10-Q: ARKO Q2 Profit Rises on One-Time Gain Amid Revenue Dip

ARKO Corp. reported increased net income for Q2 2025 driven by a significant sale-leaseback gain, despite a notable decline in overall fuel and merchandise revenues.

Summary

• Net income attributable to common shareholders increased to $18.7 million in Q2 2025 from $12.6 million in Q2 2024.
• Total revenues decreased by 16.3% to $2.0 billion in Q2 2025 and by 14.2% to $3.8 billion in H1 2025, primarily due to lower fuel prices and reduced sales volumes.
• Operating income rose to $56.7 million in Q2 2025 from $42.9 million in Q2 2024, largely due to a $20.8 million gain from a sale-leaseback transaction.
• Adjusted EBITDA, a non-GAAP measure, decreased by 3.9% to $76.9 million in Q2 2025 and by 4.8% to $107.8 million in H1 2025, reflecting underlying operational challenges.
• The company converted 70 retail stores to dealer sites in Q2 2025, totaling 129 in H1 2025, as part of a transformation plan to enhance profitability.
• Loyalty program membership (fas REWARDS) grew by 9.8% year-over-year to 2.35 million members by Q2 2025.
• Maintained a strong liquidity position of approximately $875 million, including $294 million in cash and $582 million in credit availability.
• Repurchased 3.5 million shares of common stock for $14.3 million in H1 2025, with $11.3 million capacity remaining under the program.
• Declared and paid quarterly dividends of $0.03 per common share in March and May 2025, with another declared for August 2025.

Sentiment

Score: 4

Explanation: While net income increased in Q2 due to a significant one-time gain, the underlying operational performance, as indicated by declining Adjusted EBITDA and significant revenue decreases across both fuel and merchandise, suggests a challenging period. Same-store sales declines and increased interest expenses also weigh on the outlook, despite strategic initiatives like store conversions and strong liquidity.

Positives

• Net income attributable to common shareholders increased by 47.9% to $18.665 million in Q2 2025 compared to $12.618 million in Q2 2024.
• Operating income increased by 32.0% to $56.690 million in Q2 2025 compared to $42.948 million in Q2 2024, primarily due to a $20.8 million gain from a sale-leaseback transaction.
• Fuel margin per gallon in the retail segment increased to 44.9 cents in Q2 2025 from 41.6 cents in Q2 2024.
• Merchandise margin increased to 33.6% in Q2 2025 from 32.8% in Q2 2024.
• Strong liquidity position of approximately $875 million, including $294 million cash and $582 million credit availability.
• Successful conversion of 70 retail stores to dealer sites in Q2 2025 (129 in H1 2025), expected to yield greater profitability.
• Loyalty program (fas REWARDS) membership increased by 9.8% year-over-year to 2.35 million members.
• Continued share repurchase program, with $11.3 million capacity remaining.
• Increased fuel margin per gallon in the wholesale segment for fuel supply locations (6.3 cents vs 6.0 cents) and consignment agent locations (30.6 cents vs 29.7 cents) in Q2 2025.
• Increased fuel margin per gallon in the fleet fueling segment for proprietary cardlock locations (51.7 cents vs 49.1 cents) and third-party cardlock locations (21.2 cents vs 10.1 cents) in Q2 2025.

Negatives

• Total revenues decreased by 16.3% in Q2 2025 and 14.2% in H1 2025, primarily due to lower average fuel prices and fewer gallons sold.
• Fuel revenue decreased by $318.0 million (16.8%) in Q2 2025 and $502.4 million (14.3%) in H1 2025.
• Merchandise revenue decreased by $74.1 million (15.6%) in Q2 2025 and $134.3 million (15.1%) in H1 2025, due to store conversions/closures and lower same-store sales.
• Adjusted EBITDA decreased by 3.9% in Q2 2025 and 4.8% in H1 2025, indicating a decline in core operational profitability.
• Net income attributable to ARKO Corp. for the six months ended June 30, 2025, decreased by 44.9% to $7.426 million from $13.469 million in the prior year period.
• Same store fuel gallons sold decreased by 6.5% in Q2 2025 and 6.4% in H1 2025.
• Same store merchandise sales decreased by 4.2% in Q2 2025 and 5.5% in H1 2025, with approximately half of the decline from cigarettes.
• Increased income tax expense to $17.1 million in Q2 2025 from $7.5 million in Q2 2024, primarily due to deferred income tax expense related to the sale-leaseback gain.
• Increased interest and other financial expenses, net by $9.5 million in H1 2025 compared to H1 2024, partly due to lower fair value adjustments of warrants and prior year financial income from deferred consideration.
• Exposure to variable interest rates on approximately 51% of debt, increasing interest rate risk.
• Accrued $2.0 million for a wage and hour collective action settlement, with potential for an additional loss of up to $1.2 million.

Risks

• Changes in economic conditions, tax or trade policies, and consumer confidence in the United States.
• Ability to successfully achieve anticipated benefits of the transformation plan, including retail store conversions to dealer sites.
• Significant changes in the current consumption of, and related regulations and litigation related to, cigarettes and other tobacco products.
• Changes in the wholesale prices of motor fuel.
• Significant changes in demand for fuel-based modes of transportation and for trucking services.
• Highly competitive fragmented industry with many similar competing products and services.
• Ability to make acquisitions and divestitures on economically acceptable terms and successfully integrate acquired operations.
• Negative events or developments associated with branded motor fuel suppliers.
• Dependence on several principal suppliers for fuel purchases, third-party transportation providers for motor fuel, and one principal supplier for merchandise.
• Significant portion of revenue generated under fuel supply agreements with dealers that must be renegotiated or replaced periodically.
• Retail sale, distribution, transportation, and storage of motor fuels are subject to environmental protection and operational safety laws and regulations that may expose to significant costs and liabilities.
• Failure to comply with applicable laws and regulations.
• Loss of key senior management personnel or failure to recruit or retain qualified personnel.
• Unfavorable weather conditions.
• Ability to effectively manage workforce.
• Payment-related risks that may result in higher operating costs or inability to process payments.
• Significant disruptions of information technology systems, breaches of data security, or compromised data.
• Evolving laws, regulations, standards, and contractual obligations related to data privacy and security regulations, and actual or perceived failure to comply.
• Failure to adequately secure, maintain, and enforce intellectual property rights and third-party claims of infringement.
• Operations present risks which may not be fully covered by insurance.
• Variable rate debt.
• Agreements governing indebtedness contain various restrictions and financial covenants.
• Corporate structure includes Israeli entities that may expose to additional tax liabilities.
• Market price and trading volume of common stock may be volatile and could decline significantly.
• Sales of a substantial number of shares of common stock in the public market could cause prices to decline.
• Potential for additional loss of up to $1.2 million from wage and hour collective action settlement.

Future Outlook

The company expects to continue converting a meaningful number of additional retail stores to dealer sites throughout 2025 and into 2026 as part of its transformation plan. Capital spending will primarily focus on remodeling and updating stores, including new format stores, with two more new-to-industry stores targeted to open in the second half of 2025. The company will remain opportunistic regarding acquisitions to expand its store base. The impact of the recently enacted One Big Beautiful Bill Act (OBBBA) on consolidated financial statements is currently being assessed.

Management Comments

• We continue to develop and implement our Transformation Plan, which includes leveraging our unique, multi-segment operating model through more active conversion of retail stores within our retail segment to dealer sites within our wholesale segment.
• These conversions also will allow us to focus and better prioritize future investments in our remaining retail stores.
• Relevant and delicious food offerings are a key strategic priority for us with the launch of the flagship location of our new format store program in June 2025.
• We largely rely on internally generated cash flows and borrowings for operations, which we believe are sufficient to meet our liquidity needs for the foreseeable future.
• There can be no assurance that we will continue to pay such dividends or the amounts of such dividends.

Industry Context

The convenience store and fuel distribution industry is highly competitive and fragmented, facing challenges from fluctuating wholesale fuel costs, supply chain disruptions, and increased competition from various retail sectors. Inflation and higher interest rates have impacted merchandise costs and consumer purchasing power, leading to reduced travel and sales volumes. Labor market conditions have also driven up wage costs. The company's strategy of converting retail stores to dealer sites aims to leverage its multi-segment model for greater profitability and enhanced purchasing power in a competitive acquisition environment. The focus on foodservice and loyalty programs reflects broader industry trends towards enhancing customer experience and retention.

Legal Proceedings

• Accrued approximately $2.0 million in Q1 2025 related to a wage and hour collective action settlement, with a potential for an additional loss of up to $1.2 million.
• Company is a party to various other legal actions in the ordinary course of business, which management believes are routine and not reasonably probable to have a material adverse impact.

Related Party Transactions

• No material changes to the description of related party transactions as set forth in the annual financial statements.

Stakeholder Impact

• Shareholders: Impacted by declining Adjusted EBITDA and overall revenue, but also by increased Q2 net income (due to one-time gain), continued dividends, and share repurchases. The conversion price of Series A convertible preferred stock was adjusted due to common stock dividends.
• Employees: Affected by lower personnel costs in site operating expenses (potentially indicating workforce adjustments or efficiency gains) and the wage and hour collective action settlement.
• Customers: Experiencing lower average fuel prices but also reduced demand due to challenging macroeconomic environment and severe weather. Loyalty program members benefit from exclusive pricing and deals.
• Suppliers: Company depends on several principal fuel suppliers and one principal merchandise supplier, making them sensitive to changes in company purchasing patterns and credit terms.
• Creditors: Impacted by the company's variable rate debt (51% of total debt), which increases interest rate risk, but also by strong liquidity position.

Next Steps

• Continue converting additional retail stores to dealer sites throughout 2025 and into 2026.
• Further implement the Transformation Plan, including targeted capital allocation toward strategic retail sub-segments.
• Expand the new format store program across the retail footprint, with two more new-to-industry stores targeted to open in the second half of 2025.
• Assess the impact of the One Big Beautiful Bill Act (OBBBA) on consolidated financial statements.
• Complete the acquisition of one SpeedyQ Markets site in the third quarter of 2025.
• Evaluate dividend payments within the context of the company's overall capital allocation strategy on an ongoing basis.
• Continue share repurchases under the authorized program, subject to market conditions and other factors.

Key Dates

Recommendation

While the company reported an increase in Q2 net income, this was primarily driven by a one-time gain from a sale-leaseback transaction. The underlying operational performance, as evidenced by declining Adjusted EBITDA and significant revenue decreases across both fuel and merchandise segments, suggests ongoing challenges from a difficult macroeconomic environment and reduced demand. The strategic transformation plan, including store conversions and new store formats, shows potential for future profitability, and the company maintains a strong liquidity position. However, the current operational headwinds and the impact of variable rate debt warrant a cautious 'hold' stance until there is clearer evidence of sustained organic growth and improved core profitability.

Keywords

Convenience Store, Fuel Distribution, Retail, Wholesale Fuel, Fleet Fueling, SEC Filing, 10-Q, ARKO Corp, GPM Investments, Fuel Sales, Merchandise Sales, Financial Results, Quarterly Report, Transformation Plan, Dealerization, Loyalty Program, Share Repurchase, Dividends, Liquidity, Debt, Environmental Liabilities, Wage and Hour Settlement