CST Brands Eyes Up to 55 New Builds in 2015

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CST Brands Eyes Up to 55 New Builds in 2015

By Melissa Kress, Convenience Store News - 11/11/2014

SAN ANTONIO — CST Brands Inc. is looking to build almost as many new-to-industry convenience stores in 2015 as it's built over the past two years.

For the current year, according to Kim Lubel, president and CEO of San Antonio-based CST Brands, the company remains committed to opening 38 new-to-industry stores. To date, CST has opened 25 and plans to open another 13 by the end of the year — nine in the United States and four in Canada.

"By the end of 2014, we [will] have built and opened 60 new-to-industry stores in the last two years alone, 11 more than the total built over the previous five years," Lubel explained during the company's third-quarter earnings call Tuesday morning. "We are still working through our 2015 capital budget. We do currently anticipate building between 45 and 55 new-to-industry sites in the U.S. and Canada in 2015. Furthermore, we anticipate this level of organic growth to continue in future years supported by our partnership with CrossAmerica."

This new-to-industry store growth strategy comes as CST's larger format stores generate almost twice the inside store sales and fuel sales as its core legacy stores,  on average, she said.

Lubel also noted that during the third quarter, the company closed on the purchase of the general partner and incentive distribution rights of Allentown, Pa.-based CrossAmerica Partners LP, as well as the acquisition of Canastota, N.Y.-based Nice N Easy Grocery Shoppes with CrossAmerica.

"As we hope is evident by these transactions and our accelerated pace of new store growth, we want to continue to grow in the future, both organically and through acquisitions," she said. "We believe the convenience retail market remains fragmented with many retail, wholesale and combined opportunities. As we look at acquisitions going forward, you should expect that, as with the Nice N Easy acquisition, it will be a collaborative effort between CST and CrossAmerica."

The company intends to focus on and prioritize those opportunities that make the most economic sense for both parties, Lubel added.

"As we look at acquisition opportunities, we do not have a specific network size in mind. We really want to look at stores that fit both what CST's perspective is on in-store sales opportunities [and] have decent fuel volume sales to help out with the partnership side of things," she said.  "In terms of geography, one of the reasons we changed the name of Lehigh Gas to CrossAmerica was really to reflect the fact that we intend to grow across the U.S. with our partnership with CrossAmerica. I think our acquisition of Nice N Easy shows just that."

To manage this growth, CST has developed a dedicated integration and operations team led by Jeremy Bergeron, former vice president and treasurer. The newly formed team will evaluate the current state of the business and determine where the acquired source will fit best — into the CST core network or into the CrossAmerica wholesale dealer network, she explained.

CST is also continuing its network optimization plan and divestiture of approximately 100 stores, which it announced earlier this year. According to Lubel, bids for these convenience stores have been received and evaluated, and CST expects to close on the sale of 85 to 95 of these locations over the next two quarters. As of Tuesday, it already closed on 12 of the sites.

By the Numbers

Looking at the third-quarter financials, CST experienced declining crude oil and wholesale gasoline prices that positively impacted its overall profitability, especially in the U.S., Lubel said, pointing out that this was a significant change from the rising price environment experienced for much of the first half of this year.

The company's U.S. fuel profit dollars increased by $40 million, or 52 percent, for the third quarter of 2014 compared to the third quarter of 2013.

"The declining crude oil and wholesale gasoline environment, combined with our fuel pricing strategy that focused on gross profit dollars, allowed us to achieve a 25-cent-per-gallon net margin in the U.S. this quarter. Applying this positive margin to our large fuel volume allowed us to capture significant gross profit," Lubel reported.

Inside the stores, CST achieved a 5-percent or better increase in merchandise gross profit dollars in the U.S. for three straight quarters, and this quarter was no exception. CST's U.S. merchandise gross profits increased by $5 million, or 5 percent.

"This is a reflection of our commitment to continue to improve this part of the business, particularly through our new-to-industry store growth," Lubel said.

Overall, for the three-month period ended Sept.30, the company reported net income of $63 million vs. net income of $42 million for the comparable period in 2013.