officer of Retail Operations and President of Retail Operations

Rocky B. Dewbre - Executive Vice President, President of Wholesale and Chief Operating Officer of Wholesale

Mary E. Sullivan - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

John R. Lawrence - Stephens Inc., Research Division

Irene Nattel - RBC Capital Markets, LLC, Research Division

Kelly A. Bania - BofA Merrill Lynch, Research Division

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Ben Wyatt - Stephens Inc., Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

James Jampel

Suzanne Franks

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Susser Holdings and Susser Petroleum Partners First Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Chip Bonner, Executive Vice President. Please go ahead.

E. V. Bonner

Thank you, operator. Good morning, everyone, and thank you for joining us. This morning, we released our first quarter 2013 earnings for both Susser Holdings Corporation and for Susser Petroleum Partners, our news release were broadcast to our e-mail list. If you'd like to be added to one or both of those lists, please send your request via the IR pages of our websites, and we will be glad to add you.

A replay of this call will be available on the web for at least 60 days via our telephone replay until May 15. To access the replay on the web, go to our IR pages either at www.susser.com or www.susserpetroleumpartners.com You will find the replay instructions in this morning's earnings release.

A reminder that today's call will contain forward-looking statements. That information is based on management's beliefs, expectations and assumptions and includes the company's objectives, targets, plans, strategies, costs and anticipated capital expenditures. These statements involve risk and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in the company's Form 10-K report for 2012 on file with the SEC.

During today's call, we will discuss certain non-GAAP financial measures that we believe are helpful for a full understanding of our financial condition. Please refer to our news release for reconciliation of each financial measure. Reminder that the information reported on this call speaks only to the company's view as of today, May 8, 2013, so time-sensitive information may no longer be accurate at the time of any replay.

With me on the call today are Sam Susser, Susser Holdings CEO; Steve DeSutter, the President of our retail group; Rocky Dewbre, the President of our wholesale group; and Mary Sullivan, our CFO; and other members of our leadership team.

Now I'll turn the call over to Sam Susser.

Sam L. Susser

Thanks, Chip, and good morning, everyone. We delivered solid first quarter performance with same-store sales up 4.2% year-over-year and up 11% on a 2-year stat comparison basis.

Overall merchandise sales rose 9.5%, compared to a year ago. Fuel volumes were also strong, up nearly 6% for retail and wholesale combined. Average retail gallons sold per store increased 4.1% versus a year ago. Retail fuel margins before credit card expense came in at a very strong $0.166 per gallon after deducting the $0.03 margin Stripes now pays to the partnership. That's almost $0.07 a gallon higher than the average first quarters for the previous 5 years on a comparable basis and $0.033 better than the same period last year. Consolidated gross profit increased about 20% versus the first quarter of 2012 and our adjusted EBITDA was up almost 39% from a year ago.

I should point out that we are going up against an 8% comp in the second quarter of 2012. Also, Easter fell in Q1 this year versus Q2 last year, so the calendar change will have a negative impact on our second quarter sales performance comparison.

We don't spend a lot of time giving the weather report, especially after so many companies have flagged the issue, but like others, so far in 2013, we have had significantly more cold weather days than the prior 2 years, and that's had a measurable effect on our numbers.

The strong economy in our region also is attracting significant numbers of new retail competitors, including expansions by the Dollar stores, drugstores and large box retailers offering fuel. In addition, in certain markets, we have seen an increase in the number of new convenience stores being built by traditional operators.

In the wholesale side of the business, we saw an overall 4.4% growth in total gallons distributed and a 6% sequential increase in distributable cash flow, compared to the previous quarter. We continue to be most pleased with the performance of Susser Petroleum Partners and remain bullish on our ability to drive growth in distributable cash flow in the years ahead. Rocky will provide some highlights for the quarter in a moment.

Our board, yesterday, declared a first quarter distribution of $0.4375 for Susser Petroleum Partners common units, to be paid on May 30 to shareholders of record as of May 20. The payout amounts to unitholders, partners is $9.6 million and distributable cash flow represents coverage of just under 1.1x.

We mentioned in last quarter's call that we would evaluate increases in the quarterly distribution later in the year. Assuming the business continues to grow on its current trajectory, we could be announcing our first increase to the distribution as early as next quarter.

Looking at the longer-term, we remain quite bullish on our regional economies' potential and we expect a combination of new manufacturing plants, including refinery expansions, new chemical plants and steel plants will help drive the employment base higher in our key markets over the next few years.

Now I'd like to turn the call over to Steve DeSutter, President of Stripes, for a more detailed look in our convenience store operations. Steve?

Steven C. DeSutter

Thanks, Sam, and good morning, everyone. Well despite the weather-related challenges that Sam described earlier, we continue to see a modest pickup in our same-store average customer count versus the prior year. Same-store average transaction size also grew nicely, accounting for about 3/4 of our comp growth, which reflects both an increase in the basket size and some price inflation. Our merchandise sales performance in the first quarter was led by increases in beer, food service, packaged drinks, cigarettes and snacks. Gross profit was driven by same-store dollar increases in packaged drinks, food service and snacks.

Our Laredo Taco Company concept continues to perform very well in the first quarter. Although we've experienced some food and supply cost pressures over the last year or so, we didn't see meaningful inflation in our food or other costs during the quarter. We are continuing on the outlook for supply alternatives that will allow us to contain our cost in the food business without compromising quality, so we can offer a strong value to our customers and maintain and grow our market share.

Cigarette sales increased year-over-year, continuing a multiyear trend. However, cigarette margins were weaker in the first quarter. Even though we outperformed the regional and national cigarette sales volume trends, we are not immune to the long-term national decline in the number of cigarettes being sold. Fortunately, our Stripes chain is much less weighted to cigarettes sales than most of our competition. About 19% of our total merchandise sales this last quarter, so it would be less of a factor for us as we go forward than, I guess, for other C stores.

Retail fuel was a strong contributor, again, in the first quarter. Total gallons per store increased 4.1%, with growth in gasoline and diesel both contributing fairly equally this quarter. Sam covered our very strong fuel margin performance for the quarter. As you'll recall, our quarterly margins were unpredictable but tends to be stronger in a falling fuel price environment and during periods of volatility, which we experienced in the first quarter.

Looking now at our new store development activities. We opened 4 new Stripes stores in the first quarter and opened 2 more large footprint stores in April. We currently have 14 more under construction and expect 4 of those stores to be opened by the end of the second quarter. Among the new stores we recently broke ground on our 3 stores located along Interstate 35 corridor in Waco and the surrounding areas of Central Texas, which is a new market area for us. We still expect to open a total of 29 to 35 new stores this year.

While we're pleased with the overall results for the quarter, we did, as expected, encounter significant start-up costs associated with the large number of new stores that we have opened in the last 2 quarters.

As mentioned in our last 2 earnings calls, it normally takes about 6 months for new stores to turn cash flow positive. The effects were amplified in the first quarter, since this is traditionally our lowest average per store sales period. Additional training cost preparing for a higher number of new stores about to open and increases in benefit costs also put pressure on personnel cost. On a same-store basis, personnel cost rose about 100 basis points during the quarter versus the prior year.

Our new labor management tools we discussed with you at our Analyst Day and continued management focus on these results will improve progress as we move through the year. Our management remain razor focused on enhancing our operations, streamlining the new store opening process. We've also increased our attention to reducing employee turnover, which has been a challenge as the economy has gained steam in Texas, especially in markets such as the Permian Basin and the Eagle Ford Shale areas, where we're competing with oil-related companies for workers. We're making thoughtful investments in technology, recruiting and on training and building depth in our management team and improving our skills of our workforce, which we believe will help us to continue to improve customer service and drive sales growth in the coming years.

We're also making a number of revenue-generating investments in ice making, fresh food displays and a new fountain wall concept that offers even more variety to our customers. The first one of these will be in operation this quarter and will be tested in 5 or 6 new stores this year.

Now, I'm going to turn the call over to Rocky Dewbre for a more detailed look at the wholesale fuel segment. Rocky?

Rocky B. Dewbre

Thanks, Steve. Good morning, everyone. A reminder that the wholesale results that are consolidated into Susser Holdings financial statements consist mostly of the operations of Susser Petroleum Partners. But our overall wholesale segment in Susser Holdings also includes the consignment dealer and fuel transportation businesses that were not contributor to the partnership as part of the IPO last September, and will remain with Susser Holdings.

Now let me begin with a review of Susser Petroleum Partners results. Comparing actual first quarter 2013 results against pro forma Q1 2012 numbers. Volumes sold to third party customers, that is independent dealers and commercial customers, increased 1.7% year-over-year to 115.8 million gallons. Gross profit on these third party sales increased by 20% to 5.8 million and margin per gallon increased to $0.05 per gallon from $0.042 per gallon a year earlier. The margin improvement was largely driven by a strong performance in our commercial fuels business.

Gallons sold by the partnership to Susser Holdings for resale at Stripes stores and independently operated consignment sites increased by 5.7% versus the prior year period to 251.1 million gallons. This growth mainly reflects gallons sold by new Stripes convenience stores.

The partnerships average fuel margin for all gallons sold was $0.036 per gallon in the first quarter, versus $0.034 per gallon a year earlier on a pro forma basis.

Total gross profit for the partnership was $15.6 million, which is up 15.2% from the first quarter of 2012 on a pro forma basis. Adjusted EBITDA was $11.2 million and distributable cash flow was $10.4 million.

We did see an increase in G&A expense this quarter versus the fourth quarter of 2012. Of the 700,000 increase, almost half is due to additional noncash stock compensation cost. The balance is largely due to expenses related to running a separate public company that was not reflected in 2012 results.

During the first quarter, we purchased 6 stores from Stripes at a total cost of $26.1 million and are receiving annual rental income of $2.1 million, in addition to the $0.03 per gallon on the fuel sold by these big box stores.

In April, we also purchased the 2 stores Stripes completed to-date in the second quarter. Since our IPO, we have dropped down a total of 16 Stripes stores and a total investment of $65.4 million, which will produce annual rental income of $5.2 million in addition to the $0.03 per gallon on all fuel volumes sold at the sites.

Now looking at the consolidated wholesale segment of Susser Holdings. Adjusted EBITDA was $12.3 million, compared to $5.2 million a year ago. Of the $7.1 million increase, $6.5 million represents the new $0.03-per gallon markup on gallons sold to the retail segment that we didn't have a year earlier prior to the IPO. The balance reflects the increased gallons sold and higher margins.

Our Wholesale segment added 5 new dealers in the first quarter and discontinued 5, which leaves our independent dealer count at 579 locations, as of March 31. Although our independent dealer count was flat on a net basis at the end of the quarter, our top line of new dealer customers continues to build, and we still expect to bring on 25 to 40 new contracted wholesale sites in 2013.

We've also been busy growing our commercial fuel business, with a customer count increasing by over 60 during the first quarter, which brings our total active customer count in this segment to over 1,700. We also continue to explore acquisition opportunities to further enhance our growth.

And now, I'll turn the call over to Mary Sullivan, to walk you through the financials. Mary?

Mary E. Sullivan

Thanks, Rocky. Good morning, everyone. Before I begin, a quick reminder that our Susser holdings results fully consolidate the results from Susser Petroleum Partners, with the minority interest share of the partnership's net income, deducted as noncontrolling interest.

So looking at the consolidated results of Susser Holdings. This morning, we reported a first quarter net loss of $232,000 or $0.01 per diluted share versus a net loss of $528,000 or $0.03 per share for the first quarter of last year. Adjusted EBITDA was $31.8 million, an increase of $8.8 million from a year ago.

As was the case in the fourth quarter, most of the increases in operating expenses in the first quarter were related to the substantial increase in our store count, which Steve touched on earlier, as it relates to our labor cost. Other operating expenses as a percent of merchandise sales were in line with first quarter last year at 16.2%.

G&A expense in the first quarter increased by $3.2 million versus, a year ago. The majority of the increase reflects the increased personnel and all the other-related costs in accelerating our growth. Approximately $0.5 million of the increase is related to noncash stock compensation expense and another $0.5 million of the year-over-year increase was related to Susser Petroleum's cost of being a public company, which we didn't have in the first quarter of last year. The rate of growth will level out as the year progresses.

We continue to expect our 2013 effective tax rate to be between 26% and 29%. This rate would apply to pre-tax income before deducting minority interests. We are very pleased with the refinancing we initiated in early April, that will lower our pre-tax annual interest expense by $30 million to $32 million. This is reflected in the updated interest expense guidance in this morning's earnings release. The rest of our full-year guidance ranges have not changed. The new revolver includes an accordion feature that allows us to expand it by an additional $100 million.

As a reminder, Susser Petroleum Partners has a separate $250 million revolving credit facility that also has a $100 million accordion feature. Susser Holdings' liquidity position remains the strongest in our history, with the trailing 12-month net debt-to-adjusted EBITDA ratio of 1.1x.

As of March 31, we had nothing drawn on the parent's revolving credit facility. The partnership had $58.6 million borrowed on its revolver at quarter end. Total capital spending for Susser Holdings was about $42 million for the first quarter, of which 2/3 was for new Stripes source of land. Of that total capital spending, $27.9 million was spent at the partnership level, which primarily reflects the drop-down of stores -- Stripes stores that Rocky mentioned.

Now I'll turn it back to Sam.

Sam L. Susser

Thank you, Mary. Operator, we're now ready for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Good morning, everyone. I guess my first question is weather-related challenges that you mentioned in the quarter. Could you talk about some of the initiatives that you actually can control during this quarter to offset the colder weather, especially since your lapping the strong quarter from last year, as you've mentioned. And then can you give us a little more color on what drove your slightly lower merchandise margins this quarter?

Sam L. Susser

Sure. We are paying particularly very, very close attention to what's going on in our market pricing, promotions from our competitors. We are tracking sales trends for each of the core categories of our business, what's happening within the industry and within our region. We are working on driving growth in food service, there's certain region of the company, for example, that is underdeveloped with respect to the breakfast day part. And we have a very significant initiative working there to bring that up to where we believe it ought to be, that initiatives include sampling, television advertising, targeted at this one region. So we're very one store at a time, one community at a time paying attention and trying to respond. We are upping the ante on our local store marketing efforts. And for better or worse, there's not one big idea that creates success in the convenience store business. It's blocking and tackling and getting hundreds of little things lined up, and we are definitely paying attention because there is some softness out there, and we're trying to be sure we're not leaving anything undone. With respect to the margin, over the longer term, Q1 is generally the softest margin quarter for our company. We feel pretty good about the outlook for merchandise margin as the year rolls on. There were some timing differences in rebate recognition, especially as it relates to the cigarette category. So we had -- there's going to be some lumpiness for us in that recognition, and we expect cigarette margins to improve and stabilize a little bit from they were -- where they were in Q1, although the long-term trend of the category, as you know, as well or better than anyone, it's a tough category. But there are some timing differences that impact the margin in Q1. We feel pretty good about the outlook for merchandise margin for us, it's very, very solid. We hope to see a return to big strength in comps when Texas summer finally arrives, it hadn't showing up yet, and it was supposed to have been here 6 or 8 weeks ago, but the margin side of the business feels real solid.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. And then speaking of cigarette tax, I had a question for you regarding the potential for a sharp federal excise tax increase. Although I think the probability that this happens is low, if it were to occur, what impact would this have on your business? I guess, I assume, traffic would be negatively impacted and therefore merchandise sales. And I guess, I'd be curious to hear how you -- your business was impacted in 2009 when the FAT increased to $1.01 per pack and -- what initiatives you implemented to try and offset some of that?

Sam L. Susser

Yes, we did see a downshift that kind of killed off the end of the carton business, that last month. And our profits really weren't impacted that much because customers moved from the carton to the much more profitable single pack, that trend though, is behind us. And I think an increase in excise tax would be a slight headwind for us for the reasons you cited, with just a little bit fewer people buying cigarettes, and we, obviously, we'd be mindful of that. I think, longer-term, we're going to be in the cigarette business, we're going to be a very big committed player because of the traffic it drives and the related sales that come with it. I think, though, at some point, there'd probably be some retailers that ought to get out of the cigarette business, not in the convenience store side, but at some other formats because the profitability seems to be kind of leaving the sector for those that are low market share players. But the convenience store industry, I think is going to continue to represent this segment well.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. Just final question is on the loyalty program potential. You've alluded to this as being an opportunity for you, and I'm curious, are you any closer to being able to discuss this potential?

Steven C. DeSutter

Bonnie, this is Steve. We're not -- no, we're not close enough to discuss its potential, but you should expect that we'll have a program in place before the end of the year. This is in test and we're evaluating what we see other retailers and other retailers in the channel are doing and we're moving on with our plan but it will take a little while. We're going to be very thoughtful about a program like that. When you make a promise to consumers, you need to be able to keep it, and we want to make sure we do that.

Operator

Our next question comes from the line of John Lawrence with Stephens.

John R. Lawrence - Stephens Inc., Research Division

Sam, would you discuss a little bit the competitive framework and the landscape and maybe a deeper dive into which markets, which categories have you seen over the last 3 months -- is some of that competition in certain categories intensifying, which one would they be? And what type of player are you seeing most of that competitive threats on?

Sam L. Susser

In the competitive landscape, this is the double edge sword of being in the great state of Texas. We have great demographics, real strong economic outlook, but it's no secret. And there are a lots of big national players that are increasing their square footage in a variety of formats. And traditional truck stops and convenience stores are starting to put -- plant more flags, when that happens, often the grand opening impact as these competitors get their stores going is -- it can be felt within a region and that will be across fuel, cigarettes, beer and soda, usually, but biggest impact will be in fuel. I would say looking at the retail landscape, Wal-Mart seems to be very, very, very focused on some of these big core categories that they're wanting to increase their share in. Beer would be an example, where we see they're being very, very committed to growing their share, and also plenty aggressive on the packaged beverage side of the business. Not that our well-regarded regional supermarket chain is trying -- is prepared to cede any ground, it's a battle of the titans down here, they're very strong. The food service competition is very competitive, but not materially different from the year ago. It was hand-to-hand combat a year ago and it still is. But the value that Laredo Taco offers with homemade, delicious food and compelling prices is doing well and it remains a real strength of our business and we're grateful to be in the category. I think that -- I would say that our fuel is volatile, largely because the direction of fuel prices, and everybody is aware of that. But it's also volatile because of what happens on the street with gas wars and grand openings and that sort of thing. So the competitive landscape there is not different than in the past, but with more new openings out there in the marketplace, fuel margins are likely to be plenty volatile over the next year or 2 as people move in to take advantage of the growth here in our region.

John R. Lawrence - Stephens Inc., Research Division

And, Sam, just to follow that, would the Houston marketplace where you've got maybe less density, would it be more of an issue in that market maybe than down South Texas?

Sam L. Susser

I think the market dynamics of any of the many markets that we are in are a little bit unique, John. But -- I think where we have lots of stores we go to market a little bit differently than where we have fewer stores. And so Houston, kind of, falls into the latter category. But I think it has more to do with our penetration as opposed to the dynamics of the city itself. I'm not sure I got to the heart of your question, John. But...

John R. Lawrence - Stephens Inc., Research Division

That's fine. That's fine. That's helpful.

Operator

And our next question comes from the line of Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Just following on John's question. You’re in a bit of a catch-22 situation here because as you roll out your store base and as you expand into new markets, by definition, you're going to have fewer stores in those new markets. So as you plan your expansions, I think you said you were going to have 3 in Waco, or on the corridor near Waco, is that really how we should think of you doing it, sort of, really going in with what you perceive to be minimal, critical mass on store counts so that you can establish that footprint and be a presence in those markets?

Steven C. DeSutter

Irene, this is Steve. That market, as we said in our comments, those 3 under construction, but there are more planned. So over a 1- or 2-year period, there's -- that region up and down I-35, Stripes will become a well known brand, it's just a matter of pacing and timing. So you should expect to see us go in, in a bigger way than any one market opening a new market with just 3. Our plans are far more than that, we just haven't been more specific with the marketplace about how many more.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Okay. And presumably you're not going to be, Steve?

Steven C. DeSutter

For competitive reasons we just -- we still have lots of properties in the negotiation process. We just -- we don't want to give a lot of guidance on how many stores are in the planning cycle for what particular market. But we certainly don't enter a new market with a view to be 3 or 4 stores, that's not enough to be efficient and take -- or take advantage of the strengths of our brand and our offering.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Understood, thank you. If I could just ask a question about competitive activity. The rollout of cigarettes into some of the Dollar Store players have certainly been a topic of conversation. And I'm just wondering whether within the context of this competitive intensity that you're talking about Sam, whether those Dollar Stores are a big factor, really whether it's more some of the other channels?

Sam L. Susser

We were with one of our key suppliers yesterday and they said just a few cigarettes times 15,000 stores is a lot of cigarettes, and -- but they aren't -- I don't think they have enjoyed a meaningful success yet with their rollout strategy, but they're such big companies. Their expansion into these categories like salty snack and soda and dairy and cigarette is definitely having an impact, but it's not huge, it's really a combination of multiple channels. Some, like the Dollar Store, are broadening their offering to go after that core convenience-driven customer. Some are putting down more stores, the drugstore channel is a very good example of that. We continue to see rapid acceleration amongst these big footprint drugstores that are also, like us, seeking to fill that in-between shopping occasion between visits to the great big giant retailers. And growth from a number of other formats that I've previously talked about. So it's a little bit Dollar Store, it's a little bit drug, it's a little bit traditional convenience, it's a little bit the great big boxes being more aggressive trying to drive their own same-store sales growth. In a consumer environment that is feeling the pinch of higher payroll taxes and employers that are feeling uncertain with the impact of health care reform next year. It's a challenging environment. We remain so grateful to be in this part of the country, but we are not immune to the headwinds that consumers and businesses are feeling across the country.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great. And finally, one last one, if I may. As you look at the stores that have opened recently, are you seeing any impact on the way they're ramping? Are you still very happy with the way they're ramping?

Sam L. Susser

We are really pleased with the sales ramp. Our labor efficiency is not great in the first 3, 4, 5 months, but we're pretty optimistic that it will improve as other stores have, as they work through the maturation cycle. But we're very pleased with the overall volumes that we're getting, especially with food. And we've been pretty pleased with the fuel volumes, where -- it's taking us a little longer to build the core merchandise categories, the non-food service categories. And there are certain markets where they don't know Stripes and they don't know about the consistently good value we offer on a lot of take home packages that other convenience stores don't go after in the way we do. And with the passage of time, our experience is we will earn that vote of the customer, by being consistent out there. So a little slow on the merchandise side, good on food and fuel.

Operator

Our next question comes from the line of Kelly Bania with Bank of America Merrill Lynch.

Kelly A. Bania - BofA Merrill Lynch, Research Division

Just wanted to touch on expenses for a second. They just seemed a little bit elevated this quarter, and I know you guys have talked about that. But I think you mentioned personnel expenses, at least in your same-store base, also de-leveraged by about 100 basis points. I was wondering if you could touch on what's driving that. And then if you still expect to leverage expenses in the second half?

Sam L. Susser

I really appreciate the question, Kelly, it's something we would like to expand on. We were hit with a big change in weather pattern in January, and we had a foot fault. We did not adjust our labor spending as quickly as we should have and as fast as the standard in which we hold ourselves. And our expense controls started off not where it should have been. And Steve and Richard and the team are making progress of tightening those sales and it continues to get better, and we do expect to get leverage. As we've talked about in prior calls, really starting in the second half or fourth quarter of this year, because at that point the rate of acceleration of new stores will have worked its way through the system. We're adding 800 to 1000 new employees a year now. And we have to bring them on board in advance of when the stores open. So there's quite a bit of labor that's in our same stores before they move into the actual opening of the new stores. And as you know, they're not efficient in the first 6 months of a new store operation. So we definitely ramped it up and it's going to be a full year ramp up and we'll start turning that corner for -- we think pretty -- for sure beginning in the fourth quarter, hopefully a little before that. But we have visibility that efficiency ought to start getting really sharp on the operating expense side from the fourth quarter forward. One headwind, health care, next year and before we start pumping our chest about efficiency and operating expenses, we should caveat that, that's going to be a challenge for all retailers next year.

Kelly A. Bania - BofA Merrill Lynch, Research Division

Is there any additional color you can provide on some early estimates on how the health care will impact you?

Sam L. Susser

Not reasonable estimates, Kelly, it's million of dollars, it's not tens of millions of dollars. Probably it is going to be direct health care expense increases, but will also result in pressure on wages because the shifts in the workforce and workers going to have to move from basically being at one company to holding down 2 or 3 jobs. The way the rules are being created there's just unintended consequence that's going to put pressure on employees and companies. So it's -- I would rather not quantify the number at this time, we just don't have enough visibility. We're working it really hard, we're trying to be really smart and thoughtful and we want to take care of our tenure store employees. They're great at customer service, great at delivering food, we don't want to run them off because of the way we go about implementing the letter and spirit of health care reform.

Kelly A. Bania - BofA Merrill Lynch, Research Division

Great, that's helpful. And then just another one on same-store sales -- or a few more on same-store sales. One, I guess, can you quantify, if at all, what you think the impact of the Easter shift was? And then, two, can you comment on any regional differences that you're seeing, if any, in your same-store sales trends?

Sam L. Susser

Sure. I'd say kind of 0.5% to 1% on the impact of the Easter holiday. For us, it's a little more of the Easter. It's a big holiday in Mexico when customers take the week off and come up to the South Padre and North Padre beaches. And so it's a pretty big shift for us with all the tourist traffic. In terms of regional differences, there are -- there's bumps every quarter, so I'd rather share more than a one quarter observation. Strength from Houston, Victoria, Corpus Christi, Odessa, Midland, and all the parts in between. Softness in Oklahoma, a couple pockets of North Texas where we are at and down in the lower Rio Grande Valley, Brownsville, Harlem and parts of McAllen would be kind of the trend we're seeing. So our correlation there to the parts of the region that are benefiting from oil and gas activity continue to have pretty strong trends so volatility from quarter-to-quarter. In the other areas are seeing patterns that are more consistent with national data.

Kelly A. Bania - BofA Merrill Lynch, Research Division

[Operator Instructions] Our next question comes from the line of Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Sam, I guess given the stiff competition in the market, have you experienced, I guess, any trends in M&A opportunities, especially I guess maybe a desire for some of the smaller operators to sell?

Rocky B. Dewbre

Sharon, this is Rocky. We're actively looking at the growth opportunities in -- throughout our footprint. And we are seeing opportunities. We're looking to grow in a prudent way. Just don't have anything to announce at this time, but we're working it hard and we are hopeful that we'll have some good news sometime in the future to report.

Sam L. Susser

I think that probably the deal flow is on the upcrease -- uptick in terms of how many opportunities we see. But I think there is some seller expectations that are very, very, very pricey. And we would really like to continue to grow by acquisition, we're working hard on it. And there's some great businesses out there with people and assets we'd really like to bring in to the family. But we're going to remain price disciplined.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And, I guess, also for the -- in the real estate market, given that it's picked up, have you faced, I guess, increased competition to replenish your land bank?

Steven C. DeSutter

This is Jeff. We are seeing competition 4 corners both from convenience stores and drug. And so yes, that is it is heating up, and we remain disciplined about what we're willing to pay for a corner and we've got a great real estate team out there turning over all the rocks. So that's just the underpinning --

Sam L. Susser

We're buying a little bit bigger sites, sometimes that's how we're dealing with at the marketplace. We will buy sites that are 5 acres, and then develop the corner. And then fell off the balance to bring down our total cost. So it's just every corner has a different set of facts and circumstances and yes, there is competition out there and we will reach out and buy more greener sites that won't be developed in '14, but maybe developed in '15 or '16, but, at least, we're out there on the front end and being able to secure those locations.

Operator

Our next question comes from the line of Ben Brownlow with Raymond James.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Can you just comment -- give us a little bit of an update on the labor hour management tools that you have in place. I know it's a longer-term initiative, but just an update on the test stores, what you're seeing with the roll out there.

Steven C. DeSutter

This is Steve. We are in the final stages of preparing our training and our execution to fully roll it out to the rest of the business by early third quarter. And what we're seeing is we've learned through our beta, which is why you do them. And we figured out how to make it a more -- even more user-friendly and put more usable data in the tool. Our store managers now and they are going to be able to schedule their labor, they'll create a sales plan, and from their sales plan they'll schedule their labor and they'll see their percent of sales right there, in real time, based upon their actual store hours and their actual store labor hour cost. Test has been great, very successful, and we realized we had to get them bigger screens and put bigger screens in the stores so they could see all the information and schedule it quickly. We're making those investments, so it's right on track. We like it, and we -- and our store managers love it.

Sam L. Susser

I'd point -- add one thing, Steve. You and Bob and Richard have developed a very enhanced, robust, General Manager training program that we started with at Houston, and -- as we were beginning to open in that market, now have expanded it to West Texas, which is a market that has been the toughest for us from employee retention and turnover. And the initial results there bringing turnover rates down and overspending more money in labor. One thing that I think is relevant here is that we -- last year, we're very efficient labor-to-sales in that market, but we just didn't have enough hands on the floor to do the job right. And with the -- in the second test market, with this program, retention is starting to come in, we're getting better trained people on the floor making it a better place to work. And yes, it's -- we're spending more money, but it's the right money, and I'm glad we're doing it.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Okay. And then just one follow-up, on the higher margin other revenue category, roughly $13 million. Growth was a little bit lower than I'd modeled. Can you just talk about the dynamics there and what was driving the growth?

Sam L. Susser

Ben, you're asking about the growth in the food service category? Higher margin.

Mary E. Sullivan

Other revenue. Part of that, Ben, you get a little bit of lumpiness on lottery, depending on when the big jackpots are.

Sam L. Susser

We -- last year there were a couple of enormous mega-million sort of jackpots that weren't -- jackpots just didn't get as high this year, so we haven't seen the same volume in other income as there was last year, but that is something that's totally random. I know that we are relative to other retailers performing well in this area and we're continuing to improve customer service and investing in new flat screens and so forth. As I think our business is intact there, but I think it probably more relates to the timing of some of those bigger jackpots.

Operator

Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Good morning. I may have missed this but the lower same-store sales excluding cigarettes in the quarter?

Sam L. Susser

They were 4.6%, and cigarette sales were up 2.8%.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

And also I think, Sam, you mentioned that there was a timing issue with the rebate recognition. Could you perhaps quantify or at least give some color about the magnitude of that?

Sam L. Susser

Forgive me for slagging here, there's lumpiness that affected about 5 categories. The biggest of which was cigarettes. And directionally, about 50 basis points on margin, that's probably Q1 to later in the year.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. So as a result, you do expect that you'll be able to certainly be well within your guidance for merchandise margin, despite being below that range in the first quarter?

Sam L. Susser

Yes.

Mary E. Sullivan

Anthony, it's a timing difference.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. Got you.

Sam L. Susser

Yes. Our guidance is annual guidance by design. And we don't expect to be within that range on each quarter. We have an -- we would need wider ranges for sure, because of the great seasonality in our business. So -- we continue to feel good about our annual guidance. Our company typically fine tunes that guidance in -- after the second and third quarters of the year. And so we'll continue to look at it real hard when we get together next earnings call.

Operator

And our next question comes from the line of Ben Wyatt with Stephens.

Ben Wyatt - Stephens Inc., Research Division

Hey, Rocky, on SUSP side, I wanted to see if maybe you can give a little more color around that $0.05 per gallon third party margin number. Is it just your ads volume spot pricing? Maybe if you could just talk a little bit more about that.

Sam L. Susser

Well sure, Ben. Within that category, obviously, that includes our dealer supply customers, as well as our commercial business. And we've had some good success in the commercial segment, a lot of great folks out there working hard trying to pick up new customers and we've talked about the oil and gas activities, other customer categories within our commercial segment, but we've done well in that segment and that chunk of it. With the volatility in pricing, if the absolute dollar amount of fuel is higher one period versus another, that also can impact our margins some. So it's a several different things, it's not any one thing, but the biggest item is the commercial fuels fees.

Ben Wyatt - Stephens Inc., Research Division

Got you, appreciate it. And then I guess just one for me. You alluded to it a little on the G&A side. Is this quarter kind of a good run rate for us to use going forward?

Mary E. Sullivan

I'll take that one, this is Mary. I think it's pretty close. We are still ramping up some of the costs we'll have of running the separate public company, but being first quarter, keep in mind there is a little bit of lumpiness, sometimes you have some annual costs that tend to get paid in the first quarter. So short answer is I think we're pretty close to being there, Ben.

Sam L. Susser

Ben, I look at it as -- when we were trying to model this thing out, we did the best we could. Overall, our -- for the quarter, our gross profit was a little better than what we had estimated and our cost side was a little higher. Overall, we came in, I think, pretty well in line with what we expected. But quarter-to-quarter, we're still trying to figure out what G&A is going to look like with this new public company.

Operator

Our next question comes from the line of Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Can you provide an update on the trend in shrink and shortages and how your efforts and technology are working to improve shrink?

Steven C. DeSutter

Lee, this is Steve. We -- and I don't have the number right number in front of me, but I would say that we were in line with the year ago, maybe slightly better in the first quarter on our key controllables, that's coming from technology and it's coming from stabilization and some improvements in turnover and store management, who, obviously, has to be trained to use the tools. So they're working together and they're marginally on plan. We expect to see that improve as we go through the year. But January, again, is one of those -- January, February, March, that first quarter is just a pretty tough quarter for us in terms of controllable. So expect to see that improve, but year-over-year, it looks good.

E. V. Bonner

Looks good, the -- we've got some low hanging fruit over the last few years and big baskets of it. And we're holding onto that and maybe getting just a little bit more. And we hope to get a little bit more in the next few years, but I don't see opportunities for big leverage in that area. Pretty comfortable that we're going to really be able to improve our labor efficiency and effectiveness over the next couple years further, less opportunity probably on the short-term side.

Operator

Our next question comes from the line of Ronald Bookbinder with Benchmark Company.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Could you talk about blending your own fuel? How it impacts profitability and how you see your percentage of blending trending going forward?

Rocky B. Dewbre

Sure, Ron, this is Rocky. So when we have the opportunity to blend our own fuel with the rims that come along with that, it obviously provides a margin enhancement opportunity. We have increased, somewhat, our volume that we're blending and are looking at opportunities to continue to grow our unbranded segment as we supply fuel to third parties including Stripes. So I think last year was all in for the year, was around 5% of the total volume that was bulk. Bulk is what we call our volume that we blend ourself. And that number it's growing but it's still small relative to the overall business.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And over time, what percent do you think that could grow to?

Sam L. Susser

Probably hinges on how supply negotiations go with some of the major refineries as we approach contract terminations. It potentially can be very significant, but it really will just hinge on how those negotiations go.

Rocky B. Dewbre

It is something, obviously, that we're very aware of and are evaluating options.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Okay. And just on the weather issue, did you have some regions or some weeks where weather wasn't an impact? And so if you could, sort of, tell us how much of a comp impact do you think weather had on you guys?

Sam L. Susser

We haven't had a week yet with a typical Texas 100-degree weekend. We just haven't had one yet. So directionally, the difference between hot and cold is 5% or 10%. And it's going to be hot this summer, that's for sure. Highly likely, blazingly hot. 3 or 4 weeks from now, it's coming.

Operator

Our next question comes from the line of James Jampel with HITE.

James Jampel

That $0.05 a gallon margin on the third-party customers, I understand from your other comment that you had some new commercial customers that might have pushed that average up. Do you consider that to be sustainable going forward?

Rocky B. Dewbre

This is Rocky again, so as I think about that piece -- and we've been in the commercial fuels business for many, many years. That's the roots of our company way back since grandfather. So we're very familiar with the business. The margins in that business ebb and flow just like the other pieces, the level of profitability we achieved in that segment in Q1 is not abnormally high, it's just relative to what it was last year in that segment, it was higher. So yes, I would say that -- let me say it differently. The overall margins we're achieving in the segment are not abnormally high and, therefore, over a longer-term, I think it will be sustainable.

Sam L. Susser

With some volatility around them.

Rocky B. Dewbre

Absolutely.

James Jampel

Okay. Great. And given your overall statements on the, like, increasingly competitive landscape you see there -- all goes to plan?

Sam L. Susser

Yes. We're looking at the second full year of operation of the MLP versus the first. We feel that our business remains on track to achieve that objective.

Operator

And our next question comes from the line of Suzanne Franks with Vivid.

Suzanne Franks

I was wondering what your competitive expectations might be for CST Brands, which was just spun out of Valero recently?

Sam L. Susser

They're a well-run competitor that we have some overlap in deep South Texas and in Houston. They have run their business well and been innovative, and we see signs of them accelerating new store growth. But there -- in most markets, we don't have much direct overlap. We certainly view them as a healthy, successful competitor and they'll probably have even more focus in the years ahead, probably have been very, very busy preparing for the spin-off of the segment.

Suzanne Franks

Right. So you said overlap of your stores is really limited to Houston, deep South Texas and maybe that overlap is what, 20% of your stores? Or 30% of the store base? What?

Sam L. Susser

Closer to 20% probably.

Suzanne Franks

20%? Okay.

Sam L. Susser

They have a lot of stores in some metropolitan areas [indiscernible] wholesale fuels presence. So there's not a lot of direct overlap with Stripes but there is with our very valued wholesale customers.

Operator?

Operator

Yes?

Sam L. Susser

I think we're at the end of our time.

Operator

All right, let me turn the call back over to Mr. Sam Susser for closing remarks.

Sam L. Susser

Thank you, everybody, for dialing in with us. The company continues to mature and strengthen, and we appreciate your interest, and we hope you'll come down and see us again soon. We really enjoyed hosting those of you that were able to be with us on our Analyst Day, and look forward to doing that again at the not too distance future. Have a great day, everyone. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Susser Holdings Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts