Core-Mark Surpasses Zacks Estimate

Core-Mark Holding Company, Inc. ( CORE - Snapshot Report ) recently posted fourth quarter 2011 adjusted earnings of 65 cents per share, substantially above the Zacks Consensus Estimate of 56 cents as well as the year-ago performance of 48 cents per share. The better-than-expected results were driven by double-digit growth in the top line and margin expansion.In full-fiscal 2011, adjusted earnings were $2.75 per share versus $2.31 in the prior year.

The company, which distributes packaged consumer products to the retail industry, reported net sales of $2.13 billion for the quarter, up 14.6% year over year. The upside in revenue wasattributable to strong contributions from Forrest City Grocery Company (acquired in May 2011) and a new deal with a big retailer (in July 2011). In full-fiscal 2011, revenue increased 11.7% year over year to $7.27 billion.

Quarter Highlights

Sales at Cigarette category rose 12.8% from the prior-year quarter to $1.5 billion due to a 12.2% rise in carton volume. However, excluding the contribution from Forrest City and the new contract, cigarette sales fell 1.7%.

Sales at Non-cigarette category jumped 19.0% to $636.8 million. Excluding the new contract and Forrest City contribution, non-cigarette sales rose 4.7% on the back of same-store sales growth of 4.3%.

During the quarter, adjusted gross profit expanded 16.5% to $109.8 million, attributed to lower LIFO expense and increase in cigarette and non-cigarette profit.

Total operating expense climbed 7.4% to $101.1 million due to higher fuel costs, as well as start-up and integration costs for Forrest City and new Florida division, respectively. However, as a percentage of net sales, total operating expenses fell 32 basis points.

Adjusted EBITDA surged 44.2% to $22.2 million in the fourth quarter of 2011, driven primarily by new business from the FCGC acquisition and the new contract.

Financial Position

At the end of the quarter, the company had cash and cash equivalent of $15.2 million, long-term debt of $63.1 million and shareholders’ equity of $375.5 million.

During the quarter, the company repurchased approximately 542,000 shares for about $19 million.

Outlook

For fiscal 2012, the San Francisco, California-based company expects net sales to be $9.0 billion, up 11.0% year over year, benefiting from the FCGC acquisition, the new contract win, market expansion and vendor consolidation initiative. Core-Mark anticipates earnings per share in the range of $2.75 and $2.90 and adjusted EBITDA between $102 million to $105 million. The company expects capital expenditure to be $30 million.

Our Take

The company reported higher sales and margins in the recently concluded quarter and expects the trend to continue through 2012, based on the benefits fromthe acquisition of Forrest City, new contract wins and market share growth.

However, higher fuel prices remain a threat in 2012. Hence, the company plans to invest in natural gas as an alternative fuel source.

Core-Mark, which competes with United Natural Foods, Inc ( UNFI - Analyst Report ) , currently has a Zacks #1 Rank, implying a Strong Buy rating over the short term. We also reiterate our long-term Neutral recommendation on the stock.