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

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Operator

Greetings. Welcome to Arco Corp. Second Quarter twenty twenty five Earnings Call. 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.

Jordan Mann
SVP - Corporate Strategy, Capital Markets & IR at GPM Investments, LLC

Thank you. Good afternoon, and welcome to Arco's second quarter twenty twenty five earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President and Chief Executive Officer and Rob Giamatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10 Q for the 2025 as filed with the SEC are available on Arco's website at www.arcocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2024.

Jordan Mann
SVP - Corporate Strategy, Capital Markets & IR at GPM Investments, LLC

Before we begin, please note that all second quarter twenty twenty five 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 twenty twenty five 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 Arco 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.

Jordan Mann
SVP - Corporate Strategy, Capital Markets & IR at GPM Investments, LLC

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 06/30/2025. 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 exclude intercompany charges by our subsidiary GPMP. And now, I would like to turn the call over to Ari.

Arie Kotler
Chairman, President & CEO at Arko

Thank you, Jordan, and thank you all for joining. Like many in our industry, in the second quarter, we continue to navigate challenging microenvironment marked by geopolitical events, persistent inflation, mixed consumer sentiment and restrained personal consumption. Through it all, our team remained focused and executed 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.

Arie Kotler
Chairman, President & CEO at Arko

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 back bar 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 improvement from May to June, and we are seeing further improvement as we enter the third quarter. Through late July, early third quarter trends in both same store gallons and inside 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. Total merchandise same store sales trend in July was three percentage points better than total merchandise same store sales for the second quarter, which was the best comp performance we've seen in the last eighteen months.

Arie Kotler
Chairman, President & CEO at Arko

It's still early, but we are encouraged by what we're seeing so far. Our team remained focused on executing our core transformation strategy, which include advancing our dealerization program, investing in our retail stores by bringing our new format store and our Foodservice Fast Grade 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 remain a central component of our long term transformation plan.

Arie Kotler
Chairman, President & CEO at Arko

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 a 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 $20,000,000 before G and A. As our dealerization efforts continue, we have identified more than $10,000,000 in expected annual structural G and 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.

Arie Kotler
Chairman, President & CEO at Arko

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 a new format stores, which include a bold and innovative remodel design to elevate the customer experience and better reflect our commitment to foodservice, 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. We opened our first new format store on June 25 in Ashland, Virginia.

Arie Kotler
Chairman, President & CEO at Arko

And while it has only been open a short time, we are pleased with its initial performance. Early results show outperformance in foodservice 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 foodservice as a focus, which we believe is a critical area of opportunity for ALCO. We are in various stages of engineering designs and layout on this next tranche of stores.

Arie Kotler
Chairman, President & CEO at Arko

Turning to our new to industry stores. Last week, we opened our second new location this year. 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 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.

Arie Kotler
Chairman, President & CEO at Arko

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, trip 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. 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 spend on average more than 15% more than our typical enrolled loyalty member during the second quarter.

Arie Kotler
Chairman, President & CEO at Arko

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 spend on average approximately 50% more in the 2025 and visited an average 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 2,350,000 members, up 10% from the end of Q2 last year. 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.

Arie Kotler
Chairman, President & CEO at Arko

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 expand assortments, revised space allocation, high value promotions, and a more effective visual merchandising strategy, which has been significantly improved by our back bar refresh and incentive program for discrete 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.

Arie Kotler
Chairman, President & CEO at Arko

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 improvement in same store gallon growth from May to June, and this improvement continued into July. Our Wholesale and Fleet segments continued to perform through a combination of our dealerization program and robust fuel margin as compared to the prior year.

Arie Kotler
Chairman, President & CEO at Arko

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 2,200,000.0 shares. We believe that our disciplined capital allocation strategy, aligned with strength of our transformation plan and consistent operational execution position 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.

Robert Giammatteo
EVP & CFO at Arko

Thank you, Ari. Good afternoon, everyone. Turning to second quarter twenty twenty five results. Adjusted EBITDA was $76,900,000 for the quarter compared to $80,100,000 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 $80,400,000 compared to $87,900,000 in the year ago period.

Robert Giammatteo
EVP & CFO at Arko

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 $800,000 with a 6.5% decline in gallons, mostly offset by an increase of $0.26 per gallon. Same store fuel margin was $0.45 per gallon for the quarter. Same store operating expenses were down approximately 0.8%.

Robert Giammatteo
EVP & CFO at Arko

Turning to our Wholesale segment. Operating income was $23,200,000 for the quarter versus $21,300,000 in the year ago period. Fuel margin was $0.01 $01 per gallon versus $9.9 in the year ago period. Gallons were up 3.9% for the quarter driven by our channel optimization program, which contributed more than 19,000,000 gallons for the quarter or almost 8% of total wholesale gallons. Excluding channel optimization, gallons were down approximately 4.1% at comparable wholesale sites.

Robert Giammatteo
EVP & CFO at Arko

We continue to be pleased with the impact of our channel optimization program, which has driven approximately $4,500,000 in incremental profit contribution for the 2025. As Ari mentioned, we continue to expect that at full maturity this program will deliver in excess of $20,000,000 in incremental operating income across our combined retail and wholesale segments. This outlook excludes additional G and A efficiencies we expect over time as we transition to a smaller retail segment footprint. Moving on to our Fleet segment, operating income was $13,100,000 for the quarter versus $13,700,000 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 $45.9 in the year ago period.

Robert Giammatteo
EVP & CFO at Arko

Total company general and administrative expense for the quarter was $40,700,000 versus $42,400,000 in the year ago period. Net interest and other financial expenses for the quarter were $19,500,000 compared to $21,400,000 in the year ago period with the decrease primarily related to lower average interest rates in the 2025 and higher interest income generated. Net income for the quarter was $20,100,000 compared to $14,100,000 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 $916,400,000 in long term debt.

Robert Giammatteo
EVP & CFO at Arko

We maintained substantial liquidity of approximately $875,000,000 including $294,000,000 in cash on hand at quarter end along with remaining availability on our lines of credit. Total capital expenditures for the quarter were $45,300,000 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 70,000,000 to $80,000,000 based on the following key segment assumptions. First for our retail segment, we expect our third quarter average retail store count to be approximately twelve twenty sites.

Robert Giammatteo
EVP & CFO at Arko

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 $0.04 $25 to $0.04 $45 per gallon. For our wholesale segment, we expect mid to high teen percentage operating income growth in the third quarter driven by our ongoing channel optimization work. And 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.

Robert Giammatteo
EVP & CFO at Arko

We are maintaining our full year total company adjusted EBITDA guidance in a range of $233,000,000 to $253,000,000 And with that, I'll hand it back to Ari for closing remarks.

Arie Kotler
Chairman, President & CEO at Arko

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.

Operator

Thank you. We will now be conducting a question and answer session. Our first question is from Bobby Griffin with Raymond James. Please proceed.

Bobby Griffin
Bobby Griffin
Managing Director at Raymond James Financial

Good afternoon, everybody. Thanks for taking my questions. I guess, Ari, 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 to your point, 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.

Arie Kotler
Chairman, President & CEO at Arko

Yes. Good afternoon, Bobby. Yes, you are absolutely correct. I mean, saw improvement from basically from May to June, June to July, but this is probably the best improvement we've been seeing over the past eighteen months. We don't know if this is just because all of the sudden something turnaround, but what I can tell you is probably that I think the value and the messages that we're sending out there with Fueling America, I believe our offering, our assortments, our promotions are very, very, very strong.

Arie Kotler
Chairman, President & CEO at Arko

And we see them driving trip frequency. I mentioned for example the loyalty trip frequency. So just to put dollars and cents, we've been we are talking about going from $73.83 to $110 which is almost 50%. We're talking about trips up almost three trips basically per month between loyal members and non loyal members. We see an increase in customers purchasing the qualified product of fueling Americas.

Arie Kotler
Chairman, President & CEO at Arko

And as you can imagine, all of those products are products that have a higher margin. I mean, I'll give an example, just something that we're actually promoting this month. If you buy two candies for $6 you get zero five zero dollars off per gallon. I mean, this is, Skittles and M and M for example. I mean, this is huge.

Arie Kotler
Chairman, President & CEO at Arko

Another one, if you buy Marlboro, two packs of Marlboro, $0.02 5 off per gallon. Hope that this is a result of what we've been doing over the past few months, but this is absolutely was very positive and of course we're going to take it.

Bobby Griffin
Bobby Griffin
Managing Director at Raymond James Financial

Absolutely. Thank you. And then 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? And if the program does run through '26, do you have to wait until 2026 or do we have to wait until '20 to see some of the G and A savings start to flow out or can that start to flow out earlier, and you could view the program at scale sooner?

Robert Giammatteo
EVP & CFO at Arko

Yes. Thanks, Bobby. So, no, I think the program store lift, 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. Ari had in his prepared remarks what is under contract and then there's a substantial amount still after. So, I think we know what that number is, we know what that number is and we're executing on it.

Robert Giammatteo
EVP & CFO at Arko

In terms of G and A savings, now we already are seeing savings in G and A in the second quarter. You can see the total G and A number was down. That number is inclusive of a certain amount of the restructuring expense that it is. So we are seeing it already. So things that are directly related to stores, field leadership, things that are directly one to one related, we're going to see real time things that are like prepaid annual software licenses, we will see we get into 2026.

Robert Giammatteo
EVP & CFO at Arko

So again, pace of G and A will accelerate as we continue, but we are seeing some of it already. I would estimate we're probably 25% to 33%, maybe a third of the way through the first tranche of savings. And I do believe that there's going to be more. So again, 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.

Bobby Griffin
Bobby Griffin
Managing Director at Raymond James Financial

Okay. And then lastly for me, just CapEx, the 22 fee properties. I mean, we saw the absolute dollar number step up year over year meaningfully and up sequentially. So any color just on how big of the 22 fee properties were in driving that? And just thoughts on exactly kind of what that is for the business and help me understand that better?

Arie Kotler
Chairman, President & CEO at Arko

Are you referring to the 22 properties that we purchased?

Bobby Griffin
Bobby Griffin
Managing Director at Raymond James Financial

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

Robert Giammatteo
EVP & CFO at Arko

Bobby, that number for the property is about $22,000,000 So when we talked about at the beginning of the year, we kind of talked about the prior two years full year CapEx was about 110,000,000 to $115,000,000 And while we don't provide guidance for CapEx, if you back out that $20 ish million twenty two million dollars from where you are, you're kind of on that similar pace from the past two years. So again, 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 and T. So again, it doesn't impact our cash position. We offset that with financing.

Bobby Griffin
Bobby Griffin
Managing Director at Raymond James Financial

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

Arie Kotler
Chairman, President & CEO at Arko

Thanks, Bobby. Thank you,

Operator

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

Dan Guglielmo
Dan Guglielmo
Equity Research Analyst - Consumer at Capital One Financial

Hi, everyone. Thank you for taking my question. The first one, you all mentioned macro headwinds and shifting 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.

Robert Giammatteo
EVP & CFO at Arko

Yes. So as we've talked about in prepared remarks, we have the merchandise sales for the third quarter positioned same store sales position down modestly. So again, this is on higher productivity stores. Again, the stores were keeping higher productivity, but we do see again a macro. We are cautious and we're at a negative modest same store sales performance.

Robert Giammatteo
EVP & CFO at Arko

We're not talking about the fourth quarter yet, Daniel. There's as we look sequentially on as Ari mentioned, we've seen since February with the exception of a little blip in May, we've seen month on month sequential improvement in the comp sales trend on the merch side. And so 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? That's something again, we have a little more confidence near term in Q3 because we've seen July, we see where we are right now. Fourth quarter, we're going to see as we get deeper into the third quarter what that looks like and we really guide the forward quarter at this point.

Dan Guglielmo
Dan Guglielmo
Equity Research Analyst - Consumer at Capital One Financial

That's really helpful. Appreciate that color. And then 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.

Dan Guglielmo
Dan Guglielmo
Equity Research Analyst - Consumer at Capital One Financial

How have wages trended this summer versus last summer kind of when thinking about the business?

Robert Giammatteo
EVP & CFO at Arko

Yes. 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. So that's kind of a baseline inflationary pressure that we're seeing about 3%. So 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.

Dan Guglielmo
Dan Guglielmo
Equity Research Analyst - Consumer at Capital One Financial

Appreciate that. And then just as a follow-up to that, what you said, as you continue through the transformation plan, kind of you're going at kind of low hanging fruit, it feels like. Do you expect kind of less of a benefit as the kind of the later stores are taken out? Or how are you thinking about that?

Robert Giammatteo
EVP & CFO at Arko

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

Arie Kotler
Chairman, President & CEO at Arko

Yes, let 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 an example. When we dealerize 10 stores, by definition, you are eliminating discrete managers. And this is just one example, okay.

Arie Kotler
Chairman, President & CEO at Arko

We have people in the back office that do accounting work, let's call it two per 10 stores, for example. We have when you get to 80 stores, you're eliminating all of the sudden the regional manager. So again, is a of position tied directly with the operation. So as you remove stores by definition you're going to reduce G and A that's part of the outcome.

Robert Giammatteo
EVP & CFO at Arko

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

Arie Kotler
Chairman, President & CEO at Arko

No, no. We are sharpening our pencil all the time. I mean, 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 eighteen months. I mean, this is a big project. This is a big project for us.

Arie Kotler
Chairman, President & CEO at Arko

And I think the reason we are moving forward very successfully is because we have the second segment, which is the wholesale segment, which help us tremendously over here. But so far, like I said, so far we are very, very pleased with the traction. And like Rob said, I mean, we expect to continue to see benefit just ramping up further over here.

Dan Guglielmo
Dan Guglielmo
Equity Research Analyst - Consumer at Capital One Financial

Great. Thank you. Appreciate all the color.

Arie Kotler
Chairman, President & CEO at Arko

Thank you.

Operator

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

Anthony Bonadio
Anthony Bonadio
VP - Equity Research at Wells Fargo

Yes. Hey, guys. Thanks for taking our questions. So I wanted to start out with fuel margins. I know you guys had another strong quarter on that front, but I think industry days maybe been a little softer than one might think just given breakeven dynamics and how soft gallons have been.

Anthony Bonadio
Anthony Bonadio
VP - Equity Research at Wells Fargo

So 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 years progressed?

Arie Kotler
Chairman, President & CEO at Arko

I'll start and then I'll let Rob maybe finish with some remarks. So 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.

Arie Kotler
Chairman, President & CEO at Arko

I think the software and the system that we have in place helping us to just to optimize and maximize gross profit dollars over here, making sure that we continue to be competitive. And as you can see this particular quarter we were basically trending close to basically $0.45 So, 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 up for what we saw in Q2. So not only that we were able to expand margin, we also see an improvement in basically in fuel gallons, a decrease in July.

Arie Kotler
Chairman, President & CEO at Arko

And we hope that that's going to be sustainable. That's what we hope.

Robert Giammatteo
EVP & CFO at Arko

Anthony, CPG can pop significantly when there's volatility. And I think we saw one month, specifically April in the second quarter, where we had a $07 increase year on year. And that drove significant profitability into April. Those things, I mean, we're in an uncertain macro environment right now, geopolitically everywhere and that those sorts of things, those trends, even though there could be some pressure on gallons, uncertainty certainly can be supportive of higher CPG.

Anthony Bonadio
Anthony Bonadio
VP - Equity Research at Wells Fargo

So it sounds like people sort of behaving rationally still?

Arie Kotler
Chairman, President & CEO at Arko

Well, I think people have the same issues with trends. If you are 4% or 6%, you still have a trend down. And I think when you have trend down, people need to pay the smaller guys are probably like everybody else need to pay their bills. And in order to pay the bills, the only way to make it happen, you need to increase margin. And that's what we've been seeing.

Arie Kotler
Chairman, President & CEO at Arko

I mean, listen, the margin is up almost $0.35 in Q2 and we continue to see strong margin going into July, very similar margin going into July. So, we expect we expect or we hope that margin will stay strong for the remaining quarters.

Anthony Bonadio
Anthony Bonadio
VP - Equity Research at Wells Fargo

Okay. That's helpful. And then I just wanted to touch on, OTP or Alt Nicotine. I think there was some rhetoric, out of the FDA recently on increased focus on the illicit market. So can you just talk a little bit more about what you're seeing in that category?

Anthony Bonadio
Anthony Bonadio
VP - Equity Research at Wells Fargo

And just any thoughts on a potential crackdown there and how you guys might be positioned to benefit from that?

Arie Kotler
Chairman, President & CEO at Arko

Yes. So if you remember, Anthony, at the beginning of the year, I made a big remarks regarding to our back bar refresh in basically in many of our stores in almost 1,000 stores. Since that, I can just tell you that OTP was a very, very strong basically category for us in Q2. OTP was up two point basically 2.6% in sales. And at the same time, our margin was up 170 basis points.

Arie Kotler
Chairman, President & CEO at Arko

So this is a category that at least for us, we are paying a lot of attention to this category. And I think those crackdowns can only help us 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 selling some illegal OTP product. We of course selling only legal product. And I think it's about time that we start to see some enforcement over there.

Arie Kotler
Chairman, President & CEO at Arko

But regardless, like I said, OTP for us was a very successful story since we refreshed the back bar or from all variety. And like I said, I mean, it's big success and it's a big contributor to the gross profit dollars over here in Q2.

Robert Giammatteo
EVP & CFO at Arko

And thanks, Anthony. Just the OTP penetration is 10% of the total assortment versus cigarettes and more in the 26%, 27% range. But the contribution margin from OTP was essentially equal to cigarettes. So 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.

Anthony Bonadio
Anthony Bonadio
VP - Equity Research at Wells Fargo

Got it. Thanks guys.

Arie Kotler
Chairman, President & CEO at Arko

Thank you.

Operator

Our next question is from Benjamin Wood with BMO Capital Markets. Please proceed. Hi, how are doing?

Benjamin Wood
Benjamin Wood
VP - Equity Research at BMO Capital Markets

Hey everyone. This is Ben on behalf of BMO and Kelly Bania. Just wanted to circle back on the dealerization 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. So 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?

Benjamin Wood
Benjamin Wood
VP - Equity Research at BMO Capital Markets

Also just trying to understand is this total number, is that all part of the $20,000,000 in savings target or should we expect you to update that savings as you guys get deeper into this?

Arie Kotler
Chairman, President & CEO at Arko

I'll let Rob discuss the $20,000,000 and then I basically give you my 2¢ regarding to the pace. We are very pleased with the pace, but I'll let Rob jump in.

Robert Giammatteo
EVP & CFO at Arko

Yes. Ben, the number that we shared in excess of $20,000,000 is the fully executed program. So while we haven't shared the total store count that is inclusive of all the stores. So again, in excess of $20,000,000 but you should not expect us to be offset 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.

Arie Kotler
Chairman, President & CEO at Arko

And regarding to the pace, Ben, regarding to the pace, as I mentioned earlier, just think about it, 500 stores in eighteen months, this is unheard of. I mean, it's going in accordance to our plan. Like I said, we are very, very pleased with that. What sometimes take a little bit longer is just getting licenses I mean, we want to make sure that all of the dealers that are taking over some of those stores, they are fully equipped and fully licensed.

Arie Kotler
Chairman, President & CEO at Arko

We don't want to be in a position that God forbid they are losing the license and they are 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 order to continue to operate from the minute that we stop operating.

Benjamin Wood
Benjamin Wood
VP - Equity Research at BMO Capital Markets

Okay. That's great. And then 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? And then what about the labor needed?

Benjamin Wood
Benjamin Wood
VP - Equity Research at BMO Capital Markets

How many employees will run it versus your store average? Trying to understand the complexity of it versus with this new foodservice versus kind of the other store base you're running.

Arie Kotler
Chairman, President & CEO at Arko

Sure. So most of we opened the first one last week sorry, last month, last month on June 25. At this particular store, we did not change any of the square footage that was a large enough store, over 3,000 square foot. So we basically just added Beer Cave and some other features in of course in addition to that all of the food service equipment over there we had a deli before. So we just converted the deli to our new concept.

Arie Kotler
Chairman, President & CEO at Arko

We remodeled the store from the inside and the outside. So in this particular case, did not add any square footage. In the store that we opened this morning, we were able to add additional square footage to the basically to the original store. So this is something that we did. In terms of labor and we'll share some picture later on, but in terms of labor, we have a share labor model, which means we need one person literally to operate the food service concept that we put in place over here.

Benjamin Wood
Benjamin Wood
VP - Equity Research at BMO Capital Markets

Okay. That's super helpful. So then is it kind of correct to assume that or maybe I'll ask you this is 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?

Arie Kotler
Chairman, President & CEO at Arko

Well, the we are in a phase of structuring and engineering and 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 type of stores, different type 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. So this is something. But right now at the moment, we already identified another tranche of basically of stores. It's approximately 25 stores that we already identified in the same geography that we started.

Arie Kotler
Chairman, President & CEO at Arko

We started over here in the Virginia market, in the Richmond market. And the plan is basically to finish this tranche But again, 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, last prototype that we just the new format that we just opened last month and this morning.

Benjamin Wood
Benjamin Wood
VP - Equity Research at BMO Capital Markets

Great. Thank you guys very much.

Arie Kotler
Chairman, President & CEO at Arko

Which by the way that was one of the decision 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. Think we lost Ben. Thank you, Ben.

Operator

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

Hale Holden
Hale Holden
Managing Director at Barclays Capital

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

Arie Kotler
Chairman, President & CEO at Arko

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 part. We completed this project. This project was completed by the end of Q1, beginning of Q2. So we are we're done.

Arie Kotler
Chairman, President & CEO at Arko

Now it's just a matter of adding additional assortment to the mix of the year.

Hale Holden
Hale Holden
Managing Director at Barclays Capital

Okay. And then on the store conversions that Ben was just asking about, any thoughts are in what constitutes a success in terms of either merchandise sales lift or same storage lift versus maybe where the control group is?

Arie Kotler
Chairman, President & CEO at Arko

Sure. First of all, One of the reasons behind that of course is making sure that we increase traffic. Success will turn to be an increase inside margin because adding foodservice over here by definition the gross margin on foodservice is much higher than basically what we saw before. So, the success for us will be increased food traffic, increase the basket size associated with that, expand our food service. So far get very nice results.

Arie Kotler
Chairman, President & CEO at Arko

I can tell you that the store that we opened just last month on June 25, just in the month of July, that is excluding cigarettes in that particular store are up 6% compared to prior year. So, that's for us so far we are very, very pleased on what we're seeing over here.

Hale Holden
Hale Holden
Managing Director at Barclays Capital

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.

Arie Kotler
Chairman, President & CEO at Arko

Yes, no problem.

Hale Holden
Hale Holden
Managing Director at Barclays Capital

Thank you.

Arie Kotler
Chairman, President & CEO at Arko

We'll do that. Thank you.

Operator

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

Arie Kotler
Chairman, President & CEO at Arko

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

Operator

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

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