Susser Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Susser Holdings (SUSS)

Susser Holdings (NYSE:SUSS)

Q2 2013 Earnings Call

August 07, 2013 10:00 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

Kevin J. Mahany - Vice President of Merchandising

Analysts

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

John R. Lawrence - Stephens Inc., Research Division

Irene Nattel - RBC Capital Markets, LLC, Research Division

Michael Otway - Wolfe Research, LLC

Sharon Lui - Wells Fargo Securities, LLC, Research Division

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

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

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

Karen F. Short - Deutsche Bank AG

Operator

Good morning, ladies and gentlemen, thank you for standing by, and welcome to the Susser Holdings, Susser Petroleum Partners Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 7, 2013. I would now like to turn the call 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 second 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 1 or both of those lists, please send your request via the IR pages of our website, and we'll be glad to add you. A replay of this call will be available on the web for at least 60 days and via our telephone replay until August 14.

To access the replay on the web, go to our IR pages either at www.susser.com or www.susserpetroleumpartners.com.

You will find a replay instructions in this morning's earnings release.

A reminder that today's call will contain forward-looking statements. These statements are based on management's beliefs, expectations and assumptions, and include the company's objectives, targets, plans, strategies, costs and anticipated capital expenditures.

These statements involve risks and uncertainties that could cause actual results to differ materially. They are described more fully in the company's annual reports for 2012 and on file with the SEC. During today's call, we will also 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.

As a reminder, the information reported on this call speaks only to company's view as of today, August 7, 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.

Sam L. Susser

Thanks, Chip and good morning, everyone. We were pleased to announce this morning Susser Petroleum Partners' first increase in distribution to our unitholders. The partnership's board declared a distribution of $0.4528 per unit, which represents a 3.5% increase over the first quarter distribution. That's a $1.81 on an annualized basis. Distributable cash flow increased by 14% versus the first quarter to $11.9 million and the higher distribution represents a 1.2X coverage. We are very pleased with the performance of the partnership since last September's IPO. We will of course, evaluate future increases on a quarter-by-quarter basis, but our goal is to continue to grow our distributable cash flow and be in a position to increase our unit distribution regularly. I'll ask Rocky to provide some additional highlights of our Wholesale business and the partnership in a moment.

Now looking at our businesses overall in the second quarter. Cooler than normal temperatures in April and part of May this year impacted same-store sales, as compared to a year ago when scorching Texas temperatures drove a near record 8% same-store merchandise sales increase. The year-over-year comparison was also impacted by the Easter weekend falling in the first quarter this year versus the second quarter last year. The calendar difference had a negative impact of 50 to 100 basis points on the second quarter same-store sales. Same-store sales increased 2.2%, but they were up 10.2% on a 2-year stack comparison basis for the quarter. Overall, total merchandise sales from our 567 Stripes stores increased 8.5% year-over-year in the second quarter, including the impact of the 28 new retail locations we had added in the past 4 quarters.

Merchandise margins were strong at 34.3%, up 20 basis points from a year ago. As expected, our fuel margins were softer compared to the same quarter a year ago, which was a record-breaking period for us. We did not enjoy the falling fuel prices this year that we experienced throughout the second quarter of 2012 and this different trend has reflected in lower margins in 2013. The lower retail fuel margins were partly offset by overall fuel volumes that were 9.7% higher or 5.5% higher looking at average gallons sold per store per week. You'll note in this morning's release that we have slightly raised both ends of our guidance range for average per store gallon growth. Wholesale volumes sold to third-parties were 1.7% higher than a year ago.

Looking now at new store development. We opened 6 new large-format Stripes stores in the second quarter and closed one smaller store. Since the end of the second quarter, we've opened 3 more, bringing our total new stores year-to-date to 13. We currently have 16 additional stores under construction. As you may have noted in this morning's news release, we have adjusted the range of our new store construction guidance and we now expect to open between 28 and 30 stores this year. As a reminder, in 2012, we opened 25 new large-format Stripes stores. As we've mentioned the last few quarters, it typically takes about 6 months for new stores to turn cash flow positive and about 3 years for them to reach maturity. The negative pressure on earnings last quarter from the unusually large number of stores that opened at the end of 2012 has generally abated and that group of stores, as expected, contributed positive cash flow in the second quarter. Although we are still quite away from maturity, this past year's crop of stores continues to steadily improve and it looks like they are on track with our new store performance expectations, which are based on the results we have generated consistently over the past 10-plus years.

The number of actual openings this year, although slightly lower than we had hoped for, will still set a new record for organic growth. And we remain aggressive as we explore markets looking for additional sites for future developments. Now I'd like to turn the call over to Steve DeSutter for a more detailed look at our Stripes store operations. Steve?

Steven C. DeSutter

Thanks, Sam and good morning, everyone. As Sam indicated, the unseasonably cool weather in the quarter -- early in the quarter got us off to a slower-than-normal ramp-up in sales during what is one of the 2 highest volume quarters of the year. Our April was weak with the milder temperatures and the Easter calendar shift, we saw sequentially improved merchandise performance through the quarter. Both merchandise sales and gross profit in the second quarter were led by increases in food service, packaged beverages, smokeless tobacco and candy. We were especially pleased with the results from our Laredo Taco company restaurant concept, outpacing the average merchandise growth, which has a positive impact on gross margin. For those who are interested, comps excluding cigarettes, were up 2.6% for the quarter and 3.5% year-to-date.

Retail fuel volume growth was very solid at 5.5% as Sam pointed out, when we look at average gallons per store. Diesel sales showed particularly strong growth, which again, suggests risk commercial trade, particularly in the 2 Oil & Gas production areas we serve in South and West Texas. As Sam mentioned, the primary driver for lower fuel margin this quarter was the different pattern of fuel cost movements during the period, compared to rapidly declining costs through the second quarter of 2012. Retail fuel margins before credit card expense were $0.182 per gallon, which is after deducting the $0.03 margin Stripes began paying the Partnership last September. So that would be $0.212 before the partnership payment. That compares to record margins of $0.324 a year ago, which we did not deduct the $0.03 fee and $0.246 per gallon on average over the previous 5 years. However, our year-to-date margin of $0.174 is still $0.017 better than comparable first half average for the past 5 years.

We are maintaining our fuel margin guidance for the year of $0.15 to $0.18 per gallon. We've seen some pressure on wages -- more pressure on wages this year than since the recession began in 2008. Also we shared with you on our last call that we were disappointed with our labor control in the first quarter. Our team has been working hard on this and we are pleased to deliver some improvement in labor cost performance in the second quarter compared to the first quarter. Personnel expense as a percentage of total merchandise was 18.4%, compared to an unusually strong 17.7% in the second quarter of last year, but improved by over 200 basis points sequentially from the first quarter. We have just completed the deployment to all stores of the labor scheduling tool we've been working on over the past year. We expect this tool to give us better realtime visibility in the store labor although it will be likely that it will take several quarters for us to realize its full potential. We're continuing to invest in technology and training across the organization to help us make a more profitable company and a great place to work. Competition for workers remain brisk, particularly in the 2 red hot oilfield markets and we're very focused on reducing employee turnover, as well as making sure we're maximizing the revenue per dollar of labor, while at the same time, delivering an outstanding customer experience. Our training program is helping in this regard.

Now I'm going to turn the call over to Rocky Dewbre for more detailed look at the Wholesale business. Rocky?

Rocky B. Dewbre

Think Steve. Good morning, everyone. I'd like to begin with a quick review of Susser Petroleum Partners' results, comparing the actual second quarter 2013 results against pro forma second quarter 2012 numbers. Volume sold by the partnership to Susser Holdings for resale at Stripes stores and independently operated consignment sites increased 8% year-over-year to 264.1 million gallons. This growth reflects gallons sold by our new Stripes convenience stores that have opened during the last 12 months, as well as volume growth in existing stores and at independently operated sites where we sell motor fuel on a consignment basis.

Volumes sold independently there's end commercial customers increased just slightly from a year ago to 124.9 million gallons. Gross profit on these third-party gallons was $6.1 million or $0.049 per gallon, compared to $5.2 million or $0.042 per gallon a year ago. The margin improvement per gallon was driven in part by strong performance in our commercial fuels business, which has benefited from our ability to buy fuel in bulk and take advantage of the recent brands dislocation. The partnership's average fuel margin for all gallons sold was $0.036 per gallon in the second quarter, compared with $0.034 per gallon a year ago on a pro-forma basis.

Total gross profit for the partnership was $17 million, a 20.7% increase, compared to a pro forma gross profit of $14 million in the second quarter of last year. Adjusted EBITDA was $12.8 million and distributable cash flow was $11.9 million. With the increase in the distribution announced this morning, we will pay out $9.9 million of that to unitholders later this month.

Rental income for the quarter was $2.3 million. We purchased 6 stores from Stripes in the second quarter at a total cost of $21.2 million. We purchased 2 more Stripes stores since the end of June for $6.7 million. Since our IPO, we have purchased a total of 22 Stripes stores at a total investment of $89.7 million, including the post completion true-up. These 22 stores will produce annual rental income of approximately $7.2 million for the partnership, in addition to the $0.03 per gallon margin on all fuel volumes sold at the sites.

Looking now at the consolidated Wholesale segment of Susser Holdings, which includes all the operations of the partnership plus the consignment and fuel transport business that were retained at the parent levels. Wholesale adjusted EBITDA was $15.4 million, compared to $8.3 million a year earlier. Most of the $7.1 million increase represents the new $0.03 per gallon markup on gallons sold to the Retail segment that we didn't have prior to the September IPO. The balance reflects the increased gallons sold, partly offset by lower margins on our fuel sales at consignment sites.

We added 10 new dealers last quarter and discontinued 6, which brings our independent dealer count to 583 locations at the end of June. Our pipeline of new dealer customers continues to build and we now expect to bring on 28 to 40 new contracted wholesale sites in 2013. Our commercial fuels business also continues to grow. We added about 60 new commercial customers during the second quarter for a total of approximately 1,800 active commercial accounts that purchase unbranded fuel from us. Now I'll turn the call over to Mary Sullivan for a few comments on the financials. Mary?

Mary E. Sullivan

Thanks, Rocky. Good morning, everyone. 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 adjusted net earnings of $12.5 million or $0.59 per diluted share versus net income of $29.8 million or $1.40 per share in the second quarter last year. The adjusted number for this quarter excludes the impact of after-tax debt refinancing charges of $16.7 million or $0.79 per share.

Adjusted EBITDA was $50.5 million, a decline of $22.3 million from a year ago, which was mainly due to the lower fuel margins. Total operating expenses for the quarter increased by almost 11% over last year, with most of the increase related to the additional store count this year. Store personnel costs remain our largest line item and Steve has already discussed the sequential improvement in personnel expense as a percentage of revenue. Credit card expense is the largest component of other operating expenses. It was $13.1 million for the quarter or about $0.055 per retail gallon, compared to $12.2 million in Q2 last year.

We're extremely pleased with the refinancing that we completed in May, including the new $500 million parent credit facility and the redemption of $425 million of 8.5% notes. Reported interest expense in the second quarter included $26 million of non-recurring pretax charges related to the refinancing. Had we completed the refinancing transactions at the beginning of the quarter, pro forma interest expense would have been approximately $3 million for the quarter. Our income tax accrual in the second quarter was negligible because we had a reported net loss due to the refinancing charge. We continue to expect our 2013 effective tax rate to be between 26% and 28% for the full year. This rate would apply to pre-tax income before deducting minority interests.

As of June 30, we had $220 million drawn on the parent company's revolving credit facility with unused availability of $278 million. The Partnership had $85 million borrowed on its revolver at quarter end with unused availability of $152 million. Our trailing 12-month net debt-to-adjusted EBITDA ratio was 1.6X. Total consolidated capital spending in Q2 was $54 million, of which, about $35 million was for new Stripes stores and land. Of that total capital spending, $30 million was spent at the partnership level, which primarily reflects the drop-down of stores from the parent to the partnership. We have made several updates to our annual guidance metrics, which you will find in this morning's news release for each company. And 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] And our first question does come from the line of Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Sam, you mentioned you expect your growth to accelerate in the next couple of years. Given the strength of your balance sheet, I assume this growth could ramp quickly. Could you quantify this for us or give us an idea of the magnitude we should expect store growth to accelerate? And then in light of this, can you give a little more color on the reduction of your top end of the new store openings this year, maybe what happened there? And then Tommy, talk a little bit about your appetite for acquisitions. It certainly sounds like it's increased. I assume there are maybe more opportunities in the market right now.

Sam L. Susser

Okay, let me take that on, Bonnie. We are looking to, every year hopefully, increase the number of new stores that we're building in our markets, working on the assumption that -- Steve uses the phrase that "The world continues to spin." But in steady-state sort of economy, we think we can accelerate our store growth a little bit. We kind of think about trying to build about 5% or 6% net new stores each year and grow our business through same-store growth in addition to that on top of getting 5% or 6% net new stores, net of closures opened up. In each of the new stores, at maturity is producing 2X, 2.5X the cash flow of our traditional legacy store. So that kind of store count growth, if we can keep that up as the base gets bigger, could deliver very healthy growth to the business. With respect to reducing the top end of our guidance for new stores, it is totally a reflection of shaggy dog stories relating to real estate development issues that have occurred on a handful of locations. Those locations are still under way, in development, and we will help in the same sites, hopefully early in the first quarter, just kind of a timing issue for us. We find the development process is certainly challenging and not getting easier in terms of working with all the different local municipalities. But we are investing more and more resources in it and more dollars in our land bank in trying to get ourselves positioned to continue to accelerate that growth and have more visibility into the number of sites that we're going really be able to open. When we give that guidance a year out, it's our best guess and we try to refine it as the year goes along. With respect to acquisition-related growth, we remain very positive that we're going to be able to identify great assets and great teams that we're going to be able to bring into our network and join the Susser family of companies here over the next year or 2. We don't want to ever comment on any particular transactions, but we are seeing some opportunities that we think will make a lot of sense and fit in very nicely with our core business. And our team is working aggressively to deliver acquisition-related growth with a special focus on the wholesale side and leveraging our MLP structure here and expect to have some attractive things done in the next year or 2 for sure.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And then maybe just going back to something you've said about the larger format stores you've been opening. Could you touch on the growth you're seeing from some of the first larger format stores you opened few years ago? Has that growth from these stores continued to accelerate or is it moderating -- just maybe walk through a little bit of the lifecycle for us, if you could?

Sam L. Susser

Sure. And I want to kind of speak to the average of the portfolio. We generally see our new stores in the first 3 years of their life cycle to outperform on a same-store basis, 1% or 2% or 3% a year in terms of the amount of outperformance of same-store growth. But we also see improved efficiency in labor management and store expenses. So whether it's store supplies, maintenance, shortages, there's a lot of different expense lines and moving levers and we tend to see stores improve in profitability quite a bit. So our long-term experience is, if you get past the first 2 or 3 months of the grand opening process, the first real 12 months, we are generating 10%-ish incremental 4-wall cash flow divided by the total investment, assuming no drop downs to the partnership, just gross investment. That is typically moving to the low mid-teens in the second year and approaching 18%, 20% and in some years, it's actually exceeded that, in the third year upon maturity. But on average, we think of it as low double-digit, the first year. Low mid-second digit, middle -- excuse me, low to middle double-digit in year 2 and approaching 20% in year 3. And we expect that kind of performance to continue as we've increased the number and size of stores here over the last 18 months.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

And those become a greater portion of your base as you mentioned?

Sam L. Susser

Yes, and it's really helping us on the food side. Every new location offers Laredo Taco. Laredo Taco is very well received in the marketplace. It's increasingly important to our business. It's a driver of our beverage and snack business. And every time we open a new store, it helps us from a brand awareness standpoint too. It seems to have kind of a halo effect on the rest of the business. We're really very pleased to see that the business is taking share in many of the core categories that we operate in and we think having the biggest, best boxes in our market is a huge part of that.

Operator

And our next question does come from the line of John Lawrence with Stephens Inc.

John R. Lawrence - Stephens Inc., Research Division

Sam, would you discuss on a fuel margin just a little bit. I mean, obviously, the last couple of years you've enjoyed really good margins. Anything happened this, I mean, with a tighter volatility and everything in this margin with this summer with that less volatility. Did you see some of the lower-priced guys do anything different with value pricing? Or anything you can point to from a pricing mechanism that made it tougher?

Sam L. Susser

John, I think the overall competitive set -- it remains competitive. We're up against some large very sophisticated big-box fuel marketers as aggressive today as they've always been. I haven't seen a big shift or change in strategy. We did not have any decrease in the cost of fuel to speak of in this quarter, which is unusual. Normally prices move up early in the year as the refiners prepare for the summer driving season and as they build inventories and then during the summer, it usually goes the other direction as they start building inventories of heating oil. We just haven't seen that yet so far this year. So comparing year-to-year, our real difference is the lack of volatility down and the cost of gasoline. It would be -- I'd be remiss if I didn't note that government policy has been very, very well reported, has created a shortage of these REMS and that has created some distortions in the fuel marketplace that are impacting different retailers in different ways in different markets. And we're certainly are part of that. We're a company that we feel some disadvantages at some places and we felt advantages where we are buying fuel in bulk and doing blending and so forth. So that's 1 element in the fuel supply chain that has been different in the last 90 days that is impacting the retail marketplace.

John R. Lawrence - Stephens Inc., Research Division

And just to take that disadvantaged position where somebody that has the RINs, can you give me an example of that?

Sam L. Susser

In cases where a marketer is not blending product and if their supplier is not passing along and they're competing heads-up with somebody that has a RINs buying advantage because they're blending or have a different arrangement on the supply side, would create that kind of advantage.

John R. Lawrence - Stephens Inc., Research Division

Great. And secondly, Steve, I don't know is there anything on the merchandise side as you move through that first quarter to second quarter on some of those new boxes sort of expanding that base business a little bit. I know LTC has started strong in a lot of those, but some of that base business starting to pick up in some of those...

Steven C. DeSutter

John, the new boxes I think it was in Sam's comments, turned to positive cash flow in the second quarter and that's across the board just strong growth, continued strong growth in food service as Sam has mentioned and as we said it led the way this quarter across the company. And the associated sales with it, so snacks and candy were especially strong. It's been a competitive retail market. The big boxes that set us apart, so nothing particularly new other than the kind of strength in seasonal growth we expected is exactly what we saw on those new stores.

Operator

Our next question does come from the line of Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

If you could just provide a little bit of color on the competitive environment overall, both for inside the store and I guess you touched a little bit on the fuel side, and we're also hearing a little bit more about stepped up competition in the QSR space. So, that as well please.

Sam L. Susser

Irene, we see the reports of very large retailers and some very large CPG companies that are really struggling on delivering same-store growth in the retail side or unit growth with the manufacturers. And definitely, there are certain retailers both the very, very large end of the spectrum and some smaller family regional chains that we see working it hard on promotions of being aggressive in certain packages, certain SKUs. Doing things to try to reverse that softness in the market, and it's greater today probably than a year ago. I'm not particularly concerned by it. I think we have long-term demographics and a real strong long-term economy and great people and the best real estate. And I think it's a winning combination as our competitors kind of ebb and flow on their promotional activity, but there's no doubt that there are some guys, big and small, that are -- they're making changes in their offering to respond to softness in their business. On the QSR side, I think it's moderately -- there's moderately more price aggressiveness, but it's not significant versus a year ago. I think the ever since the recession the QSRs have had to resort to more and more dollar pricing and value pricing of their menu. And that may be a little bit more so today than a year ago, but not much more so. They've been down and dirty for quite some time and I think feeling pressure on their margins as a result.

Irene Nattel - RBC Capital Markets, LLC, Research Division

It makes a whole lot of sense. And again, just continuing on, are you seeing much Dollar Store impact in your space?

Sam L. Susser

Stripes is doing well. We are taking share and growing share in all the core categories that we are able to assess and have visibility into. But definitely, the Dollar Stores are 1 retailer -- 1 retail channel that's doing the same thing and they are also growing share as they add more and more SKUs and more complexity to their offering. They are having success at growing share, but it doesn't seem to be at the expense of Stripes. It seems to be having more impact on other retailers in the marketplace. But no doubt about it, they're growing share in a number of important categories.

Operator

[Operator Instructions] And our next question does come from the line of Scott Mushkin with Wolfe Research.

Michael Otway - Wolfe Research, LLC

This is actually Mike Otway in for Scott. So Sam, it sounds like you're working hard and having some success on improving the operating costs. Is this something that we should expect will continue for the rest of the year? Albeit personnel and G&A and some -- a lot of those costs with the new stores?

Steven C. DeSutter

Yes. So as the new stores mature -- Mike this is Steve. We're also rolling new stores into the portfolio as well. So there's still the maturing of those new stores and their first couple of quarters as well. Our expectation is to see a slight improvement sequentially, but we've got a tough labor market. We've got a lot of wage inflation and that's making it hard to produce [indiscernible].

Sam L. Susser

If I look at over next year, I'm very confident in Steve and our team's ability to creatively find ways to reduce core expenses as a percent of merchandise sale. And we now have 31 new stores operating today that aren't in our same-store base. That's materially more than it was a year ago at this time. So we have that kind of expense pressure from that past ramp-up of these new really big-box stores. But I don't see the 31 becoming much, much higher than that over the next 12 months. So I think that's going to take a little pressure off Steve and the team as they're striving to deliver improvement on expenses divided by merchandise sales.

Michael Otway - Wolfe Research, LLC

Okay. That's really helpful. And then in terms of the delay in the store openings and those getting pushed into the first quarter of '14. What are you guys doing to standardize the process, partly to make the timeline more predictable, but also keep the expenses low in case things slip as you're negotiating real estate and things like that?

E. V. Bonner

This is Chip. The shaggy dog stories that Sam referred to, a lot of it has to do with the municipalities at work, developing in and that they've seen increased development in the form of new housing, new Commercial business, et cetera. They've not increased staff at these municipalities. So plan review is taking increasingly longer and so, what used to be a 3-week process now is 8 weeks process. And so it was that unattended consequence of a rising tide and rising development in our markets. So what we're doing is getting things in the queue much quicker. Many our first, say 16 stores that will be built next year are already been submitted for plan review today. So those are the type of things that we're trying to get out in front of and it's just a function of each municipality has different issues that we're dealing with.

Operator

And our next question that does come from the line of Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

So I noticed at the Partnership level the third-party fuel margin per gallon increased $0.049 from $0.042 last year. Just wondering if that rate is sustainable? And also, looking at the wholesale third-party fuel margin at the holdings level, it was actually down year-over-year. Can you maybe also explain what accounts for the difference in the move of that -- margin of the holdings level?

Rocky B. Dewbre

Sure. This is Rocky. So the third-party margin at Suss P. The increase there we mentioned our Commercial business has done very well both this quarter and last quarter. We've had some benefit from RINs. That Commercial business is unbranded and some of that we blend and we're able to get the benefit of the RIN. So those -- are 2 things that we have found very helpful. As far as sustainability of that going forward, if you can tell me what RINs will do, I could probably give you a better answer, but that's a part of it.

Sam L. Susser

And we've been able to take advantage in this segment of our business of the higher value of RINs, pretty optimistic. That's a continuing trend, but we don't have pure visibility into it.

Rocky B. Dewbre

The volumes that we're able to blend is -- are increasing but the price at which we're able to sell the RINs, we don't know what that's going to be going forward. So that's kind of a give-and-take. As for the wholesale margin, the Wholesale segment margin. If you remember inside that business is our consignment sites. So at the Wholesale segment level, we have all the Partnership plus the consignment, the transportation business we did not contribute. And we saw some margin decline in Q2 this year versus same time last year.

Sam L. Susser

So the consignment business has seen the same sort of margin compression that the retail Stripes stores have. And that margin is captured at the Susser Holdings, not at the partnership in terms of financial reporting.

Rocky B. Dewbre

Correct.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And I guess in terms of the benefit from the RINs, given that I guess the EPA made some announcement room pricing has declined a bit and the action. Would you be able to isolate what was the benefit from the RINs on the margins during the second quarter?

Rocky B. Dewbre

Sharon, we don't want to give a whole lot of details on that. We can obviously tell you that we've increased the amount of the quantity of fuel that we blended Q2 versus Q1 and we will continue look for opportunities to do that, but we don't want to share any more details than that.

Sam L. Susser

For competitive reasons.

Operator

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

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

Mary, could you talk about the G&A decline year-over-year and just how we should think about that going forward?

Mary E. Sullivan

Sure. G&A for the quarter we did have some lower bonus accruals, which to match up the performance that we saw in Q2 against our internal target. That's going to be the biggest delta sequentially from Q1. I think as you look at the run rate, obviously we were a little bit lower this quarter than we were in Q1. The run rate is probably somewhere in between, but again it's going to depend on our performance as we go forward into Q3 and Q4 and what we record there for the related bonus expense.

Sam L. Susser

There are a lot of people in this room, Ben, that would sure like to see that G&A line a bit higher.

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

Understood. And on the guidance that you gave for fuel comps of 2% to 5%. I guess the lower end of that and even the upper end implies a modest deceleration on it to your basis for the second half. Can you just give a little color around that volume guidance and what you're seeing or your demand outlook in relation to the recent rise in oil prices?

Sam L. Susser

Ben, the observation I have is that we're just going up against continually bigger and bigger comps, bigger and bigger numbers. The outlook feels healthy. Overall I think the economy in our part of the world is improving, although there are certain markets that we're in that are definitely very soft and there are others that are on fire. It's a mixed bag, but in total, I think the economy is improving and I think the demand for fuel is improving. We've seen some recent reports from the Texas Comptroller's Office I believe on amount of gallons sold across the state. It's healthy, both gasoline and diesel. So we feel good about demand and the outlook, but we recognize we're just going up against some huge comps.

Operator

And our next question does come from the line of Lee Giordano with Imperial Capital.

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

Just following up on the last question. Sam, are still seeing increases in drilling activity helping to drive the business in your markets? And I guess how is the difference in performance in South Texas versus West Texas at this point?

Sam L. Susser

So, Lee, the number of rigs in Texas is up slightly from the latest look I saw this week. It's up in the Permian. It's up in the Eagle Ford, which are all kind of core market for us and where we have the most exposure, thank goodness. We see the number of gas wells being drilled and a variety of other plays continues to fall. But currently, the number of oil rigs is growing faster than the number of gas rigs is falling and so, there's a slight increase. I think that, well, the number of -- the productivity of the wells that's being drilled is much greater today than it was a year ago. And they're drilling them faster and I think that we don't expect to see big giant lifts in the number of people employed in the oil patch over the next year or 2, but they're going to be producing more and more and more oil because they're just getting more productive, more efficient, smarter at allocating those resources. But the outlook is real good for strong, healthy economic activity in those markets. But I think -- I don't see another stair step leg up in terms of the number of people that are going to be working in the oil patch. But the amount of oil they're going to be producing, we're very, very bullish on and I think that's going to lead to more investment around pipelines, petrochemical and manufacturing here in the Gulf Coast. It's going to support our business over the next 3, 4, 5 years.

Operator

And our next question does come from the line of Anthony Lebiedzinski with Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

The more modest expectation for your merchandise same-store sales. Is that strictly a function of the second quarter coming in lower than you expected, or are you seeing anything in the third quarter to make you -- cause to temper your outlook for merchandise comps?

Sam L. Susser

It's solely a function of where we came out in the second quarter. We want to be realistic and have our guidance reflect our best thinking today, but we feel better -- I feel better on the call today than I did 3 months ago in terms of what we were seeing and feeling. Now we knew, and we talked about in the call 3 months ago, that there was weather and calendar shifts that were impacting the business, but we didn't know if we kind of be in a more normal trading pattern until we got back to more normal weather pattern. And as May got here and things started to heat up, it got to more normal place and we feel that, that's where we are. And we think that our outlook is consistent with our long-term performance, and we feel good about that.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. That's good to hear and also can you comment on your diesel comps, what you saw on the quarter?

Sam L. Susser

Diesel continues to grow faster than gasoline a little bit. Steve, if you have the number handy. Diesel represents 22% of our mix versus 21% as of a year ago. The growth in diesel volume was around 8% versus about 4%, and the gasoline on an average per store week. But a little bit of that is we have more stores offering diesel today and so, please take that with a little bit of grain of salt. But general the demand for diesel is better than gasoline and I think that reflects strength in the commercial side of the economy.

Operator

And our next question does come from the line of Ronald Bookbinder with The Benchmark Company.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

On the profit per gallon, you guys had some of the best fuel pricing systems in the industry. With the fuel volumes above expectations to the point that you raised guidance, why not capture some of the extra margin versus the greater volume?

Sam L. Susser

Ron, our strategy is to compete ferociously for every gallon we can get. And the margins can rise or fall and we're going to stay focused on our gallons. We are just not a company that is biased like some to be optimizing for margin all the time. That's not what we believe is going to create long-term value for our shareholders, including us.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And following up on the last caller. On diesel, you said you're at 22% of the mix of stores. What percent of the stores could have diesel and could...

Sam L. Susser

So today, we have 428 locations that sell diesel and the diesel that they sell, that's out of 570 stores operating today -- I'm sorry, it's 431 today of the 570 offer diesel, and diesel represents 22% of the total fuel that we sell today.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And what would you think the comp at per pump was for diesel, to break out the growth of going to more stores?

Sam L. Susser

I can't quite do the math in my head, but maybe on an average per store week basis, if you strip out the impact of the additional comps, it's perhaps 7% for the quarter.

Operator

And our next question does come from the line of Michael Gaiden with Robert W. Baird.

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

Can I ask -- as a follow-up to some of the RIN discussion. We talked about some of the short-term tactical gains from higher third-party margins, et cetera. Are there any strategic gains that you can leverage in the RINs marketplace now [indiscernible] capabilities? Can you use that to help do more M&A or grow your third-party business at all?

Sam L. Susser

We hope so. As we continue -- every month, we're getting smarter and we are continuously growing our bulk buying positions and our skills and our organizational capability. And we are actively looking for opportunities to further leverage our scale in our small, but growing amount of expertise in this area.

Rocky B. Dewbre

All right, as I mentioned, this is Rocky. As we mentioned earlier, our volume that we do blend has increased sequentially Q1 versus Q2 and we're continuing to turn over lots of rocks to try to find opportunities, and confident we'll find us up.

Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division

And can I lastly asked, Sam mentioned accelerating merchandise sales month over month through the quarter. Was the same true on your motor fuels business as well?

Sam L. Susser

Yes, but not quite as dramatic.

Operator

And our next question does come from the line of Karen Short with Deutsche Bank.

Karen F. Short - Deutsche Bank AG

Just going back to the merchandise comp. Can you maybe give a little more color on the competition of the comp, traffic versus ticket? I know Steve had given some color on the transaction size growth in the first quarter.

Sam L. Susser

Sure. We have seen this year a pretty flat customer count with the growth in merchandise sales definitely being driven by transaction size. And we think it's about half increase in number of items in the market basket and about half in price. I am hopeful. I can't predict, but I'm hopeful that we will see some growth in customer count over the balance of this year. But so far year-to-date, it's definitely been flat and we really like the pattern we've been on the last 5 years or so, where our sales growth has been a balance of customer count, growth and transaction size growth. And we haven't seen the growth in customer count we expect for ourselves here in the first 2 quarters, yet.

Karen F. Short - Deutsche Bank AG

Okay, within the price, is that inflation or...

Sam L. Susser

I'd say inflation. It's a mix. There's some areas where we can't take price at all and we have some compression and we're trying to offset it in some other areas.

Karen F. Short - Deutsche Bank AG

Okay, that's helpful. And then within tobacco or I guess cigarettes, can you maybe give a little color? It looks like your comp, I mean it's still slightly positive. But can you maybe give some color on units versus price within tobacco?

Sam L. Susser

Our units are down very slightly so far this year. That's counter to our long-term trend. We've been growing units at Stripes for several years. Our business or share of the category though, is growing. Even though, we're not able to deliver unit growth here in the most recent quarter. Year-to-date, we're down about 1% to 1.5% in units, but we are continuing to grow share within the space.

Karen F. Short - Deutsche Bank AG

Okay, and in terms of the units being down, so that's just I mean, usage not so much the Dollar Store impact or anything like that?

Sam L. Susser

We could tell you pretty for sure, it is usage. We are doing just fine on share in the category.

Karen F. Short - Deutsche Bank AG

Okay, and then any update on a loyalty program? I know that's been mentioned before and you said that you were hopeful customer count would grow, but that would obviously help.

Sam L. Susser

We don't have any announcements to make on loyalty at this time. We continue to kind of look at some different things Steve and his team are exploring. But we have no announcements or further commentary at this time, Karen.

Operator

And our next question is a follow-up question from the line of Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

I just have a follow-on question on your tobacco category. I'm curious to hear if you're shifting more of your tobacco sets towards smokeless, to capture the full growth in margins that occur in that category versus cigarettes? And then how did you handle the $0.06 per pack price increase on cigs that occurred during the quarter? Were you able to pass that increase on to consumers in most of your stores? And then I'm curious to hear where you are at with e-cigarettes? Are you carrying them right now and are they in all of your stores?

Sam L. Susser

Kevin, why don't you address smokeless and the follow-up.

Kevin J. Mahany

This is Kevin. We have -- we're definitely gradually moving and shifting more of our merchandising to smokeless, non-smokeless tobacco items. In our new stores especially we've gone with a larger footprint of the product and less and kind of closing the space down on our cigarette business. We currently are offering a couple of brands of e-cigarettes and we're seeing growth there. And we expect to see that as a future going. We're kind of anticipating the rollout of Altria and R.J. Reynolds and how the merchandising will go from there.

Sam L. Susser

With respect to the routine price increases, we're seeing continued compression in the cigarette category. And every price increase, including the last one, is hurting us as retailers. We're going to be aggressive with the category. We're going to fight like heck to retain every single cigarette customer we can. And we're pretty pleased that cigarette represents only about 7% of our merchandise gross profit and we think that's a real competitive advantage and reflective of the big investments we've been making in large boxes in food and in beverage. We are well-positioned to withstand the pain that these big cigarette companies continue to inflict on the retail partners very regularly.

Operator

And at this time, I would now like to turn the conference back over to Sam Susser for any closing comments.

Sam L. Susser

Thank you, operator. I would like to extend my thanks to our team members here at Stripes and at Susser Petroleum for the strides we're making in customer service and continuing to be one of the share takers in a highly competitive market. I also want to thank you, our investors and our analysts, who take the time to learn about our business model, the competitive spirit of our leadership team and learn more about the tremendous, long-term growth potential that exists in our markets. Have a great day, everybody, and thank you for dialing in with us.

Operator

Thank you very much. Ladies and gentlemen, that will conclude the conference for today. If you would like to listen to the replay, please see this morning's press release for the information. Again, we do thank you for your participation. You may now disconnect your lines at this time.

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Susser (SUSS): Q2 EPS of $0.59 misses by $0.19. Revenue of $1.55B (+3.1% Y/Y) misses by $0.01B. (PR)