CST Brands Plans Second Dropdown to CrossAmerica
SAN ANTONIO — CST Brands Inc. will drop down approximately 40 new-to-industry (NTI) stores to CrossAmerica Partners LP this summer, CST Chairman and CEO Kim Lubel confirmed Friday during a joint 2015 first-quarter earnings call for both companies. These dropdowns will be stores that have been built since CST was spun off from former parent company Valero Energy Corp. in May 2013.
A price associated with the deal has not yet been determined, according to Lubel. Along with passing ownership of the real estate of these stores to CrossAmerica, CST will hand over the wholesale fuel supply contracts. However, the parent of Corner Store convenience stores will continue to operate these stores.
CST purchased 100 percent of the membership interests of the general partner and 100 percent of the outstanding incentive distribution rights of Allentown, Pa.-based CrossAmerica, a master limited partnership (MLP), effective Oct 1.
This summer's transaction will mark the second dropdown CST has made to CrossAmerica this year. In January, it closed on the sale of a 5-percent limited partner equity interest in CST Fuel Supply to CrossAmerica in exchange for common units representing an approximate 6.1-percent limited partner interest in CrossAmerica.
STRATEGY FOR CONTINUED GROWTH
As it drops down stores, CST will continue to build NTI stores and seek acquisitions. The company plans to build 35 to 40 new Corner Store locations in the United States in 2015, along with 10 to 12 Dépanneur Du Coin convenience stores in Canada.
On the merger and acquisition front, Lubel said the market remains “fragmented.” There are more potential sellers and acquirers than in the past, but plenty of opportunities still exist.
“We think we are a very attractive buyer,” she said. “We know how to run core stores and have done so for decades.”
CST is looking for acquisitions in areas of strong economic conditions, and a solid network in terms of stores. One potential region CST is looking at for growth is the upper Midwest, Lubel revealed, adding that CrossAmerica’s purchase of Erickson Oil Products Inc., which included 64 c-stores, has been very successful thus far.
CST EARNINGS RISE
CST saw overall net earnings rise by $3 million for its latest quarter ended March 31, to $14 million.
“Led by a strong U.S. fuel margin along with continued growth in same-store merchandise sales, both in the U.S. and Canada, we delivered solid results for the first quarter of 2015,” said Lubel. “The momentum in inside-store traffic has positioned us well for the upcoming summer driving season.”
Looking at U.S. retail operations more in-depth, total operating income rose $18 million year over year to $42 million. Fuel margins increased 4 cents per gallon year over year to 14 cents per gallon, which Lubel noted was especially impressive considering the first quarter is seasonally weaker in this category.
Merchandise gross profits rose $5 million to $97 million, with same-store sales increasing 3 percent — the fourth consecutive quarter in terms of growth in this area.
On a core per-store basis, CST’s U.S. retail division sold 4,966 gallons of fuel per site per day. In terms of dollars, motor fuel sales were $10,967 per site per day. Inside the store, merchandise sales per site per day came in at $3,488, an increase of $267 per site per day.
NTI stores led the way in in-store merchandise sales. CST also cited fountain drinks as an area of excellent growth, which often leads to purchases of other high-margin in-store merchandise items. CST believes this growth can continue as it recently installed 160 Coca-Cola Freestyle fountain machines in the Southwest.
As for its current fiscal second quarter, CST provided initial guidance that U.S. gallons sold per store per day will be in the range of 5,100-5,200. Merchandise sales per store per day are expected to be in the $3,950-$4,050 range, with merchandise gross margins ranging between 29.5 percent and 30.5 percent.
The San Antonio-based retailer operated 1,035 c-stores as of March 31.
CROSSAMERICA INCREASES PROFITS
Allentown, Pa.-based CrossAmerica’s companywide earnings totaled $35 million in its most recent quarter ended March 31, compared to $16.7 million during the same quarter in 2014.
Its retail division, primarily consisting of its Erickson Oil and Petroleum Marketers Inc. acquisitions, sold 46.1 million gallons of fuel at a gross margin of 10.2 cents per gallon, vs. 15.3 million gallons at a 2.1-cent margin in the first quarter of 2014.
CrossAmerica’s in-store merchandise gross margins totaled $7.8 million in its most recent quarter. The MLP did not have these retail operations in the first quarter of 2014.