Alimentation Couche-Tard Inc. said it expects a shakeout in the U.S. convenience store sector in the months ahead as frustrated players struggling with stagnant sales in a weak economy.

The Montreal-based corner store operator would be a buyer in that scenario and said it is looking for targets big or small. The company reported a profit of US$54.8-million or 29¢ per diluted share for its latest quarter Tuesday, a 23% decline caused mostly by a drop in gross margins on U.S. gasoline sales.

Last year, U.S. convenience stores enjoyed high margins on the gasoline they sold to the public. In Couche-Tard’s case, the margin was US$0.18 per gallon for the third quarter ended Feb.1, 2009. This year the margin has dropped to US$0.12, which may change the game for certain operators.

“We have no problem with a quarter like this one. It’s just good for the M&A environment,” Couche Tard Financial Officer Raymond Paré said in an interview. “It’s exactly what we did not have in the past two years, that didn’t allow us to be able to close good deals. It was too good on the results. Today, we’re back in an environment where you need to be a good operator to make money.”

With gas margins strong, operators were comfortable with the cash that they were generating with their stores, Mr. Paré said. “What we’re seeing now is that people are starting to understand that this beautiful moment is now part of history. We’re back to a normal market.”

Roughly 60% of convenience stores in the United States are run by single, independent operators that are not part of a chain. While those operators held out during good times, refusing to sell or setting high prices for their shops, some are under pressure now amid the continued economic uncertainty and weighing whether to get out, Couche Tard executives said.

“We keep looking” for acquisition opportunities, Couche-Tard Chief Executive Alain Bouchard said during a webcast to discuss third quarter results. He declined to offer any details.

Couche Tard shares fell 5.9% to close at $18.86 on the Toronto Stock Exchange. Analysts had been expecting U.S. gasoline margins to be down, but not as much as they were.

Revenue rose 26.2% to US$4.9-billion as same-store merchandise sales grew in both Canada and the United States. The company’s board Tuesday approved a dividend hike to 4¢ per share on the strength of its “good results and strong balance sheet.” It has lowered operating expenses for four straight quarters.

The majority of its earnings come from merchandise and service sales, which are less volatile than fuel sales. In all, Couche-Tard runs a network of 5,883 convenience stores in Canada and the United States.

Financial Post