Declining Fuel Prices Aid CrossAmerica Partners' Margins in Q3

ALLENTOWN, Pa. — The third quarter of 2022 was a mixed fuel bag for CrossAmerica Partners LP.

The high fuel price environment was detrimental to CrossAmerica's wholesale fuel volume for the quarter, while the declining fuel pricing environment strongly aided fuel margins, President and CEO Charles Nifong reported during the partnership's third quarter 2022 earnings call in early November.

Wholesale fuel volume was 338.1 million gallons vs. 354.6 million gallons during the same quarter of 2021 — a decrease of 5 percent. The year-over-year change is largely due to the lower volume in the partnership's base business, and partially offset by the acquisition of assets from 7-Eleven Inc. That deal occurred during the third quarter of 2021.

Based on Energy Information Administration data, gasoline demand was down nationally approximately 6 percent for the third quarter of 2022. On a same-store basis, CrossAmerica's wholesale volume declined approximately 8 percent for the quarter. 

Conversely, wholesale fuel margin per gallon increased 30 percent to 12.5 cents for the third quarter of 2022 vs. 9.6 cents for Q3 2021.

"Margins tend to be stronger in declining fuel price environments. One significant reason for this is in a declining fuel price environment, lower volume sites are slower to adjust retail fuel street prices down due to having higher price product and inventory," Nifong explained. "This tends to make overall retail fuel street pricing slower to adjust downward. For competitors with higher volume sites that are turning their fuel inventory quickly, it generates enhanced margins."

Retail Financial Results

Moving to CrossAmerica's retail segment, fuel volume on a same-site basis was down 7 percent for the quarter year over year. Inside sales on a same-site basis were down 2 percent relative to last year. However, inside sales excluding cigarettes were up 2 percent.

The retail segment's gross profit rose $28.5 million, or 102 percent year over year, to $56.3 million in the third quarter of 2022 vs. $27.9 million in the same period of 2021.

Store margin was up approximately 40 basis points year over year, mainly attributable to changes in product mix and initiatives CrossAmerica has undertaken to preserve margin in the current inflationary environment.

Speaking to economic trends, Nifong reported that out-of-stocks are still at levels higher than CrossAmerica would like. While the partnership continues to see progress on this front, there's still work to be done to return to what the company would consider "normal levels."

"We also continue to see broad based inflation in our product costs, and while we've been successful in adjusting retail prices, it does weigh on consumer demand," the chief executive said, pointing out that CrossAmerica's wholesale segment supplies its retail segment on a variable margin basis and the overall fuel profitability at these sites is split between the company's wholesale and retail segments.

Other Financial Results

Overall, CrossAmerica recorded third quarter 2022 net income of $27.6 million vs. $8.9 million for the same period last year. Adjusted EBITDA increased 73 percent to $62.2 million for the quarter when compared to $35.9 million for the third quarter of 2021.

While the addition of the 7-Eleven sites helped boost the quarter's results, the deal also contributed to a 36 percent increase in the partnership's operating expenses compared to the prior year. The addition of those stores increased CrossAmerica's average company-operated site count from 194 to 253, a 30 percent jump.

Operating expenses also increased 11 percent quarter over quarter, driven by elevated store-level labor costs, as well as maintenance and environmental costs. Over the course of the third quarter, CrossAmerica implemented temporary and targeted incentive programs to manage overall store labor expenses, help drive up employee retention and increase customer service levels.

On the acquisition front, the partnership entered into a definitive agreement to acquire certain assets of Boston-based Community Service Stations Inc. for $27.5 million, plus working capital. The assets consist of wholesale fuel supply contracts to 39 dealer-owned locations, 34 sub-wholesaler accounts and two commission sites, one fee based and one lease.

"The assets are highly complementary to our existing asset base in the region, from both a geographic and fuel brand prospective," Nifong said. "We are excited about this transaction as these are unique assets that have attractive long term cash flow profiles. We expect the acquisition to be immediately accretive to our distributable cash flow."

The deal was finalized on Nov. 10, as Convenience Store News reported. 

Allentown-based CrossAmerica Partners LP is a leading wholesale distributor of motor fuels, convenience store operator, and owner and lessee of real estate used in the retail distribution of motor fuels. Its general partner, CrossAmerica GP LLC, is indirectly owned and controlled by entities affiliated with Joseph V. Topper Jr., the founder of CrossAmerica Partners and a member of the board of the general partner since 2012.

Formed in 2012, CrossAmerica Partners LP is a distributor of branded and unbranded petroleum for motor vehicles in the United States and distributes fuel to approximately 1,750 locations and owns or leases approximately 1,150 sites.