ARKO Corp. Common Stock 2026 Q2 Earnings Call

Thank you. Good morning. Welcome to ARKO's second quarter 2026 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer, and Galagher Jeff, Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the second quarter of 2026, as filed with the SEC, are available on ARKO's website at www.arkocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2025. Before we begin, please note that all second quarter 2026 financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the Forward-Looking and Cautionary Statement section at the end of our second quarter 2026 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during today's call.

All forward-looking statements made during this call reflect our current views with respect to future events. ARKO is under no obligation to update or revise forward-looking statements made on this call, whether as a result of new information, future events, or otherwise, except as required by law. On this call, management will share operating results on both a GAAP and non-GAAP basis. Description of the non-GAAP financial measures that we use, such as Adjusted EBITDA and reconciliations of those measures to our results as reported in accordance with GAAP, are detailed in our earnings release or in the quarterly report on Form 10-Q for the quarter ended June 30, 2026. Additionally, management will share profit measures for our individual business segments, along with Fuel contribution, which is calculated as fuel revenue less fuel costs and excludes intercompany charges by our GPMP segment.

I would like to turn the call over to Ari.

Thank you, Priya. Thank you all for joining. Before we begin, I want to welcome Priya Trivedi, who recently joined us as our new head of Investor Relations. Many of you will have the opportunity to connect with Priya, and we are excited to have her on our team. Before turning to the detailed results of the quarter, I want to spend some time on yesterday's announcement by APC, our approximately 74%-owned subsidiary, on signing an agreement to acquire the business of U.S. Petroleum Partners or USPP. We believe this planned acquisition is not simply another acquisition. It is a strategic step that accelerates APC's growth plan, expands scale in attractive markets, and demonstrates the earning power we believe can be created from the APC platform.

As a reminder, in February, we publicly offered a minority interest in our subsidiary, APC, to give investors a clearer view of the strength and value of our wholesale, fleet fueling, and GPMP businesses. At the time of the IPO, we outlined a clear strategy: compound stable fee-based earnings through disciplined, accretive acquisition while giving ARKO shareholders direct participation in the value created by APC. The USPP transaction is exactly the type of opportunity we built APC to pursue. This deal demonstrates each of the key pillars of APC's investment thesis. It deepens supplier relationships, expands APC's stable fee-based business model, utilizes the financial flexibility created through the IPO, builds on a proven acquisition track record, and accelerates APC's growth outlook. USPP is a sizable, vertically integrated fuel distribution platform and a highly strategic fit for APC.

The pending acquisition is expected to add approximately 280 million gallons of annual fuel volume, increasing APC trailing 12-month gallons stored by approximately 14% by adding more than 400 dealer locations. Upon closing, the addition of the USPP business will not only meaningfully expand APC's scale and presence in the Great Lakes region, it will also add two fuel terminals on the Buckeye Pipeline and a transportation fleet that currently handles more than 80% of USPP's distributed fuel volumes. By adding terminal and transportation capabilities, APC can participate in more of the refined product value chain, thereby potentially capturing incremental margin opportunities, shrink last-mile logistics, and add another source of stable fee-based earnings. The consideration at closing will consist of $205 million in cash plus the cost of inventory.

Additionally, at closing, APC will issue $30 million in Class A common stock to be held in escrow and be released to USPP, subject to the acquired business achieving certain EBITDA-based financial targets in the first four fuel quarters after we close the transaction. This earnout payment is subject to adjustment if the acquired business does not achieve $31.7 million EBITDA and $2.2 million EBITDA generated by certain fuel-related components. EBITDA is defined in the purchase agreement. Also, the earnout may increase if the acquired business achieves results that are greater than these financial targets. We expect the transaction to close later this year, to be accretive upon closing, and to add approximately $30 million of annual Adjusted EBITDA to APC and enhance its discretionary cash flow.

This is a clear example of the strategic value creator APC, a growth vehicle with access to capital, an attractive conversion of Adjusted EBITDA to discretionary cash flow, and a disciplined balance sheet supporting a dividend from which ARKO Corp. and our shareholders benefit. APC gives us second public platform for value creation while allowing ARKO to remain focused on transforming the retail business. Turning now to ARKO's results. We operated against a challenging consumer backdrop, a highly volatile fuel pricing environment during the second quarter. Consumer sentiment reached historic lows while prolonged higher fuel prices placed additional pressure on household budgets and influenced purchasing behavior. The national average for gasoline prices climbed from $4.24 per gallon in April to nearly $4.61 per gallon in May, before finally easing to roughly $3.96 per gallon at quarter end.

While trend held relatively steady throughout much of the quarter, the cumulative pressure showed up more visibly in June as retail demand softened. Trips to the pump actually increased as customers fueled up more frequently, but we saw pressure on both gallons sold and in-store spending. Despite these pressures, we closed out the first half of 2026 in a solid position with Adjusted EBITDA up 14% to last year. As a reminder, when fuel prices rose rapidly earlier this year, we reacted quickly, and disciplined pricing delivered an exceptionally strong first quarter with Adjusted EBITDA up 65% year-over-year. We knew that as elevated prices persisted, a portion of that outsized fuel margin benefit would normalize. Through strong execution, we minimized the give back in the second quarter, delivering Adjusted EBITDA of $72 million compared to $76.9 million in the prior year period.

The year-over-year decline in the second quarter was largely driven by $3.3 million of increased credit card fees on a same-store basis associated with elevated fuel prices. Taken together, first-half Adjusted EBITDA was $123 million compared to $108 million last year, up a strong 14% year-over-year. The consumer environment tested the model, and our results showed the benefit of scale, disciplined pricing, and more diversified earning base. We remain focused on what we can control, delivering clear value, maintaining disciplined pricing, managing expenses, and executing initiatives that improve the long-term productivity and cash flow profile of the business. Now, turning to the results by segments. In our retail business, trips to the pump increased 4% as customers fueled up more frequently. Though gallons sold remained under pressure and convenience store spending softened in June, same-store merchandise sales, excluding cigarettes, declined a modest 0.9%.

At the same time, disciplined category management, vendor-supported promotions, market share gain in several key categories, and dealerization program drove merchandise margin to 34.7%, an expansion of 110 basis points versus last year, and delivered nearly flat merchandise margin dollars on a same-store basis. In a pressured consumer environment, maintaining nearly flat same-store merchandise sales, excluding cigarettes, while expanding margin by 110 basis points, it's an important proof point for the quality of our retail execution. Fuel remained an important earning stabilizer during the quarter, and we continued to balance competitive pricing and customer value while maximizing fuel gross profit dollars. Same-store Fuel contribution increased slightly compared to the prior year period as an increase in same-store retail fuel cents per gallon margin, driven by disciplined pricing and the benefit of our scale, more than offset lower same-store gallons.

We remain committed to using targeted fuel offers to drive traffic, loyalty enrollment, and profitable in-store engagement while recognizing elevated fuel prices and associated credit card fees will continue to be a headwind. In wholesale, cents per gallon margin increased year-over-year, primarily reflecting higher prompt pay discount, while gallons declined due to higher retail fuel prices, partially offset by retail sites converted to dealer locations to our dealerization program. Fleet fueling operating income was relatively flat year-over-year as margin compressed this quarter and the prior year period at a higher than average margin. Our value proposition remains central to driving traffic and engagement in a pressured consumer environment. We believe we have the best fuel discount program in the country.

Through Fueling America's Future, fas REWARDS members can earn stackable fuel discounts of up to $2.50 per gallon on as many as 20 gallons by purchasing qualifying items in our stores, which has saved our enrolled members more than $4 million since inception. This is not only a customer value program, it is a traffic, loyalty, and gross profit engine that strengthens our relationship with high-value customers. The data reinforce why we are so focused on loyalty. In the second quarter, enrolled members' average monthly spend was more than two times higher than non-enrolled members. The numbers of visits and average basket size were almost 50% higher versus non-enrolled members. These are not incremental differences. They represent a fundamentally more valuable customer relationship and a meaningful opportunity to grow repeat traffic, basket attachment, and margin over time.