Shares of Canadian convenience store firm Alimentation Couche-Tard (TSX:ATD) were under quite a bit of pain in Friday’s session, plunging nearly 4% on the day. At less than $76 per share, the steady earnings growth juggernaut may be a bargain hiding in plain sight for investors looking for more growth but who don’t want to have to pay a price-to-earnings (P/E) ratio well north of the 25 times mark.
Indeed, on a forward-looking basis, ATD stock looks even cheaper as management continues to execute. Looking ahead, expansion (M&A opportunities) and driving same-store sales are likely to be the name of the game. Undoubtedly, improving the décor of existing stores is just half of the battle to driving comps higher as we enter the latter stages of elevated inflation.
Thriving amid inflation
The other half lies in offering merchandise that continues to offer an unmatched price value proposition. It’s not just about low, competitive pricing, but about offering a good amount of quality for the price. Now, Couche-Tard doesn’t need to offer the next coming of Costco (NASDAQ:COST) Kirkland Signature. That will be incredibly tough to do over the medium term.
However, Couche-Tard has already arguably achieved the perfect balance of quality and competitive pricing with its own private label. The Circle K brand of snacks and other goods are higher-margin items that many consumers may be quick to reach for as they seek to beat the headwind of inflation. Trading down to generic goods is really nothing new for a retailer.
And though it’s really hard for Couche-Tard to be competitive on pricing with some of the low-cost grocers out there, I do think that the name of the game is convenience, not necessarily trying to score the lowest price possible.
Convenience matters most. But don’t forget pricing and quality!
Convenience matters more than pricing when it comes to convenience stores. In that regard, I believe Couche-Tard deserves top marks for juggling convenience, as well as competitive pricing and a high standard of quality with its private-label brand.
As inflation becomes less of a problem over the coming months and quarters, the big question is whether private-label brands will continue to stick.
If the quality is there, I continue to view generic alternatives as worth picking up. Indeed, only time will tell how consumer trends change as they have more cash in their wallets or credit on their credit cards. Either way, Couche-Tard’s private label business is a tremendous growth driver that could pave the way for more growth in a post-inflation world.
Couche-Tard has many growth levers
It’s not just high-margin private labels that could help the company accelerate same-store sales, however. I’d argue that Couche-Tard has a huge opportunity to beef up its hot food offerings. Indeed, going over to the local convenience store can be as much about picking up some hot food to go as it is about stocking up one’s pantry that’s suddenly run dry or grabbing a few necessities that one may have forgotten to buy during last week’s big grocery haul.
Whether delicious pizzas (made to order) or submarine sandwiches are the way to go, I do view such restaurant-quality takeout food as opening a huge growth window for Couche-Tard in the future. That alone makes ATD stock a great buy for the next 10 years while it’s down over 12% from its high.
