CST Comes Under Fire From Another Investor Group

SAN ANTONIO  — A second investor group sent a letter to CST Brands Inc., criticizing the convenience store retailer for stock market underperformance since it was spun off from Valero Energy Corp. in 2013.

Houston-based JCP Investment Management LLC, owner of approximately 1 million outstanding shares of CST, sent a letter to CEO Kim Lubel and the company’s board of directors Tuesday. In the letter, JCP recommended CST strongly consider putting itself up for sale.

“CST is a highly attractive asset,” the letter said. “The company has high market share in several Texas markets and an attractive niche market in eastern Canada. CST owns the vast majority of its real estate and has an attractive land bank. We strongly believe that there would be significant interest in CST from strategic buyers, and the board should explore and consider the opportunities.”

JCP cited six things it is particularly concerned about regarding CST’s current operations:

• Below-industry average merchandise margins;
• Sub-optimal returns on new store builds and related concerns about significant planned capital expenditures;
• Stagnant merchandise same-store sales relative to peers;
• Mismanagement of CrossAmerica Partners LP, including a distribution coverage ratio that has declined to an unsustainable level;
• Slow growth and unclear foodservice strategy; and
• Staggered board without adequate shareholder representation.

JCP also stressed it is not alone in its assertions. As CSNews Online previously reported, Engine Capital LP, owner of approximately 1 percent of CST's shares, sent a letter to CST on Dec. 8 expressing similar concerns.

“We are not alone in our frustration with the company's operational and share price performance,” JCP wrote in its its letter. “Within the last two weeks, another shareholder has publicly voiced concerns and a leading sell-side research analyst appeared to agree with their analysis.”

The analyst JCP is referring to is Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, who issued a research report acknowledging CST’s stock is undervalued “no matter how you slice it.”

“After reviewing Engine Capital’s letter, we broadly believe its thesis is sound and its arguments should be seriously considered,” Herzog stated.

This is not JCP’s first involvement in criticism involving an allegedly underperforming, publicly traded convenience store retailer. The investment group previously expressed concern about The Pantry Inc. and was successful in gaining seats on the Kangaroo Express parent’s board of directors. It was later instrumental in The Pantry’s sale to Alimentation Couche-Tard Inc. on Dec. 18, 2014.

“As you well know, the convenience store industry is undergoing rapid consolidation,” JCP stated in its letter to CST. “Within the last 18 months, multiple transactions have taken place in the industry, most of them at enterprise value/EBITDA multiples in excess of where CST currently trades. We understand this trend quite well since two of us were on the board of directors of The Pantry Inc., which was acquired by Alimentation Couche-Tard for approximately $1.8 billion and generated meaningful total shareholder return from the date we joined the board of The Pantry.”

Laval, Quebec-based Couche-Tard is believed to be one of the convenience store operators who would be interested in CST if it were put up for sale. Marathon Petroleum’s Speedway LLC division and Sunoco LP are others who have been rumored to be interested in a possible acquisition of CST if the opportunity were presented.

San Antonio-based CST has not yet issued a public response to Engine Capital and now JCP’s comments. However, Lubel issued a company memo to CST employees reminding them not to be distracted by such allegations.

“You may have heard or read recent rumors regarding our company. This is something many publicly traded companies face. And, like most public companies, it is our long-standing policy not to comment on rumors or speculation. Don’t let market rumors distract you," Lubel said in her Dec. 11 memo.

“We were … reminded this week that, as a public company, our shareholders depend on us every day to create value by superior execution,” Lubel continued. “We have to continue to push harder than ever to be industry leaders.”

CST Brands Inc. operates approximately 1,900 convenience stores in the United States and Canada.