SAN ANTONIO and ALLENTOWN, Pa. — CST Brands Inc. will conduct a “California Network Strategic Review” to determine the fate of 76 company-operated convenience stores in the Golden State that do not fit CST's future strategy, Chairman and CEO Kim Lubel revealed Wednesday during a joint 2015 fiscal third-quarter earnings call with CrossAmerica Partners LP.
Although these 76 stores boast strong fuel volumes, the size of the locations are too small and prohibit the company from expanding them into large-format stores. Hence, CST cannot implement its high-margin, made-to-order foodservice operation adopted from its Nice N Easy acquisition into these stores, according to Lubel. The stores have lagged the rest of the company when it comes to in-stores sales.
The California locations average 1,320 square feet on 0.72 acres, compared to an average of 2,637 square feet on 1.13 acres companywide for all non-California locations. Non-fuel sales account for just 30 percent of total sales at the California locations. Under CST’s “2020 Vision,” the company plans for fuel sales to account for only 30 percent of sales across its retail network by the year 2020, with in-store sales accounting for the remaining 70 percent.
CST’s board of directors will determine the best course of action for the 76 stores, which could include an outright sale or a tax-advantaged swap for c-stores in Georgia and Florida proposed to be acquired in CST’s announced purchase of Flash Foods Inc. There is no assurance any transaction will take place, however, the company stressed.
The chief executive further outlined the 2020 Vision by stating CST’s goals are to have organic growth, inside sales growth and acquisitions.
Regarding organic growth, Lubel announced during Wednesday's call that CST will open its first large-format location (which the company calls a NTI or new-to-industry store) in two weeks in its hometown of San Antonio. The company will add more large-format new builds in the near future. Overall, CST expects to open between 55 and 65 new c-stores across the United States and Canada in 2016.
Lubel also reported that a test offering 300-plus grocery items at a limited number of c-stores has gone well thus far and CST will add these grocery items to 50 more locations in the near future.
CST EARNINGS RISE
CST's heavy focus on in-store sales is paying off. Overall, the operator of nearly 1,900 convenience stores in the U.S. and Canada reported net income of $85 million for the quarter ended Sept. 30, compared to $63 million during 2014’s third quarter.
In its U.S. retail division, motor fuel gross profits increased to 31.4 cents per gallon from 24.6 cents per gallon in the same quarter last year.
Motor fuel gallon sales per site per day rose approximately 300 gallons to 5,226 gallons. Motor fuel sales per site per day declined by more than $3,000 to $13,053 due to the low fuel price environment.
On the in-store side, U.S. merchandise sales per day improved significantly by more than $400 to $4,129. Merchandise gross profit percentage, net of credit card fees, increased by 0.6 percentage points to 30.8 percent.
CST cited made-to-order foodservice and energy drinks as key contributors to the in-store merchandise sales improvement.
CROSSAMERICA EARNINGS ALSO STRONG
CST owns the general partner of CrossAmerica Partners, an Allentown-based master limited partnership. Its retail division, which owns or leases approximately 800 c-stores, achieved a net profit of $8 million in its fiscal third quarter.
The retail division sold 61.6 million gallons of motor fuel for an average gross margin of 12.9 cents per gallon, net of commissions and credit card fees. In the same period in 2014, the company sold 46.5 million gallons of fuel at a gross margin of 5.3 cents per gallon.
In-store, CrossAmerica had merchandise margins of $11 million in its 2015 third quarter, compared to $7.4 million during the year-ago period. The company cited the Erickson Oil and One Stop acquisitions as contributing to the rise in in-store sales.
“Our record third-quarter results reflect the successful execution of our acquisition and integration strategy at CrossAmerica,” said Jeremy Bergeron, president.
The chief executive added that the wholesale fuels distributor and c-store operator will continue to pursue acquisitions that will provide growth for the company and that sell for accretive multiples.
For more on the proposed CST acquisition of Flash Foods Inc., click here.