CST Open to Major Acquisitions Following LGP Deal

SAN ANTONIO -- CST Brands Inc.'s purchase of 100 percent of the general partner interests of Lehigh Gas Partners LP (LGP), will provide the company with plenty of funding under a master limited partnership (MLP) capital structure, leading to the potential for significant acquisitions in the future, CST Chairman and CEO Kim Bowers said during Tuesday's 2014 fiscal second-quarter earnings call. 

Bowers acknowledged that before the LGP deal, CST Brands was interested in pursuing particular retail assets, but the company could not be as competitive as it hoped because of convenience store industry MLPs joining the retail acquisition fray. She did not point to any specific deals.

"We understand there is a consolidation process going on in the industry," said Bowers. "We look forward to working with [LGP Chairman and CEO] Joe Topper to identify potential opportunities." 

In the meantime, San Antonio-based CST Brands can take solace in the fact that the LGP transaction -- which cost the parent of Corner Store $85 million in cash and stock -- gives the retailer access to an additional 1,039 c-stores and gas stations, primarily in the Northeast and Mid-Atlantic states. In total, CST now has nearly 3,000 sites it operates from California to eastern Canada.

This number is expected to change in the near future, however, as Bowers revealed that CST has received bids on the vast majority of the 117 underperforming stores it intends to sell off. The chief executive said the company is in a holding pattern for a few weeks as it wants its new partner, LGP, to also review the bids and be part of the process.

According to NRC Realty & Capital Advisors LLC, which is assisting CST with the sale of these underperforming properties, there are 61 locations in Texas, 22 in Colorado, 14 in Arizona, seven in California, four in both Arkansas and Louisiana, three in New Mexico, and one in both Utah and Wyoming.

On the other side of the ledger, CST continues to build new large-format stores. Four new U.S. stores were completed in the second quarter ended June 30, with another 16 currently under construction. Company officials commented that these new builds are performing extremely well thus far, with in-store merchandise margins considerably outpacing those seen at the company's legacy stores.


Overall, CST's earnings were down in its 2014 second quarter. Net profit came in at $43 million, compared to $64 million in the same period in 2013.

There were two reasons for the earnings decline, the company noted. First, it did not spin off from Valero Energy Corp. until May 1, 2013, meaning that expenses were different for one month when comparing year-over-year results. Secondly, crude oil and wholesale gas prices were up during the second quarter, leading to reduced fuel margins.

U.S. motor fuel gross profit dropped by $12 million to $65 million in CST's second quarter. U.S. fuel gross margin was 14 cents per gallon vs. 17 cents one year prior.

The retailer also noted that competition was strong, especially in Texas, where the economy is booming. But Bowers believes CST has what it takes to trump competitors.

"Our new stores can compete with anyone, any time and at any corner," she said during the earnings call.

Breaking down second-quarter earnings further, in-store merchandise sales were CST's strongest point, rising 5 percent year over year. The chain reported merchandise gross profits of $103 million, compared to $98 million one year earlier.

Sales of food, beverages and snacks were especially strong, with company officials pointing to craft and microbrew beer as one specific area of strength.

As of June 30, CST operated 1,044 U.S. stores. It had 1,034 stores a year ago.

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