Alimentation Couche-Tard (TSX:ATD) has established itself as a dominant force in the global convenience store and fuel retail market since its inception in 1980. What started as a single store in Quebec has blossomed into a vast network of nearly 17,000 locations worldwide. This impressive expansion has not happened by chance but has been fueled by strategic acquisitions across North America, Europe, and even Asia.
Alimentation Couche-Tard: A global convenience powerhouse
As of September, Couche-Tard’s extensive network includes approximately 7,107 stores in the United States, 2,132 in Canada, and around 5,271 across Europe and other regions. Additionally, they operate 2,293 international stores under various licensing agreements. This global presence allows the company to leverage diverse markets, catering to a wide range of consumer needs—from quick snacks to fuel for vehicles. Circle K, Couche-Tard’s global brand, is a leader in most of its European markets, helping strengthen its status as a convenience leader.
Couche-Tard’s revenue breakdown reveals interesting insights into its business model: 63% of its revenue is generated in the U.S., where it enjoys higher profit margins compared to Canada and Europe. While fuel accounts for 74% of its revenue, it’s the merchandise and service offerings that drive a substantial 51% of gross profit. This dual revenue stream highlights the company’s capability to thrive in different economic climates, making it an intriguing consideration for investors looking toward 2025.
Navigating growth and challenges
Despite its robust growth, Couche-Tard faces challenges that could influence its investment appeal. With the increasing emphasis on electric vehicle (EV) adoption, particularly in Europe, the company is well-positioned to adapt its business model. Its EXTRA loyalty program boasts 3.7 million users, allowing for tailored offers that enhance customer engagement. It can translate what it learns to North America, where EV adoption is still catching up.
However, the competitive landscape is ever-evolving. Couche-Tard’s ambition to expand further was evident when it expressed interest in acquiring Seven & i Holdings, the parent company of the 7-Eleven chain. Yet, the complexities of such acquisitions, combined with Seven’s reluctance to sell at current valuations, have added uncertainty to Couche-Tard’s growth trajectory. The potential for transformative acquisitions remains a double-edged sword, offering both opportunity and risk.
As of now, the consumer discretionary stock has seen a decline of nearly 13% since early August, leading some analysts to question whether this is a temporary dip or a more serious concern regarding future growth. With the stock hovering under $74 per share and a price-to-earnings ratio (P/E) of about 19, investors are left pondering if this is the right time to accumulate shares or to wait for clearer signals of growth.
Cash flow and financial health: A solid foundation for future growth
Notably, Couche-Tard generates impressive cash flow. Over the past decade, the company has increased its operating cash flow per share by over 17%, demonstrating its ability to generate consistent returns. This robust cash flow allows for strategic reinvestment in the business and shareholder returns through dividends.
In fiscal 2024, Couche-Tard successfully reduced its leverage ratio to about 2.2 times, showcasing its commitment to maintaining a healthy balance sheet. This financial discipline positions the company favourably for future growth opportunities, especially when seeking acquisitions. However, the uncertainty surrounding its recent stock performance could lead some investors to adopt a cautious approach.
The Foolish investor takeaway
Whether Couche-Tard stock is a buy, sell, or hold for 2025 largely depends on individual risk tolerance and investment strategy. While the fundamentals remain strong, the retail stock’s recent dip and acquisition uncertainties warrant careful consideration. For those looking to invest, it may be wise to monitor developments closely, as any significant acquisition news could lead to a re-rate of the stock value.
