Wall Street seems to be missing a critical piece of the Arko Corp. puzzle. While everyone is focused on the company's shift towards organic growth and the potential of their new pizza program, a less-discussed strategy could hold the key to unlocking a dramatic surge in profitability: the aggressive conversion of retail stores to dealer sites.

This isn't just some minor operational tweak. Arko is hinting at a large-scale shift in its business model, one that could fundamentally reshape its cost structure and propel earnings to new heights. CEO Arie Kotler revealed on the recent Q1 2024 earnings call that Arko has identified "a meaningful number" of retail stores ripe for conversion to dealer sites within their wholesale segment. This move, he argued, will "significantly reduce site operating expenses and corporate G&A."

The beauty of this strategy lies in its simplicity. By transitioning underperforming retail locations to dealer operations, Arko sheds the burden of direct operating expenses and corporate overhead. Instead, they partner with independent dealers who assume those costs while Arko continues to reap the benefits of fuel volume through long-term agreements. It's a win-win. Dealers gain access to Arko's established infrastructure and brand recognition, while Arko enjoys a significant profitability boost without sacrificing scale.

This isn't just a theory. Arko has successfully implemented this strategy in the past, albeit on a smaller scale. Now, armed with the insights gleaned from a leading consulting firm and a renewed focus on organic growth, they're poised to supercharge this conversion process.

Hypothetical Profitability Impact of Dealer Conversions

Let's hypothesize. Assume Arko converts just 10% of its roughly 1,400 retail stores - that's 140 locations. Based on their Q1 2024 results, average retail store operating income (adjusted) was around $24,000. If these converted dealer sites generated even half that amount in profit for Arko, that's an extra $1.7 million in operating income per quarter, or $6.8 million annually.

Factor in the substantial reduction in G&A expenses - a figure Arko hasn't yet quantified but has stressed will be "significant" - and the potential earnings impact becomes even more compelling. This could be the catalyst that transforms Arko from an acquisition-driven company to a lean, mean, profit-generating machine.

Fuel Margin Performance: Riding the Volatility

Arko's fuel margin performance provides another clue to their potential. Despite a challenging environment marked by fluctuating fuel prices and hesitant consumer spending, Arko has demonstrated an ability to optimize fuel margins. Let's take a look at their performance over the past few quarters:

As you can see, Arko's retail fuel margin has remained relatively stable, a testament to their pricing strategy and operational efficiency. This resilience in the face of volatile fuel prices bodes well for their future profitability.

The Implications for Arko's Valuation

The implications for Arko's valuation are significant. Wall Street seems fixated on near-term headwinds, like the hesitant consumer and inflationary pressures. But the market appears to be discounting the power of this dealer conversion strategy, which could drive a sustained earnings expansion beyond the current year.

Consider this: Arko repurchased a staggering 4.8 million shares for $28.3 million in Q1, demonstrating management's confidence in the underlying value of the business. They even expanded their buyback authorization to $125 million, sending a clear signal that they believe the stock is undervalued.

Arko's Transformation: A Multi-Year Journey

Arko's aggressive dealer conversions could be the secret weapon that propels their profitability to new heights, leaving Wall Street analysts scrambling to catch up. The company is laying the groundwork for a multi-year transformation, and this under-the-radar strategy could be the hidden engine driving their success.

"Fun Fact: Arko's fas REWARDS loyalty program boasts over 2 million members, a testament to their ability to connect with customers in a meaningful way. Their new pizza program, cleverly designed to incentivize enrollment, could further boost these numbers and drive even stronger customer loyalty."