6 Strategies Shaping Murphy USA’s Growth
By Samantha Oller on Feb. 02, 2018EL DORADO, Ark. -- If first-quarter 2017 was difficult for Murphy USA, the retailer considers the fourth quarter a much welcome improvement.
The El Dorado, Ark.-based chain of more than 1,400 convenience stores reported fourth-quarter 2017 net income of $124.8 million, compared with net income of $43.8 million in fourth-quarter 2016. This included an estimated deferred tax benefit of $89 million thanks to the Tax Cuts and Jobs Act, which passed into law in December 2017.
For full-year 2017, net income was $245.3 million, compared with $221.5 million for full-year 2016. EBITDA (earnings before interest, taxation, depreciation and amortization) for the year was $406 million, which fell within Murphy USA’s guidance range. During a fourth-quarter 2017 earnings conference call, CEO Andrew Clyde credited not only higher fuel-margin capture but also strong performance in merchandise and financial discipline.
“This business will always be subject to headwinds and regulatory uncertainty, which is why we have built a strategy operating model and balance sheet that can perform in a variety of market environments,” said Clyde. “In 2017, we once again proved that resilience.”
That said, headwinds and tailwinds are forming for 2018 growth. Here are six takeaways from Murphy USA’s past year—and the year to come ...
Fuel
Retail fuel gallons fell 2.6% to 1 billion gallons in fourth-quarter 2017, and average per-store, per-month volumes fell 5.9% vs. fourth-quarter 2016. For full-year 2017, retail gallons were off 1.3% to 4.1 billion gallons, while per-store, per-month volumes fell 5.3%.
Total fuel contribution, a metric that includes retail fuel margin, product supply and wholesale results, and Renewable Identification Number (RIN) income, was 16.5 cents per gallon (CPG) for fourth-quarter 2017 vs. 15.4 CPG in fourth-quarter 2016. For full-year 2017, total fuel contribution was 16.4 CPG, up from 15.4 CPG in 2016.
“From a fuel perspective, 2017 was a relatively healthy year for margins as we price to maximize fuel contribution especially in periods of disruption vs. pricing for volume in a competitive marketplace,” said Clyde. “As we compete for customers with a larger number of low-price operators, our volumes are going to continue to be under pressure.”
For 2018, Murphy USA is providing an average per-store, per-month volume guidance of 235,000 to 245,000 gallons. This compares to 2017’s volume of more than 245,000 gallons. Clyde noted that the volume declines from increasing competition have been worse than Murphy USA originally anticipated. The retailer had expected a fuel volume decline of 1% to 2%, but the erosion has actually been in the 2% to 3% range.
Merchandise
Merchandise contribution grew 8.1% in fourth-quarter 2017 while average unit margins hit a record 16.3%. For the full year, merchandise dollars rose nearly 5%.
“Notably, this improvement in merchandise, which shows a 4.4% increase in average per-store month margins in the fourth quarter comes despite lower fuel traffic and transactions,” Clyde noted. “We are showing balance and sustainable growth in all categories, across all formats, so we are excited about the momentum we are bringing into 2018.”
He pointed to the success of a fourth-quarter tobacco promotion that helped push same-store margins up 6%. “This level of customer uptake, which registered over 1 million unique participants in an 8-week time frame, is a positive indicator of the kind of impact we believe a wider Murphy USA loyalty offer can generate.”
Murphy USA also exited a couple of product segments: fuel additives blended at the pump, which were proving unnecessarily complex, and certain unnamed brands of prepaid gift cards, which it said were fraud risks.
The retailer has created a floor plan that consolidates 90% of the product from its larger 3,400-square-foot stores into a 2,800-square-foot store that can still be built modularly. For 2018, most of Murhpy USA's new-to-industry growth will be 1,200-square-foot sites near Walmart stores, and a third will be the medium (2,400 square feet) and large (3,400 square feet) stores.
New-store growth
Heading into 2018, Murphy USA is slowing its pace of new-store growth. In fourth-quarter 2017, it opened 23 new stores and razed and rebuilt four. For full-year 2017, there were 45 new-store openings and 21 raze-and-rebuilds, to bring the official store count to 1,446.
“We expect to build fewer new stores in 2018, and this is really a function of several factors,” said Clyde. “First, it is more difficult to generate acceptable returns with higher land cost, and escalating building cost. Even with some of the improvements we have made, fewer locations of the same type will meet our return hurdles as we continue to allocate capital in a highly disciplined manner.”
Clyde added that the slower new-store growth rate had always been part of Murphy USA’s "Plan B,” or its growth strategy without Walmart, which was announced in early 2016.
“While there are still very attractive markets to build new stores, we must remain deliberate in where we choose to build and the offer we are providing customers,” said Clyde. Over the longer term, Murphy USA sees more value in an infill approach in its stronger markets, “vs. dogmatically building our stores within the halo of Walmart Supercenters.”
Tax benefits
The Tax Cuts and Jobs Act's passage has helped Murphy boost its after-tax cash profile for year-end 2017 by more than $2.7 million. The retailer’s effective tax rate, including state taxes, should end between 24% and 26%, down from the upper 30% range.
Regardless, don’t expect Murphy USA to go on a spending spree with the extra cash, Clyde said.
“The tax reforms certainly created some benefits in flexibility,” he said. “There is nothing at all about our capital allocation discipline that’s going to get looser. It’s going to remain as tight as it’s ever been.”
Execs also did not mention any bonuses for employees or wage increases, which many corporations have announced in the wake of the tax bill’s passage. When asked about labor pressures, Clyde said Murphy USA would continue to keep pace with local market dynamics.
“We want to be competitive in all of our markets, and so we use geographic wage rates and benchmarks to make sure we’re aligned there,” said Clyde.
Disruption
Despite the buzz around the opening of Amazon’s cashierless Amazon Go c-store and the disruptive potential of buying online and picking up in store (services offered by Walmart), Murphy USA is not overly concerned about them stealing its customers.
“If you look at our demographics, my belief is, not as many packages from Amazon are showing up on [our customers’] doors as some of us on this call, and I think that’s really what you’ve got to look at,” said Clyde. He described the online order pickup service at Walmart as more of a “last-mile solution,” mainly for items such as heavy dry goods—e.g., dog food—or bottled water.
Murphy USA is also insulated somewhat by its rural customer base, he said.
“It will impact us differently than maybe someone in a more metropolitan market with a different customer segment who has a whole different set of shopping experiences day to day,” said Clyde.
That said, Murphy USA does see opportunity in the growth of payment systems such as Apple Pay and Amazon Cash, especially as it upgrades its pumps to be compliant with credit-card chip technology standards and rolls out its long-awaited loyalty program.
“As consumers move toward those, we've want to accept as many payment methods as we can, especially if those drive down [the] very, very high cost of payment cards in our business,” Clyde said.
Loyalty update
Speaking of loyalty, Murphy USA will pilot its program in two major markets, beginning around the end of first-quarter 2018. Expect the retailer to be slow, deliberate and cautious in the rollout of the program, as it seeks to capture the business of its value-focused customer base.
“As an everyday-low-price retailer, we don't have the ability to do high-low pricing and price discrimination that so many of the existing loyalty programs have,” said Clyde, referring to programs that offer a discounted price to members and higher prices to nonmembers.
“We cannot do that because our core customer comes to us every day for that low price of fuel and tobacco and other convenience items,” he said. “This is going to be a unique solution, but the economics have to work and we have to give it some time to make sure that we’re changing customer behaviors.”