You may not have heard of Stripes if you haven’t driven through Texas. This convenience store chain, owned by Susser Holdings (SUSS.N), also sells motor fuel and is the largest independent fuel distributor in Texas (the company does not refine petroleum but buys it wholesale). Unfortunately, it operates in some of the lowest fuel margin regions of the state and analysts have taken estimates down for the current quarter since Susser reported weak earnings last quarter on May 8, blaming unseasonably cold weather. There is now a StarMine negative Predicted Surprise of -7.4%, which is an indicator that the company may miss estimates when it reports second quarter earnings on August 7.
Earnings per share estimates
Source : Eikon
Lower estimates
The chart above shows that the StarMine SmartEstimate (orange line) and the I/B/E/S consensus both declined in the last 90 days. The consensus estimate is now 79 cents a share, down from 90 cents a share on May 8. The SmartEstimate has fallen even more and is at 73 cents a share, 6 cents below the consensus. The fact that there is also a Bold Estimate of 62 cents a share strengthens the case for an earnings miss. A Bold Estimate represents an estimate by a StarMine rated 5-star analyst (this is the highest possible rating) that is significantly different from the consensus. When an analyst with a record of accuracy goes against the crowd, it may be worth a second look.
The Texan economy has benefitted from the oil boom, and employment has been soaring, as have wages. That has put pressure on wage costs at Susser Holdings, which is competing with higher-paying jobs at oil companies. The strong economy in Texas is also bringing increased competition in the form of additional convenience stores and dollar stores. In the last earnings call, CEO Sam Susser acknowledged that “there are lots of big national players that are increasing their square footage and the variety of formats,” and these national players have deep pockets. In order to keep up with the competition, Susser Holdings has had to increase quickly the number of stores it operates in order to get more visibility. That has led the company to spend more on capital expenditures over the last three quarters than it has earned from operations. That in turn has led to negative free cash flows. In the chart below, the red section of the bars represents the amount by which free cash flow trails net income. Earnings that are not backed by strong cash flows tend to be less sustainable than those backed by strong cash flows.
Source : Datastream Pro/StarMine
Competition from Walmart?
Analysts seem to have taken note of some of these trends. They have not only lowered estimates for the current quarter, but for the full year and next year (by 4% and 6%, respectively). That contributes to the poor StarMine Analyst Revisions Model (ARM) score of 7 — an indicator that analysts may not be done lowering estimates. It remains to be seen if Stripes can compete with some of the larger convenience and grocery store players like Walmart, but for the current quarter, signs point to an earnings miss.
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