Investing.com -- ARKO Corp., the Richmond, Va.-based convenience store operator and fuel supplier, has seen its credit rating downgraded by S&P Global Ratings due to weaker operating performance. The credit rating agency has lowered ARKO’s issuer credit rating from ’B+’ to ’B’ and its issue-level rating on senior unsecured notes from ’B-’ to ’CCC+’. The recovery rating remains unchanged at ’6’.
Over the past two years, ARKO’s earnings have seen a decrease due to macroeconomic challenges and company-specific issues. These pressures are expected to continue throughout 2025, leading to weaker credit metrics. This includes S&P Global Ratings-adjusted EBITDA interest coverage falling below 2.0x.
ARKO’s retail segment has been particularly impacted, with a 6.1% decline in same-store fuel gallons sold and a 5.4% decrease in same-store merchandise sold in 2024. This was due to a challenging consumer environment and ARKO’s exposure to lower income markets where consumers have faced greater economic stress. In addition, the company’s decision to close or convert a number of underperforming retail stores last year has led to lower volumes and inside sales, pressuring profitability.
ARKO’s credit protection metrics have deteriorated as a result, with adjusted interest coverage declining to 2.0x. The difficult operating environment is expected to continue in 2025, with S&P Global Ratings forecasting an approximate 5% decline in its adjusted EBITDA.
Despite these challenges, ARKO is implementing a transformation plan that includes converting certain retail stores to dealer sites. This strategy, however, carries execution risk. The company converted 153 sites in 2024 and plans to complete a significant number of conversions in 2025, including approximately 100 by the end of Q1’25.
The conversion strategy will result in reduced retail operating expenses and ARKO expects to realize general and administrative savings. The company also anticipates an incremental $20 million in operating income upon completion of its store conversions. Membership in ARKO’s loyalty program increased by about 13% year over year, and the company expects its enhanced discount offering to drive further membership growth and improved store traffic and productivity in 2025.
ARKO’s liquidity position at the end of 2024 was $841 million, including $262 million in cash, $448 million available under its M&T and Capital One (NYSE: COF ) lines of credit, and $132 million available under its asset-backed lending (ABL) facility. The company expects to use its projected capital expenditures of around $115 million in 2025 primarily for maintenance, remodels, and strategic initiatives including expanding its food program.
S&P Global Ratings maintains a stable outlook for ARKO, reflecting expectations that despite forecasted volume declines in 2025, the company’s fuel pricing strategy and transition to operating more productive retail stores will support positive free operating cash flow and adjusted interest coverage in the high-1x area over the next 12 months.
The rating could be further lowered if ARKO’s free operating cash flow or EBITDA generation declines materially relative to the base case. This could occur due to weakened operating performance or execution issues transitioning retail locations to wholesale sites. Conversely, the rating could be raised if the company strengthens credit metrics and improves operating performance, including successfully executing its transformation plan.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.