Mindy West: No. I mean, I think we’re fine with the leverage levels that we have, that we have plenty of access to liquidity, and additional capital if we need it. So, we plan to make good on our commitment, to buy 1 million shares a year. But we think that our existing operating cash flows can more than fund our even ambitious CapEx budget and still leave an increment leftover. So it largely depends on what is the share price, as to would we need to borrow anything in order to meet our commitment. But certainly comfortable that we have capacity to do that.
Andrew Clyde: Great.
John Royall: Great. That’s helpful. Thank you. And then maybe if you could talk a little bit about the tick-down in unit merchandise margins from 3Q to 4Q. Is that just mix from the tobacco business being strong and the nontobacco business being down? And if so, what are your expectations that you have baked into the ’24 guide with that 8% growth? Does any of that come from margin growth?
Andrew Clyde: Yes. So, I don’t have the specifics around the individual components here. There’s always going to be this challenge, when you’re growing tobacco faster than your competitors, you’ve got a unit margin reduction. As we said before, we don’t take unit margin to the bank. We take contribution margin dollars to the bank. And so, that’s usually the biggest driver there. There could be some mix within some of the other center of the store categories, promotional activity, et cetera. As we think about 2024, we expect to see really a lot more of the same. But we’re going to get the full year benefit of the price increases at QuickChek on food and beverage, where we were a very intentional last year, in terms of holding price, to demonstrate value to our customers.
And if any of you also look at the earnings reports, from the major QSR chains, they’re now recognizing that they probably may have taken, a little bit too much price, and they’re talking about value. And for us, value never goes out of style and we need to deliver that every day. So, I do think we’ll see some improvement this year on that front. One of the things that I haven’t talked about is the investment in G&A in terms of the impact from the digital transformation efforts. The G&A spend from that is, in the neighborhood of $40 million across the initiative, and some of its being capitalized. But just in terms of the pilots that we’ve already run, we’re seeing a 20-plus percent return on that investment on an annualized basis. And those pilots have all exceeded what we estimated on paper.
When you take the initiatives that we’ve completed, and analyzed that are now going into pilot. We expect a return on that to be north of 40%. And a significant amount of that is going into the merchandise contribution, right? So, it might be getting that additional upsell at QuickChek that’s, more than doubled. It’s that incremental contribution from the production planning. It’s that share of wallet, from the personalization on the Murphy side. We’ve segmented our stores and identified where we can take price. And where we want to be a little bit more aggressive, across the entire center of the store that’s generating benefits beyond that’s generating benefits beyond expectations. So, there’s just a whole host of things within those initiatives that, we’re going to see, are going to not only start to pay early dividends in 2024, but provide the foundation to sustain that type of growth, into the future.
And there’s elements of the program, like the updated QuickChek rewards, et cetera, that will be coming in the near future as well.
John Royall: Thank you.
Operator: Your next question comes from the line of Ben Bienvenu from Stephens. Your line is open.
Benjamin Bienvenu: Hi, good morning, everybody.
Andrew Clyde: Good morning.
Benjamin Bienvenu: So my first question is on the fuel side of the equation. I think, Andrew and Mindy, there’s been this notion historically that, in order to get margin you have to give up gallons. And so, this combination and the guidance of gallons on a APSM basis, minus 1% to plus 1% to flat to slightly up at the midpoint, while also having very strong margins is potentially kind of in contention with one another. But I wonder as breakeven requirements, for the industry have gone higher and yours have gone lower. What are you seeing with your retail fuel price differential that, potentially allows you to be more competitive, and take market share as you have? And is that something that you see continuing as you move forward?
Andrew Clyde: Yes. So Ben, look, what I would say is when you think about our volume and our margin, you really got to break those two apart and then break each of those volume and margin components into pieces. So, if we have flat macro demand, plus or minus 1%, right, that’s kind of the first indication of how our stores are going to do. We’re going to have a massive recession or we going to have something like COVID. Or we’re going to have economic growth, or prosper or something that drives that up. That’s going to be the first indication of what we’re able to do. And then secondly, where do we price? And we’re going to price everyday low price. And so, I think you’re right, as our differential to the competition, is going to be the biggest determinant of that.
And with the higher structural margins that we’ve seen. We’ve been able to put an extra $0.01, or so on the Street. We kept it on the Street in ’23, and that allows us to certainly offset any competitive pressures from new builds, because other good competitors are building new stores, like we are. And in that environment, you would think, okay, well, flat volumes, flat margins. But margins are going up largely, because of the structural regions we’ve been talking about, right? The marginal player doesn’t have the scale, to invest in the things that we’re doing, doesn’t have the extra penny to put on the Street. Their trade-off at the top of the market, they take a $0.01 in profit, lose 4% volume. They’re almost kind of neutral to that. And by the way, go ahead and put it up $0.02 if you have to, to offset some of the other traffic losses.
So, it’s really that factor that allows us, to get both volume and margin. And then after that, it would just be structurally, what is going on in the price environment, right? 2022 was a much more volatile environment, and we benefited both volume and margin in that scenario. 2023 was a fairly benign environment. It didn’t hurt us volumetrically, and we actually still did even better than we expected on the margin side, but I would attribute that largely to the marginal player in that structural dynamic. And so, there’s nothing to read into strategy, like one of the earlier questions, about us changing our price/volume equation. We will be everyday low price. We will take our advantage and put it on the Street for the benefit of our consumers, who need us now more than ever.
And that helps begin this virtuous cycle, or flywheel that flows through to traffic inside the store. The benefits we have there, the free cash flow to invest in growth, and new capabilities and then, of course, get back to our shareholders. So, I hope that answers your question, but we are not doing anything that would signal, hi, we’re doing anything different from a price/volume equation strategy.
Benjamin Bienvenu: Yes. That makes a lot of sense. It’s very helpful. Shifting gears to the tobacco side of the business. How analogous is what’s happening there to what’s – is it to what’s happening in the fuel business? Because I look at that business, the industry volumes have declined materially. You’ve seen APSM sales and contribution expand meaningfully. Merchandise margins on tobacco, up almost 150 basis points over the last three years while taking market share. Is that a similar market structure such that, the breakeven within the tobacco business, are being driven higher? Or that’s a component that’s – it’s all the circular reference? Is that something that you see persisting in share gains, continuing in that side of the business?
Andrew Clyde: It is. And Ben, for kicks, I thought about doing sort of the fuel breakeven calculation, but putting fuel in the numerator and tobacco in the denominator, to kind of get the same-type equation. And it’s exactly the same. It’s a commodity that has the same type of elasticity. And so, if you go back to Q1 of 2019, our bulk cigarettes, carton was 45%. You know, it peaked almost at 60%, but it’s still up 10 percentage points, right? So, people are buying more in bulk from us at our stores. We’ve applied the same strategy to smokeless. And also the way we think about, say, cigars in terms of how we promote and price those. And if you look at the discount on a per-pack, per-roll, per-stick basis, those have increased also.
As we’ve been able to take promotional funds as well as profit from other parts of the business, to invest in that to grow that share. And so, while cigarette share has grown, smokeless share and cigar share has grown even more significantly, as a result of applying those same types of price/volume trade-offs in that category. And similarly, we see a lot of the marginal competitors behaving the same way in that category as they do in the fuel category, very analogous categories.
Operator: Thank you. [Operator Instructions] Your next question comes from Anthony Bonadio from Wells Fargo. Your line is open.
