ARKO Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2025

Key Takeaways

  • Positive Sentiment: Adjusted EBITDA was $76.9 million in Q2, exceeding the midpoint of guidance and demonstrating disciplined execution despite a challenging consumer environment.
  • Negative Sentiment: Same-store merchandise sales excluding cigarettes fell 3% and fuel volumes declined 6.5% in Q2, reflecting persistent industry headwinds on consumption.
  • Positive Sentiment: Over 300 stores have been converted to dealer locations with 200 more under contract, on track to deliver over $20 million of annual operating income and $10 million of G&A savings when fully scaled.
  • Positive Sentiment: The first two new format stores, featuring the Fast Crave foodservice concept, have outperformed in foodservice and key merchandise categories relative to the broader network.
  • Positive Sentiment: Fueling America’s Future loyalty campaign boosted enrollments by over 50%, with members making an extra trip per month and spending 15% more during promotional periods.
AI Generated. May Contain Errors.
Earnings Conference Call
ARKO Q2 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 4

Savings. Welcome to Arko Corp.'s second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jordan Mann, Senior Vice President, Corporate Strategy, Capital Markets, and Investor Relations. Thank you, sir. You may begin.

Speaker 4

Thank you. Good afternoon and welcome to Arko Corp.'s second quarter 2025 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer, and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the second quarter of 2025, as filed with the SEC, are available on Arko Corp.'s website at www.arkocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2024. Before we begin, please note that all second quarter 2025 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.

Speaker 4

Please review the forward-looking and cautionary statements section at the end of our second quarter 2025 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and Arko Corp. 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 basis and on a non-GAAP basis.

Speaker 4

Descriptions of those 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 our quarterly report on Form 10-Q for the quarter ended June 30, 2025. 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 subsidiary, GPMP. I would like to turn the call over to Arie.

Operator

Thank you, Jordan, and thank you all for joining. Like many in our industry, in the second quarter, we continue to navigate a challenging microenvironment marked by geopolitical events, persistent inflation, mixed consumer sentiment, and restrained personal consumption. Through it all, our team remains focused and executes with discipline, as reflected by our financial performance this quarter with adjusted EBITDA above the midpoint of our guidance. In this environment, we have seen more price sensitivity, greater reliance on loyalty-driven offers, and continued movement towards value-based purchasing. We stayed grounded by focusing on execution, merchandising discipline, loyalty-led engagement, and controlling expenses, including smarter labor scheduling and tighter cost management at the store level.

Operator

We expanded merchandise margin by 80 basis points year over year, driven by category mix, effective promotions through the work our team is doing with our suppliers, and our continued optimization of assortment through backbar resets and loyalty target offers, all while being responsive to evolving consumer needs. We were pleased with improved performance in most of our core categories, and we believe performance reflects the effectiveness of our promotions and our focus on driving growth in key categories. While the second quarter reflected many ongoing pressures, we saw consecutive improvements from May to June, and we are seeing further improvements as we enter the third quarter. Through late July, early third quarter trends in both same-store gallons and in-site sales have been more favorable than what we experienced in Q2, with same-store sales growth for July, excluding cigarettes, up slightly year over year.

Operator

Total merchandise same-store sales trend in July was 3% better than total merchandise same-store sales for the second quarter, which was the best comp performance we've seen in the last 18 months. It's still early, but we are encouraged by what we're seeing so far. Our team remains focused on executing Arko Transformation Strategy, which includes advancing our dealerization program, investing in our retail stores by bringing our new format store and our food service Fast Crave brand to life. In addition, we are applying targeted promotions both in stores and at the pump to deepen customer engagement. These efforts are enabling us to navigate today's operating environment while positioning the business for sustainable long-term growth. Dealerization remains a central component of our long-term transformation plan.

Operator

We continue to focus on converting select company-operated stores to dealer locations, where we believe the long-term economics are more favorable for those stores under our wholesale segment. Since launching this initiative last year, to date, we have converted more than 300 stores, and we currently have approximately 200 additional sites that we expect to convert under a letter of intent or contract for conversion, with a further meaningful pipeline for conversion ahead. As previously disclosed, once fully scaled, we continue to expect this program to deliver a cumulative annualized operating income benefit of more than $20 million before G&A. As our dealerization efforts continue, we have identified more than $10 million in expected annual structural G&A savings as we fully scale this program. We continue to believe that by transitioning select stores to dealer locations, we are unlocking long-term value.

Operator

We previously noted that our dealerization program will facilitate targeted capital investment into our retail stores. As part of this, we are very excited to introduce our new format stores, which include a bold and innovative remodel design to elevate the customer experience and better reflect our commitment to food service, convenience, efficiency, and community connection. We developed this new format over many months with our internal team and outside consultants, including learning from customer focus groups. This new format includes a complete remodel inside and outside the store, a modernized layout, and we have introduced our new food and beverage concept, Fast Crave, which elevates our food and beverage offering to grow food service as a differentiator across our network.

Operator

We opened our first new format store on June 25th in Ashland, Virginia, and while it has only been open a short time, we are pleased with its initial performance. Early results show outperformance in food service and dispensed beverages, as well as key categories like candy, packaged beverages, and alternative snacks relative to the rest of our stores. Our second new format store opened this morning in Mechanicsville, Virginia. Importantly, we have identified the next tranche of stores to be remodeled in the new format, focusing on improved customer experience and with food service as a focus, which we believe is a critical area of opportunity for Arko. We are in various stages of engineering designs and layout on this next tranche of stores. Turning to our new-to-industry stores, last week we opened our second new location this year.

Operator

This NTI in Kingston, North Carolina, incorporates almost all elements of our new store format. We continue to advance the other NTIs in our pipeline and have begun working on three more of these NTI stores, of which two are expected to open in the second half of 2025. In addition to executing our dealerization program and remodel investments, we're beginning to see the positive momentum across other core initiatives for this year. This includes focusing on high-margin categories like OTP and food, and enhancing our loyalty ecosystem to better engage customers. Our Fueling America's Future campaign continues to engage customers and drive improved loyalty enrollment growth, thrift, and basket size. This program provides up to $2 per gallon in fuel discounts up to 20 gallons to enrolled loyalty members who purchase qualifying in-store items.

Operator

Average daily enrollment in our Fast Rewards program increased more than 50% from the period prior to the campaign. When utilizing the Fueling America's Future promotions, our enrolled loyalty members made an extra trip per month and spent on average more than 15% more than our typical enrolled loyalty member during the second quarter. Importantly, we are seeing improved sales on our qualifying items that are tied to our Fueling America's Future promotions. Turning to our loyalty program as a whole, during the quarter, enrolled Fast Rewards members spent on average approximately 50% more in the second quarter of 2025 and visited an average of approximately three more trips per month compared to non-members. Overall, we added more than 38,000 new members in the quarter, bringing total enrollment to approximately 2.35 million members, up 10% from the end of Q2 last year.

Operator

These results underscore the effectiveness of our loyalty platform in an environment where consumers are looking to stretch every dollar, and this is why we continue to focus on enrollment initiatives like Fueling America. Our team is continuing to optimize promotional offers and sharpen messaging to drive even deeper engagement. Diving deeper into OTP, our stores are benefiting from expanded assortments, revised space allocation, high-value promotions, and a more effective visual merchandising strategy, which has been significantly improved by our backbar refresh and incentive program for district and store managers. OTP remains a key growth lever for in-store margin and customer engagement. Over the quarter, OTP was one of our top-performing categories for same-store sales growth and same-store contribution growth. Taking all our strategies as a whole, they are guided by experienced leadership and brought to life every day by a dedicated operation team focused on enhancing the customer experience.

Operator

Turning to fuel, industry-wide demand remained soft in the second quarter, with national retail fuel volumes down approximately 4%, and our volumes reflected that trend. While gallons declined, our CPG margin increased compared to the prior year period, reflecting the benefit of our scale and our strategic pricing. This margin performance helped offset some of the impact of lower volume on retail fuel contribution. As I mentioned before, we saw consecutive improvements in same-store gallon growth from May to June, and this improvement continued into July. Our wholesale and fleet segments continue to perform through a combination of our dealerization program and robust fuel margin as compared to the prior year. These two segments continue to provide stable and reliable cash flow for our business. We continue to believe our stock is an attractive investment. In the second quarter, we repurchased 2.2 million shares.

Operator

We believe that our disciplined capital allocation strategy, aligned with the strength of our transformation plan and consistent operational execution, positions us well to deliver long-term shareholder value. I will now turn the call over to Rob to review financial results for the second quarter and review our thoughts for the third quarter and full year 2025.

Speaker 2

Thank you, Arie. Good afternoon, everyone. Turning to second quarter 2025 results, adjusted EBITDA was $76.9 million for the quarter compared to $80.1 million in the year-ago period, with the decrease caused primarily by lower retail merchandise contribution. At the segment level, our retail segment contributed operating income of approximately $80.4 million compared to $87.9 million in the year-ago period. Same-store merchandise sales, excluding cigarettes, were down 3% versus the year-ago period, while total same-store merchandise sales were down 4.2%. Same-store margin rate was up approximately 50 basis points versus the prior year. Same-store fuel contribution was down approximately $0.8 million, with a 6.5% decline in gallons, mostly offset by an increase of $0.026 per gallon. Same-store fuel margin was $0.45 per gallon for the quarter. Same-store operating expenses were down approximately 0.8%.

Speaker 2

Turning to our wholesale segment, operating income was $23.2 million for the quarter versus $21.3 million in the year-ago period. Fuel margin was $0.101 per gallon versus $0.099 in the year-ago period. Gallons were up 3.9% for the quarter, driven by our channel optimization program, which contributed more than 19 million gallons for the quarter, or almost 8% of total wholesale gallons. Excluding channel optimization, gallons were down approximately 4.1% at comparable wholesale sites. We continue to be pleased with the impact of our channel optimization program, which has driven approximately $4.5 million in incremental profit contribution for the first half of 2025. As Arie mentioned, we continue to expect that at full maturity, this program will deliver in excess of $20 million in incremental operating income across our combined retail and wholesale segments.

Speaker 2

This outlook excludes additional G&A efficiencies we expect over time as we transition to a smaller retail segment footprint. Moving on to our fleet segment, operating income was $13.1 million for the quarter versus $13.7 million in the year-ago period, with total gallons down 6.8% to the prior year. Fuel margin was very strong for the quarter at $0.49 per gallon, up from $0.459 in the year-ago period. Total company general and administrative expense for the quarter was $40.7 million versus $42.4 million in the year-ago period. Net interest and other financial expenses for the quarter were $19.5 million compared to $21.4 million in the year-ago period, with the decrease primarily related to lower average interest rates in the second quarter of 2025 and higher interest income generated.

Speaker 2

Net income for the quarter was $20.1 million compared to $14.1 million for the year-ago period, with the increase driven primarily by a non-cash gain related to the expiration of a purchase option received in 2021. Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA. Turning to the balance sheet, excluding lease-related financing liabilities, we ended the second quarter with $916.4 million in long-term debt. We maintained substantial liquidity of approximately $875 million, including $294 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Total capital expenditures for the quarter were $45.3 million, which included the purchase of 22 fee properties at favorable terms. Turning to third quarter guidance, we expect total company adjusted EBITDA to be in the range of $70 million to $80 million based on the following key segment assumptions.

Speaker 2

First, for our retail segment, we expect our third quarter average retail store count to be approximately 1,220 sites. On a per-average store basis, we expect merchandise sales to be up mid-single digits, reflecting the higher productivity of retained stores versus the year-ago period, partially offset by same-store merchandise sales performance, which is positioned down modestly. Again, on a per-average store basis, we also expect gallons to be up mid-single digits, reflecting the higher productivity of retained stores versus the year-ago period, partially offset by same-store gallon performance, which is positioned down low to mid-single digits. We are modeling total retail fuel margin in a range of $0.425 to $0.445 per gallon. For our wholesale segment, we expect mid to high % operating income growth in the third quarter, driven by our ongoing channel optimization work.

Speaker 2

Finally, for our fleet segment, we expect third quarter operating income growth to be up low single digits, with gallons roughly in line with the prior year on higher expected cents per gallon. We are maintaining our full year total company adjusted EBITDA guidance in a range of $233 million to $253 million. With that, I'll hand it back to Arie for closing remarks.

Operator

Thanks, Rob. I'm proud of the way our team continues to deliver in the face of ongoing challenges. We're deepening customer engagement, our promotional efforts are yielding results, and we're making progress on our transformation roadmap. We are entering the second half of the year with clear priorities and a focus on creating lasting value. We will now open it up to questions.

Speaker 4

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Bobby Griffin with Raymond James. Please proceed.

Speaker 4

Good afternoon, everybody. Thanks for taking my questions. I guess, Arie, first for me, I wanted to maybe dive into your comments on July. Pretty notable change there, at least through the one month of the new quarter. Curious if you can unpack it further on what's maybe driving that, industry trends versus the channel optimization, some of the new programs coming on, because I don't, to your point, I don't think we've seen ex-cigarette merchandise sales close to flat in a very long time, and even gallons seem to be getting a little bit better.

Operator

Yeah. Good afternoon, Bobby. Yeah, you are absolutely correct. I mean, we saw improvement basically from May to June, June to July. This is probably the best improvement we've been seeing over the past 18 months. We don't know if this is just because all of a sudden something turned around. What I can tell you is probably that I think the value and the messages that we're sending out there with Fueling America's Future, I believe our offering, our assortment, our promotions are very, very, very strong. We see them driving trip frequency. I mentioned, for example, the loyalty trip frequency. Just to put dollars and cents, we've been talking about going from $73.83 to $110, which is almost 50%. We're talking about trips up almost three trips per month between loyal members and non-loyal members.

Operator

We see an increase in customers purchasing the qualified product of Fueling America's Future. As you can imagine, all of those products are products that have a higher margin. I'll give you an example, just something that we're actually promoting this month. If you buy two candies for $6, you get $0.50 off per gallon. This is Skittles and M&M, for example. This is huge. Another one, if you buy two packs of Marlboro, $0.25 off per gallon. I hope that this is a result of what we've been doing over the past few months. This absolutely was very positive, and of course, we're going to take it.

Operator

Absolutely. Thank you. Rob, maybe just switching gears to the channel optimization, kind of a two-part question. I don't think you guys want to give a full number of how many stores you think you can move to dealer, but maybe to help us think about it, are you identifying more stores today than you maybe identified six months ago? If the program does run through 2026, do you have to wait until 2026, or do we have to wait until 2026 to see some of the G&A savings start to flow out, or can that start to flow out earlier and you could view the program at scale sooner?

Speaker 2

Yeah, thanks, Bobby. No, I think the program store list, as we said, we're not putting out the full number yet, but it's been defined for a good period of time now, and it's now about execution. Arie hadn't prepared to mark what is under contract, and then there's a substantial amount still after. I think we know what that number is. We've known what that number is. We're executing on it. In terms of G&A savings, no, we already are seeing savings in G&A in the second quarter. You can see the total G&A number was down. That number is inclusive of a certain amount of the restructuring expense fitted in, so we are seeing it already. Things that are directly related to stores, field leadership, things that are directly one-to-one related, we're going to see real-time.

Speaker 2

Things that are like prepaid annual software licenses, we will see when we get into 2026. That pace of G&A will accelerate as we continue, but we are seeing some of it already. I would estimate we're probably 25% to 30%, 33%, maybe a third of the way through the first tranche of savings, and I do believe that there's going to be more. This is just the first tranche that we see, and as we get deeper into the smaller footprint, we will continue to look for opportunities on that front.

Speaker 2

Okay. Lastly for me, just CapEx, the 22 fee properties. We saw the absolute dollar number step up year over year meaningfully and up sequentially. Any color just on how big of the 22 fee properties were in driving that, and thoughts on exactly what that is for the business and help me understand that better.

Operator

Are you referring to the 22 properties that we purchased?

Operator

Yeah, the CapEx, I'm just trying to understand, I'm trying to kind of get at a run rate for core CapEx. You had this quarter, it stepped up sequentially, but you also called out you purchased 22 properties. I'm just trying to better understand what's normal and what was part of that property purchase.

Speaker 2

Bobby, that number for the properties is about $22 million. When we talked about at the beginning of the year, we kind of talked about the prior two years, full year, CapEx was about $110 to $115 million. While we don't provide guidance for CapEx, if you back out that $20 million, $22 million from where you are, you're kind of on that similar pace from the past two years. That was, those are opportunistic at good cap rates for us to buy, and we look for those opportunities as they develop. That is a kind of a one-time, we financed it with M&T. It doesn't impact our cash position. We offset that with financing.

Speaker 2

Perfect. Yeah, that's exactly what I was looking at. Thanks, thanks, Rob, and thanks, guys, for the details. Best of luck here in 3Q.

Speaker 2

Thanks, Bobby.

Operator

Thank you, Bobby.

Speaker 4

Our next question is from Daniel Guglielmo with Capital One Securities. Please proceed.

Speaker 4

Hi, everyone. Thank you for taking my question. The first one, you all mentioned macro-economic headwinds and shifts in consumer spending in the press release, but the July commentary was positive. For the guidance next quarter and the full year, what type of macro and consumer spending environment are you all assuming? Just trying to get a sense of what's kind of built in there for your assumption.

Speaker 2

Yeah, as we talked about in prepared remarks, we have the merchandise sales for the third quarter position, same-store sales position down modestly. This is on higher productivity stores. The stores we're keeping have higher productivity, but we do see a macro. We are cautious and we're at a negative, modest, modest same-store sales performance. We're not talking about the fourth quarter yet, Danielle. As we look sequentially, as Arie mentioned, we've seen since February, with the exception of a little blip in May, month-on-month sequential improvement in the comp sales trend on the merch side. That is a question in terms of does that continue going deeper into the back half of the year or does it stay where it is? We have a little more confidence near term in Q3 because we've seen July, we see where we are right now.

Speaker 2

Fourth quarter, we're going to see as we get deeper into the third quarter what that looks like, and we don't really guide the forward quarter at this point.

Speaker 2

That's really helpful. I appreciate that color. The second one is on the transformational plan. We've seen it kind of drive down the site operating expenses line, and I know labor is a big piece of that line, especially kind of with demand increases in the summer. How have wages trended this summer versus last summer kind of when figuring out the business?

Speaker 2

Yeah, we've seen consistent wage performance up in that 3% range, and that's been consistent quarter on quarter for some time now since we got clear of the pandemic. That's kind of a baseline inflationary pressure that we're seeing, about 3%. As you think about the operating expense itself being down, the decreased hours as our field organization deals with lower top-line demand, we do reduce hours, and that is partially offset by the increased rate that we're seeing.

Speaker 2

I appreciate that. Just as a follow-up to that, what you said, as you continue through the transformation plan, you're going at kind of low-hanging fruit. It feels like, do you expect kind of less of a benefit at the later stores are taken out, or how are you thinking about that?

Speaker 2

I don't think we're expecting a lower benefit. I mean, Arie, I don't know if you have a point of view on that. I think each deal is different. It depends on, go ahead.

Operator

Yeah, let me jump in if you don't mind. Listen, there is a direct expense associated with the stores that you are dealerizing. I mean, I'll give you an example. When we dealerize 10 stores, by definition, you are eliminating discrete managers. This is just one example, okay? We have people in the back office that do accounting work, let's call it two per 10 stores, for example. When you get to 80 stores, you're eliminating all of a sudden the regional manager. Again, there are a lot of positions tied directly with the operation. As you remove stores, by definition, you're going to reduce G&A. That's part of the outcome.

Speaker 2

Arie, I think he's looking to tease out as we get deeper into the optimization program, do we see the deals getting less favorable? I think there's no reason to expect that.

Operator

We are sharpening our pencils all the time. At the end of the day, if you think about it, the plan that we put together over here, we're talking about 500 stores in around a year to 18 months. I mean, this is a big project. This is a big project for us. I think the reason we are moving forward very successfully is because we have the second segment, which is the wholesale segment, which helps us tremendously over here. So far, like I said, we are very, very pleased with the traction. Like Rob said, we expect to continue to see benefits just ramping up further over here.

Operator

Great. Thank you. Appreciate all the color.

Operator

Thank you.

Speaker 4

Our next question is from Anthony Bonadio with Wells Fargo. Please proceed.

Speaker 4

Yeah, hey guys. Thanks for taking our questions. I wanted to start out with fuel margins. I know you guys had another strong quarter on that front, but I think industry data has maybe been a little softer than one might think, just given break-even dynamics and how soft gallons have been. Can you guys just talk a little bit more about what you're seeing out there competitively on the fuel side and whether you've seen any change there as the year's progressed?

Operator

I'll start and then I'll let Rob maybe finish with some remarks. If you're looking on the industry in Q2, the national demand was down 4%. That's the national demand. I understand we were a little bit down than the national demand. We are very, very competitive, very, very competitive. I think the softwares and the systems that we have in place helping us to optimize and maximize gross profit dollars over here, making sure that we continue to be competitive. As you can see, this particular quarter, we were basically trending close to basically $0.45. I think we see an improvement in fuel margin. We see so far July, the same thing goes to July. We saw improvement month after month, but July, we basically saw a decline that is basically half of what we saw in Q2.

Operator

Not only that, we were able to expand margin, we also see an improvement in fuel gallons, a decrease in July. We hope that that's going to be sustainable. That's what we hope.

Operator

Okay.

Speaker 2

Anthony, you know.

Speaker 2

Go ahead.

Speaker 2

The CPG can pop significantly when there's volatility. I think we saw one month, specifically April in the second quarter, where we had a $0.07 increase year on year. That drove significant profitability into April. Those things, I mean, we're in an uncertain macro environment right now, geopolitically everywhere. Those sorts of things, those trends, even though there could be some pressure on gallons, that uncertainty certainly can be supportive of higher CPG.

Speaker 2

It sounds like people are sort of behaving rationally still.

Operator

I think people have the same issues with trends. You know, if you are 4% or 6%, you still have a trend down. I think when you have trend down, people need to pay, you know, the smaller guys are probably, you know, like everybody else, need to pay their bills. In order to pay the bills, the only way to make it happen, you need to, you know, increase margin. That's what we've been seeing. I mean, listen, the margin is up almost $0.035 in Q2. We continue to see strong margin going into July, a very similar margin going into July. You know, we expect that, you know, we expect or we hope that margin will stay strong for the remaining quarters.

Operator

Okay. That's helpful. I just wanted to touch on OTP or alt nicotine. I think there was some rhetoric out of the FDA recently on an increased focus on the illicit market. Can you just talk a little bit more about what you're seeing in that category and any thoughts on a potential crackdown there and how you guys might be positioned to benefit from that?

Operator

Yeah. If you remember, Anthony, at the beginning of the year, I made a big remark regarding our backbar refresh in basically many of our stores in, you know, almost a thousand stores. Since that, I can just tell you that OTP was a very, very strong, basically, category for us in Q2. OTP was up 2.6% in sales, and at the same time, our margin was up 170 basis points. This is a category that, you know, at least for us, you know, we are paying a lot of attention to this category. I think those crackdowns can only help us, you know, against competition. Some of the competitors, I can tell you, I've been seeing that for a long period of time that some of the competitors, you know, selling some illegal OTP products. We, of course, you know, selling only legal products.

Operator

I think it's about time that we start to see some enforcement over there. Regardless, like I said, OTP for us was a very successful story since we refreshed the backbar, offer more variety. Like I said, I mean, it's a big success and it's a big contributor to the gross profit dollars over here in Q2.

Operator

Yeah, thanks, Anthony. The OTP penetration is 10% of the total assortment versus cigarettes in more than the 26%, 27% range. The contribution margin from OTP was essentially equal to cigarettes. As we continue to comp positive there, it's going to contribute more and more as we go forward to really mitigate some of the downside with cigarettes, the structural decline in cigarettes.

Operator

Got it. Thanks, guys.

Operator

Thank you.

Speaker 4

Our next question is from Ben Wood with BMO. Please proceed.

Speaker 4

Hey everyone. This is Ben on behalf of BMO and Kelly Benya. Just wanted to circle back on the dealerizations and just try to understand, is the pace of dealerizations going in line with the original plan? I think you're targeting now more than 500 stores, but mentioned dealerizations are expected into 2026. Is the message that the total number is consistent with the long-term or with the prior communications, but is this maybe a slower pace? Also, just trying to understand, is this total number, is that all part of the $20 million in savings target, or should we expect you to update that savings as you guys get deeper into this?

Operator

I'll let Rob discuss the $20 million, and then I basically give you my two cents regarding the pace. We are very pleased with the pace, but I'll let Rob jump in.

Speaker 2

Yeah, Ben, the number that we shared in excess of $20 million is the fully executed program. While we haven't shared the total store count, that is inclusive of all the stores. In excess of $20 million, but you should not expect us to be updating that number. That's consistent with what we're seeing so far in terms of run rate, and that's where we expect to end up.

Operator

Yeah, regarding the pace, Ben, regarding the pace, as I mentioned earlier, just think about it, 500 stores in 18 months, this is unheard of. It's going in accordance with our plan. Like I said, we are very, very pleased with that. What sometimes takes a little bit longer is just getting licenses and putting everything in place. We want to make sure that all of the dealers that are taking over some of those stores are fully equipped and fully licensed. We don't want to be in a position that, God forbid, they're losing the license and they're losing sales. For us, this is a long-term play, and we want to make sure that those guys continue to make money, and we want to make sure that they get all of their licenses to continue to operate from the minute that we stop operating.

Operator

Okay, that's great. Could you just provide some details on this new store format for the NTIs and remodels? How does the square footage compare to the average store in your portfolio? What about the labor needed? You know, how many employees will run it versus your store average? Trying to understand the complexity of it versus with this new food service versus kind of the other store base you're running.

Operator

Sure. Most of you know, we opened the first one last month on June 25th. In this particular store, we did not change any of the square footage. That was a large enough store, over 3,000 square foot. We basically just added the beer cave and some other features, of course, in addition to that, all of the food service equipment. Over there, we had a deli before. We just converted the deli to our new concept. We remodeled the store from the inside and the outside. In this particular case, we did not add any square footage. In the store that we opened this morning, we were able to add additional square footage to the original store. This is something that we did.

Operator

In terms of labor, we have a shared labor model, which means we need one person, literally, to operate the food service concept that we put in place over here.

Operator

That's super helpful. Is it kind of correct to assume that, or maybe I'll ask you this, what percentage of the remaining store base after you've gone through this dealerization do you think would qualify for this kind of full remodel?

Operator

We are in a phase of structuring and engineering, but the stores that we are planning on keeping, we believe that the majority of them basically can fit. Remember when we actually put this plan together, we put the plan together based on the fact that we have different types of stores, different types of square footage, and we want to make sure that we can customize in most of those stores the food service concept that we put together. This is something. Right now, at the moment, we already identified another tranche of stores. It's approximately 25 stores that we already identified in the same geography that we started. We started over here in the Virginia market, in the Richmond market. The plan is basically to finish this tranche and continue.

Operator

We believe that the stores that we are planning on keeping as part of our retail segment, we will be able to customize in the majority of those stores the food service concept and everything that we did in the last two stores, the last prototype, the new format that we just opened last month and this morning.

Operator

Great. Thank you guys very much.

Operator

Which, by the way, that was one of the decisions of dealerizing some of the stores that we didn't feel will fit with this concept or with this new format that we brought to market. I think we lost Ben. Thank you, Ben.

Speaker 4

Our next question is from Hale Holden with Barclays. Please proceed.

Speaker 4

Hey, good afternoon. I just had two on other tobacco products. I was wondering, you know, I did hear those comments at the beginning of the year, and I was wondering where you are on the bar rollout and/or how much, you know, more work you had to do to get the allocations, base allocation to the product, or if you were fully built out at this point.

Operator

We are fully on the stores that we are keeping, and like I said, it's over, it's around 1,000 stores that we have out there. We already invested and finished our work on the back bar. We completed this project. This project was completed by the end of Q1, beginning of Q2. We are done. Now it's just a matter of adding additional assortment to the mix over here.

Operator

Okay. On the store conversions that Ben was just asking you about, any thoughts, Arie, on what would constitute a success in terms of either merchandise sales lift or same-store lift versus maybe where the control group is?

Operator

Sure. First of all, traffic. One of the reasons behind it, of course, is making sure that we increase traffic. Success will turn to be an increase in inside margin because adding food service over here, by definition, the gross margin on food service is much higher than basically what we saw before. The success for us will be increased food traffic, increase the basket size associated with that, expand our food service. So far, we get very nice results. I can tell you that the store that we opened just last month on June 25th, just in the month of July, sales excluding cigarettes in that particular store are up 6% compared to prior year. That's for us. So far, we are very, very pleased with what we're seeing over here.

Operator

Great. I'd love to see some pictures in the next quarter deck. It's hard for me to see them from the satellite photos outside.

Operator

Yes, no problem.

Operator

Thank you.

Operator

will do that.

Operator

Thank you.

Operator

Thank you.

Speaker 4

We have reached the end of our question and answer session. I would like to turn the conference back over to Arie for closing remarks.

Operator

Thank you for joining, everyone. You know, we are focused, we are on track, and we are excited on what's ahead of us. Have a great evening.

Speaker 4

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

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