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SUSS > SEC Filings for SUSS > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis of our financial condition and results of operations should be read in conjunction with "Item 6. Selected Financial Data" and our consolidated financial statements and the related notes referenced in "Item 8. Financial Statements and Supplementary Data." The fiscal years 2010, 2011 and 2012 presented herein each include 52 weeks.

Safe Harbor Discussion

This report, including without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection under the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by use of phrases such as "believe," "plan," "expect," "anticipate," "intend," "forecast" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs, anticipated capital expenditures, expected cost savings and benefits are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:

• Competitive pressures from convenience stores, gasoline stations, other non-traditional retailers located in our markets and other wholesale fuel distributors;

• Volatility in crude oil and wholesale petroleum costs;

• Increasing consumer preferences for alternative motor fuels, or improvements in fuel efficiency;

• Inability to build or acquire and successfully integrate new stores;

• Dependence on our subsidiaries, including the Partnership, for cash flow generation;

• Indirect exposure to the Partnership's business risks, by virtue of our significant relationships with the Partnership;

• Operational limitations arising from our contractual agreements with the Partnership;

• Our substantial indebtedness, and the restrictions imposed by the covenants in respect of that indebtedness;

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• Our ability to comply with federal and state regulations including those related to environmental matters and the sale of alcohol and tobacco;

• Dangers inherent in storing and transporting motor fuel;

• Pending or future consumer or other litigation or adverse publicity concerning food quality, food safety or other health concerns related to our restaurant facilities;

• Wholesale cost increases of tobacco products or future legislation or campaigns to discourage smoking;

• Healthcare reform legislation and regulation;

• Compliance with, or changes in, tax laws-including those impacting the tax treatment of the Partnership;

• Dependence on two principal suppliers for merchandise;

• Dependence on suppliers for credit terms;

• Seasonal trends in the industries in which we operate;

• Dependence on senior management and the ability to attract qualified employees;

• Acts of war and terrorism;

• Dependence on our information technology systems;

• Severe or unfavorable weather conditions;

• Cross-border risks associated with the concentration of our stores in markets bordering Mexico;

• Impairment of goodwill or indefinite lived assets; and

• Other unforeseen factors.

For a discussion of these and other risks and uncertainties, please refer to "Part 1. Item 1A. Risk Factors." The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of March 15, 2013. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available in the future.

Our operations include retail convenience stores and wholesale motor fuel distribution. We are a leading operator of convenience stores and one of the largest motor fuel distributors in Texas based on store count and motor fuel volumes sold. As of December 30, 2012, our retail segment operated 559 convenience stores in Texas, New Mexico and Oklahoma offering merchandise, food service, motor fuel and other services.
On September 25, 2012, our subsidiary SUSP completed its initial public offering of common units representing limited partner interests. In connection with the initial public offering, substantially all of our wholesale motor fuel distribution business (other than our motor fuel consignment business and transportation assets) and certain owned and leased convenience store properties were contributed to the Partnership. We own 50.1% of SUSP's limited partner interests through common and subordinated units, the general partner of SUSP as well as all of SUSP's incentive distribution rights, which entitle us to specified increasing percentages of cash distributions as SUSP's per-unit cash distributions increase. SUSP received net proceeds from the offering of $206 million, after underwriter discounts, fees and offering expenses. We will continue to consolidate the operations of the Partnership in our financial statements, with the 49.9% share of the Partnership's net income allocated to public limited partners reflected as attributable to noncontrolling interest. For the year ended December 30, 2012, we sold 1.4 billion gallons of branded and unbranded motor fuel. We purchase fuel directly from refiners and distribute it to our Stripesฎ convenience stores, contracted independent operators of convenience stores ("dealers"), unbranded convenience stores and other commercial users. We believe our combined retail/wholesale business model makes it possible for us to pursue strategic acquisition opportunities and operate acquired properties under either format, providing an optimized return on investment. Our market share and scale allows the integration of new or

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acquired stores while minimizing overhead costs. In addition, we believe our food service and merchandising offerings distinguish us from our competition, providing the opportunity for increased traffic in our stores. Our business is seasonal, and we generally experience higher sales and profitability in the second and third quarters during the summer activity months and lowest during the first and fourth quarters. For a description of our results of operations on a quarterly basis see "Quarterly Results of Operations and Seasonality."
During 2012, we continued to expand and upgrade our operating portfolio. We opened 25 new retail stores and closed seven, including three retail stores converted to wholesale dealer sites. We expect to open a total of 29 to 35 new retail stores during 2013. We added 39 dealer sites and discontinued 25, for a total of 579 dealer sites as of the end of 2012 in our wholesale segment. We expect to add a total of 25 to 40 new dealer sites during 2013.
Our total revenues, net income attributable to Susser Holdings Corporation and Adjusted EBITDA were $5.8 billion, $46.7 million and $182.9 million, respectively, for fiscal 2012 compared to $5.2 billion, $47.5 million and $167.0 million, respectively, for fiscal 2011. Net income attributable to Susser Holdings Corporation for 2012 was reduced by a non-cash deferred income tax charge of $3.6 million ($0.17 per diluted share) recorded during the third quarter solely related to Susser Holdings' contribution of net assets to SUSP in connection with SUSP's IPO.
We believe we have adequate liquidity and financial flexibility to continue to operate and grow our business. As of December 30, 2012, we had total revolver borrowings of $35.6 million and $15.9 million in standby letters of credit. On our $250.0 million SUSP revolver, we had borrowings of $35.6 million and $12.8 million in standby letters of credit, leaving unused availability of $201.6 million. On our $100.0 million SUSS revolver, we had no outstanding borrowings and $3.1 million in standby letters of credit, leaving unused availability of $96.9 million. We had combined cash on the balance sheet of $286.2 million. Additionally, SUSP has $148.3 million of marketable securities which serve as collateral for the SUSP term loan. Marketable securities were reflected in current assets in the Form 10-Q for the third quarter of 2012. In the consolidated balance sheets at December 30, 2012, marketable securities have been classified as long term assets to better match the debt that they collateralize.

Market and Industry Trends
The economy in Texas, where the majority of our operations are conducted, continues to fare better than many other parts of the nation. Additionally, our business has remained generally more resilient through economic cycles than many other retail formats. We have reported positive comparable merchandise results in 19 of the last 20 quarters, and 2012 was our 24th consecutive annual increase in same-store merchandise sales, with growth of 6.6% over the prior year. We also achieved a 5.8% increase in average gallons sold per retail store for 2012, driven partly by growth in diesel volume, which we believe is primarily attributable to increased manufacturing, oil and gas activity, increased construction and continued improvement in the number of people working in the markets in which we operate. Diesel volumes are also growing as we add new stores and add diesel to selected older stores.
We typically experience lower fuel margins in periods when the cost of fuel increases gradually, and higher fuel margins in periods when the cost of fuel declines or is more volatile. We report retail fuel margins before credit card fees, but higher fuel prices result in higher credit card costs, which tends to drive fuel margins higher to cover the additional credit card fees.
Additionally, our fuel margins have historically exhibited seasonal differences, with lower fuel margins during the first and fourth quarters and the highest fuel margins in the second or third quarter of the year. Our cost of motor fuel generally follows the movements in the price of crude oil. Crude oil prices ranged from approximately $78 to $109 per barrel during 2012, with an average of approximately $94, compared to a range of $75 to $113 per barrel for 2011 and an average of approximately $95, based on West Texas Intermediate ("WTI") spot prices.
Our retail fuel margin for 2012 of 21.8 cents per gallon was 1.4 cents lower than 2011, partly due to slightly less volatility in fuel prices during 2012 compared to the prior year. Concurrent with the completion of the SUSP IPO in September 2012, SUSP began charging the retail segment a three-cent per gallon profit margin on gallons sold to it. The impact of this mark-up was a reduction of our reported retail fuel margin by 0.75 cents per gallon. However, this reduction in retail gross profit is offset by an increase in wholesale segment gross profit, resulting in no change to consolidated gross profit. After deducting credit card fees, our retail fuel margin for 2012 was 16.3 cents per gallon compared to 17.7 cents a year ago. Fuel gross profit represented 37.9% of our consolidated gross profit for 2012 versus 38.7% in the 2011. For our retail division, fuel represented 33.5% of retail gross profit for 2012.

Although we are unable to anticipate future trends in energy prices, in general, greater volatility in energy prices provide opportunities to enhance fuel margins. Despite future movements in energy prices, we believe our growth in scale, geographic diversification, strong technology, combined retail/wholesale format and larger format retail stores offering more fueling

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stations provide us the ability to minimize the negative impacts of periods with lower fuel margins. Higher crude oil prices may also increase our working capital needs. We believe we have adequate liquidity to operate our business with significantly higher crude oil prices.

Other significant trends in the retail convenience store industry include a national decline in the number of cigarettes sold, the expansion of food service categories as an increased percentage of merchandise sales, the continued increase of motor fuel competition from hypermarkets and additional competition from other retail formats, such as drug and dollar stores. We believe that our larger format stores, more efficient motor fueling facilities and Laredo Taco Companyฎ offerings position us strongly to competitively address these industry trends in our retail segment. Our larger format stores with expanded parking facilities allow us to handle more customers during peak times and to provide more product variety and enhanced offerings such as food service, and leverage variety, thereby increasing store traffic. These additional offerings result in a lower overall percentage of our sales and gross profit resulting from cigarettes than the industry average, which reduces our dependence on cigarette sales to drive operating results. Our larger and more efficient fueling facilities provide more fueling positions to increase customer traffic during peak drive times and during periods of intense local price competition.

Description of Revenues and Expenses

Revenues and Cost of Sales. Our revenues and cost of sales consist primarily of the following:

• Retail. Retail revenues are primarily derived from sales of merchandise, motor fuel and services through our company-operated convenience stores. Sales from our proprietary Laredo Taco Companyฎ restaurants and other food service items are included in merchandise sales. Merchandise and motor fuel revenue is recorded at gross selling price, including any excise taxes, but excluding sales taxes. Cost of sales for merchandise and motor fuel includes excise taxes, which are paid to the vendors as part of the cost of product, and any delivery fees, net of any rebates received.

We also offer a number of ancillary products and services to our customers including lottery tickets, ATM services, proprietary money orders, prepaid phone cards and wireless services, movie rentals and pay phones. The income for these ancillary products and services is recorded in other revenues in our consolidated statements of operations. There is minimal cost of sales associated with other revenue, and therefore other retail revenue is recorded on a net basis.
• Wholesale. Wholesale revenues are derived primarily from sales of motor fuel to branded dealers, unbranded convenience stores and other end users. Prior to the SUSP IPO on September 25, 2012, sales of motor fuel from our wholesale to retail segment were at delivered cost without any profit margin. Effective with the SUSP IPO, the retail segment began paying a profit mark-up of approximately 3 cents per gallon on purchases from SUSP pursuant to our fuel distribution agreement with SUSP. All of the SUSP operations are included in our wholesale segment operations. With respect to management's discussion and analysis, wholesale operations data presented represents third-party transactions, excluding sales to our retail segment, unless otherwise noted. The wholesale cost of motor fuel includes delivery costs, purchase discounts and other related costs, but excludes excise taxes, which are billed on a pass-through basis to the retailer/consumer.

The wholesale business also receives rental income from convenience store properties it leases to Stripes and third parties, sale of rights to operate dealer locations and nominal commission income on various programs, which we refer to as "value-added programs" and we offer to our branded dealers. These programs allow dealers to take advantage of products and services that they would not likely be able to obtain on their own, or at discounted rates. Rent and value-added program income is recorded in other revenues in our consolidated statements of operations. There is minimal cost of sales associated with other revenue.
• Other. APT derives revenues from environmental remediation, environmental compliance, and motor fuel construction services it provides to our retail stores and wholesale locations, as well as to third parties. Cost of sales includes the direct labor, materials and supplies required to provide the services and indirect costs, such as supervision.

Operating Expenses. Our operating expenses consist primarily of the following:
• Selling, general and administrative expenses consist primarily of store personnel costs, benefits, utilities, property and equipment maintenance, credit card fees, advertising, environmental compliance and remediation, rent, insurance, property taxes, administrative costs and non-cash stock-based compensation charges.

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• Other operating expenses include depreciation, amortization, loss (gain) on disposal of assets and impairment charges.

Key Measures Used to Evaluate and Assess Business

Key measures we use to evaluate and assess our business include the following:
• Merchandise same store sales. This reflects the change in year-over-year merchandise sales for comparable stores. This measure includes all merchandise and food service sales, but does not include motor fuel sales due to the volatility in the retail price of motor fuels. We include a store in the same store sales base in its thirteenth full month of operation. A store that is closed is removed from the same store calculation base. A store that is razed and rebuilt is treated as a closed store when it is razed, and then as a new store when it is rebuilt. Remodeled stores are included in our same store sales base, even if the store is temporarily closed for the remodel. Although we believe this calculation is generally comparable to that used by others in our industry, this calculation may differ from that used by other companies.

• Merchandise gross profit and margin. Merchandise gross profit represents gross sales price of merchandise sold less the direct cost of goods and shortages. Included in shortages are bad merchandise and theft. Merchandise margin represents merchandise gross profit as a percentage of merchandise sales. We do not include other gross profit from ancillary products and services in the calculation of merchandise gross profit.

• Average gallons per store per week. This reflects the average motor fuel gallons sold per location per week for a specific period, and includes all stores in operation during the period that sell fuel.

• Gross profit cents per gallon. Our retail gross profit cents per gallon reflects the gross profit on motor fuel before credit card expenses divided by the number of retail gallons sold. Our wholesale gross profit cents per gallon reflects the gross profit on motor fuel sold to third parties after credit card expenses divided by the number of wholesale gallons sold to third parties.

• EBITDA, Adjusted EBITDA and Adjusted EBITDAR. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are important measures used by management in evaluating our business. We monitor EBITDA, Adjusted EBITDA and Adjusted EBITDAR on a site, segment and consolidated basis as key performance measures.

We define EBITDA as net income (loss) attributable to Susser Holdings Corporation before net interest expense, income taxes, net income attributable to noncontrolling interest and depreciation, amortization and accretion. Adjusted EBITDA further adjusts EBITDA by excluding non-cash stock-based compensation expense and certain other operating expenses that are reflected in our net income that we do not believe are indicative of our ongoing core operations, such as significant non-recurring transaction expenses and the gain or loss on disposal of assets and impairment charges. Adjusted EBITDAR adds back rent to Adjusted EBITDA.

Subsequent to the SUSP IPO, we have revised our definition of EBITDA to exclude the impact of noncontrolling interest, in order to present a consolidated amount for EBITDA, Adjusted EBITDA and Adjusted EBITDAR which is consistent with the metrics used by our management and in our credit agreement covenants. Prior to the SUSP IPO, the amount of noncontrolling interest was not material.

EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not recognized terms under GAAP and do not purport to be alternatives to net income as measures of operating performance. EBITDA, Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Please see Note 9 to "Item 6. Selected Financial Data."

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Key Operating Metrics

The following table sets forth, for the periods indicated, information
concerning key measures we rely on to gauge our operating performance:

                                                                Year Ended
                                           January 2,            January 1,         December 30,
                                              2011                  2012                2012
                                             (dollars in thousands, except per gallon items)
Merchandise sales                      $       806,252       $       881,911      $       976,452
Motor fuel - retail                          1,987,072             2,715,279            2,995,840
Motor fuel - wholesale to third
parties                                      1,094,279             1,549,143            1,792,210
Other                                           43,027                47,835               53,625
Total revenue                          $     3,930,630       $     5,194,168      $     5,818,127
Gross Profit:
Merchandise                            $       270,683       $       297,601      $       330,952
Motor fuel - retail (1)                        135,611               182,521              186,041
Motor fuel - wholesale to third
parties (2)                                     26,018                31,042               37,091
Motor fuel - wholesale to Stripes (2)                -                     -                6,472
Other, including intercompany
eliminations                                    40,790                45,822               50,838
Total gross profit                     $       473,102       $       556,986      $       611,394
Adjusted EBITDA (3):
Retail                                 $       104,027       $       148,549      $       154,205
Wholesale                                       21,499                24,942               35,833
Other                                           (5,514 )              (6,473 )             (7,141 )
Total Adjusted EBITDA                  $       120,012       $       167,018      $       182,897
Retail merchandise margin                         33.6 %                33.7 %               33.9 %
Merchandise same store sales growth                4.0 %                 6.0 %                6.6 %
Average per retail store per week:
Merchandise sales                      $          29.6       $          31.9      $          34.5
Motor fuel gallons sold                           27.3                  28.7                 30.3
Motor fuel gallons sold:
Retail                                         735,763               785,582              853,163
Wholesale - third party                        494,209               522,832              594,909
Average retail price of motor fuel per
gallon                                 $          2.70       $          3.46      $          3.51
Motor fuel gross profit cents per
Retail (1)                                        18.4 ข                23.2 ข               21.8 ข
Wholesale - third party (2)                        5.3 ข                 5.9 ข                6.2 ข
Retail credit card cents per gallon                4.4 ข                 5.5 ข                5.5 ข

(1) Effective September 25, 2012, the retail fuel margin reflects a reduction of approximately three cents per gallon as SUSP began charging a profit mark-up on gallons sold to our retail segment. Prior to this date, no gross profit mark-up was charged by the wholesale segment to the retail segment. Excluding the impact of this profit mark-up to SUSP for fiscal 2012, the average retail margin would have been reported as 22.6 cents per gallon, or 0.75 cents higher.

(2) The wholesale margin from third parties excludes sales and gross profit to the retail segment. Wholesale margin to Stripes reflects the markup of approximately 3 cents per gallon beginning September 25, 2012. Prior to this date, no profit margin was recognized in the wholesale segment on sales to Stripes stores.

(3)) We define EBITDA as net income (loss) attributable to Susser Holdings Corporation before net interest expense, income taxes, net income attributable to noncontrolling interest and depreciation, amortization and accretion. Adjusted EBITDA further adjusts EBITDA by excluding non-cash stock-based compensation expense and certain other operating expenses that are reflected in our net income that we do not believe are indicative of our ongoing core operations, such as significant

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non-recurring transaction expenses and the gain or loss on disposal of assets and impairment charges. Adjusted EBITDAR adds back rent to Adjusted EBITDA. In addition, those expenses that we have excluded from our presentation of Adjusted EBITDA and Adjusted EBITDAR are also excluded in measuring our covenants under our revolving credit facility and the indenture governing our debt agreements and indentures. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not presented in accordance with GAAP. Please see Note 9 to "Item 6. Selected Financial Data."

The following tables present a reconciliation of our segment operating income
(loss) to EBITDA, Adjusted EBITDA and Adjusted EBITDAR:

                                                          Year Ended January 2, 2011
                                       Retail Segment        Segment        All Other (a)     Total (b)
                                                            (dollars in thousands)
Operating income (loss)              $         62,765     $     16,695     $      (9,464 )   $   69,996
Depreciation, amortization and
accretion                                      38,191            4,664             1,143         43,998
Other miscellaneous                                 -                -              (174 )         (174 )
EBITDA                                        100,956           21,359            (8,495 )      113,820
Non-cash stock-based compensation                   -                -             2,825          2,825
Loss (gain) on disposal of assets
and impairment charge                           3,071              140               (18 )        3,193
. . .
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