Value Line recently initiated coverage of Susser Holdings Corporation (SUSS) in its flagship product, The Value Line Investment Survey. The company is the largest non-refining operator of convenience stores in Texas, based on store count. As of January 1, 2012, its retail segment operated 541 convenience stores in Texas, New Mexico, and Oklahoma. The majority of these units, 493 to be exact, are in Texas. These stores offer food service, merchandise, and motor fuel. Susser also operates an in-house restaurant, Laredo Taco Company, which is available in 329 of its locations. The company also purchases branded and unbranded motor fuel from refiners for its stores.

The company is based in Corpus Christi, Texas. The Susser family entered the motor fuel distribution business in the 1930s, and in 1988, Sam L. Susser became the President and CEO. At the time, Susser operated only five stores and had annual sales of $8 million. Since then, the company has grown dramatically, making 13 significant acquisitions in both the retail convenience store and wholesale fuel distribution segments. As of January 1, 2012 of the almost 7,600 employees in the fold, just over 80% were full-time workers. Susser completed its initial public offering in October, 2006.

Susser’s business experiences significant seasonality during the year, largely due to consumer purchasing patterns. Revenues and earnings are disproportionately high during the second and third quarters. The company operates in two primary segments: the retail group, Stripes, which operates the retail convenience stores, and the wholesale segment, Susser Petroleum Company, or SPC, which purchases fuel from refiners and supplies it to its retail stores, other independently owned stations, and other end users of motor fuel.

Merchandise sales accounted for about 24% of total revenues in the most recent year, with motor fuel accounting for 74%, and other, which includes Applied Petroleum Technologies, which manages the company’s maintenance, environmental, and construction activities contributing the remainder. However, from a gross profit perspective, merchandise represented 58% of the total, while motor fuel added 35%, and the so-called other 7%.

The convenience store industry in which Susser operates is highly competitive. There is relative ease of entry for competitors, which offer most of the same products and services. The primary competitors for its retail segment include other convenience stores, supermarkets, drugstores, discount stores, and club stores. Over the past 15 years, many of these non-traditional retailers also have entered the motor fuel business, and have captured a significant share of this market.

As some of the larger retailers adjust their store formats to appeal to traditional convenience store customers, Susser has come up with strategies to combat these moves. It has focused its new store development on larger format units in geographically desirable locations. It also has added more immediately consumable products, such as food service and cold beverages, while emphasizing the quick service that typically cannot be met by hypermarkets and other large supermarkets.

The company’s wholesale division competes with major oil companies that sell their own products directly to consumers and other fuel distributors.  If these firms decided to substantially increase their own fuel distribution operations in Texas, this would clearly hurt business prospects.

Overall, market trends are favorable. The company operates most of its stores in Texas, which has been faring better economically than other parts of the United States due largely to a stable housing industry, strong population growth, and a relatively healthy job market. Growth from ongoing operations also remains strong, as management continues focused on opening new stores, which should help drive sales and profitability in the coming years. The company is focused on cost-reduction initiatives, as well.

We note, however, that Susser has a sizable debt load, totaling about 57% of total capital. Susser is also susceptible to swings in retail gas prices. Typically, the higher the gas prices, the lower the profitability from this segment. Fierce competition will most likely remain an issue for the foreseeable future.

Subscribers interested in learning more about this operator of convenience stores are advised to consult Value Line’s quarterly reports for Susser, as well as any supplemental reports and relevant articles that may arise as important news comes to light.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.