Alimentation Couche-Tard (TSX:ATD.B) has fallen asleep over the last three years, but the convenience store giant has just awoken after its applause-worthy quarter that saw the best same-store sales growth (SSSG) in seven years.
While many investors may be turned off by c-stores and the potential disruption from technologically innovative convenience solutions (Uber Eats and the like), the latest quarter should put investor fears to rest as convenience stores remain one of the most robust sub-industries within brick-and-mortar retail.
Convenience has never been more important
Nothing is more convenient than picking up the milk and snacks you need in the Mac’s down the street! Although I’m sure some may be inclined to wait over an hour to pay a hefty premium (to go with a tip for the driver) for the novelty of grocery delivery, I believe such “convenient” delivery services will never be economical for a vast majority of Canadians — at least in an era where self-driving cars and delivery drones aren’t all over the place.
Who knows? Maybe in 10 years Couche-Tard will be sending out drones to deliver marijuana and munchies to residences within its proximity! I could go into great detail about how Couche-Tard could lever technology to its advantage, but I’m sure you get the point by now: Couche-Tard is a retailer that’s going to thrive in an era where tech’s going to increase the convenience expectations of the consumer.
An overlooked moat
Just have a look at Amazon.com. They’re experimenting with brick-and-mortar convenience stores themselves! That’s because e-commerce isn’t replacing them anytime soon, as convenience stores will always be the superior option for those who reside within proximity to one. Thus, I believe many investors severely discount Couche-Tard’s moat.
Sure, it’s a brick-and-mortar retailer, but as we’ve witnessed over the past year, not all brick-and-mortars are created equal, and they’re not all vulnerable to the rise of their digital counterparts. Convenience is key, and Couche-Tard has considerably more flexibility to adapt in order to keep up with trends, unlike its supermarket counterparts, which look more like big-box department stores like Sears.
Couche-Tard doesn’t just sell quick-to-consume goods: it sells time
Supermarkets may be cheaper, but the experience is sigh-worthy. For many Canadians, the weekly grocery haul isn’t a great experience for most folks, albeit it’s a necessary one.
Going into a convenience store for a mini-haul, however, is typically a positive experience, and as millennials move toward peak consumer spending, the positive experiences are going to prevail, even if that means paying a premium for goods you could get cheaper elsewhere.
Millennials realize that time is money, and from an opportunity cost perspective, convenience stores are in the business of selling time to customers. Time that would be spent rolling a heavy cart through endless aisles at the local supermarket, waiting in line for 20+ minutes as individual items are scanned and bagged, returning the cart, and struggling with traffic on the way home.
Consequently, I believe the “brick-and-mortar retail fear” discount provides today’s investors with an opportunity of a lifetime to grab an excellent growth stock with a remarkable margin of safety. In the end, earnings results will dictate where the stock goes, and if you’re a fan of Couche-Tard’s last quarter, get ready for more of the same as the stock returns to the growth track.
Bottom line
You’re getting double-digit EPS growth numbers over the foreseeable future for a mere 16 times forward earnings and a measly 0.5 P/S. Couche-Tard is the epitome of a grow worthy value investment, so today I have zero hesitation pounding the table on this beautiful business. The moat is overlooked and the fears over Couche-Tard’s “uncertain” future are overblown beyond proportion.
Stay hungry. Stay Foolish.
