Couche-Tard to Divest More Than 200 C-Stores

By 
Greg Lindenberg, Editor, CSP

Circle K

LAVAL, Quebec -- With Alimentation Couche-Tard Inc.'s acquisition of CST Brands Inc. now complete, and with the pending acquisition of Holiday Stationstores Inc., Couche-Tard plans to divest more than 200 noncore convenience stores, company executives said on a Sept. 6 earnings call.

They also discussed integrating CST Brands and CrossAmerica Partners into the company’s retail and wholesale networks, progress in the global Circle K rebranding effort, as well as the company’s financial performance.

But before diving into the financial results, Brian Hannasch, president and CEO, took a moment to address the devastation caused by Hurricane Harvey …

Harvey update

Hurricane Harvey

“Our thoughts and prayers go out to all those who continue to suffer following the catastrophic storm,” Hannasch said. “Our teams in Texas and the Gulf region continue to work tirelessly to support impacted employees, open our stores and get our fuel and services restored to the communities in which we serve. The flooding and damage done by Harvey is among the worst in our U.S. history. We will continue to monitor daily the situation, to help out our employees and their families and our customers.”

Texas is home to Circle K Gulf Coast, one of Couche-Tard’s largest business units, with more than 700 c-stores under flags such as Circle K and CST Brands’ Corner Store. Hannasch said the storm affected 123 stores at various levels and forced them to close. As of Sept. 5, 24 stores were still closed. “We are working assiduously to support our employees and reopen our stores,” he said.

“Unfortunately, I've been through a number of these [storms] starting when we bought Circle K back in 2003,” said Hannasch. “The focus is on preparing our sites to best serve the communities we are in without endangering our employees. That includes increasing inventories, focusing on fuel, water, batteries and other staples. … We have seen everything from moderate case, people stocking up on core items, to panic buying as we saw this week in Texas, where there were perceived shortages of fuel. And we saw lines five and six hours long at some of our sites in San Antonio and Dallas. What happens in the weeks and months following also depends on the severity and extent of the damage, the rebuilding and repair.”

On the insurance front, he said, “We do maintain a certain level of named-storm coverage for property; however, we do not maintain business disruption. We view ourselves as being very, very geographically diversified, and certainly, that's an advantage to us in situations like we faced with Harvey and potentially here with Hurricane Irma."

Divesting stores

Circle K

Couche-Tard’s rapid growth has necessitated some divestment of stores and other assets. Although timing and locations were not discussed, 200 c-stores are expected to go on the market soon.

“One of our highest priorities is to reduce our debt and further strengthen our balance sheet,” said Claude Tessier, CFO. “In this regard, we are very satisfied with the positive term out on our new senior notes. We are also working to put together a divestment plan for noncore and surplus assets, including more than 200 stores that do not meet our profitability standards."

Acquiring CST Brands

CST Brands Corner Store Market

On June 28, Couche-Tard completed the $4.4 billion acquisition of San Antonio-based CST Brands Inc., with more than 2,000 convenience stores in Texas, the Southwest, the Southeast, New York and eastern Canada.

Couche-Tard also sold a significant portion of CST's Canadian assets to Parkland Fuel Corp., Calgary, for $753 million, including 159 company-operated sites, its independent dealers and network of commission agents and more. Couche-Tard retained 157 of CST's company-operated sites in Canada.

To satisfy the U.S. Federal Trade Commission (FTC), Couche-Tard also entered in an agreement to sell 70 company-operated sites to Empire Petroleum Partners LLC, Dallas. The companies expect this transaction to close during the second quarter of fiscal 2018.

Once the deal with Empire is completed, through CST, Couche-Tard will add 1,263 sites to its North American network.

Couche-Tard also acquired the general partner of CrossAmerica Partners LP, owns 100% of its incentive distribution rights (IDRs) and holds a 20.5% equity investment in it. CrossAmerica supplies motor fuel under various brands to more than 1,200 U.S. locations. The combination with Couche-Tard’s existing wholesale network of more than 700 stores makes it a major U.S. wholesaler of motor fuel.

Integrating CST

CrossAmerica Partners

“This quarter has been notable in terms of integration, as we brought CST Brands, our largest acquisition to date, fully into our company and began combining our wholesale fuel network with CrossAmerica Partners LP,” Hannasch said. “For the first time, CST is officially part of our company's financial report.”

“By adding 1,263 sites from CST, and CrossAmerica Partners' wholesale fuel network to ours, we have critically strengthened our position in both the retail and wholesale fuel markets,” he said.

CFO Tessier said, "Our knowledge from past acquisitions such as The Pantry and Statoil Fuel and Retail is making a tremendous difference in capturing potential cost synergies and integrating resources with CST as demonstrated by our current annual costs reduction run rate of $47 million. We will use this deep experience and our usual financial discipline as we move to close on Holiday Stationstores in fiscal 2018.”

Other quarterly growth

Cracker Barrel

On May 30, Couche-Tard acquired 53 company-operated convenience stores in Louisiana from Baton Rouge, La.-based American General Investments LLC and North American Financial Group LLC. These c-stores operate under the Cracker Barrel brand and include 11 quick-service restaurants (QSRs). On the same date, it closed seven of those stores.

On July 7, Couche-Tard acquired 53 fuel-supply contracts with independent operators in the Atlanta metro area from Empire Petroleum Partners.

And during the quarter, Couche-Tard completed the construction, relocation or reconstruction of 23 c-stores. As of July 23, the company had 49 stores under construction.

Circle K rebranding

Circle K rebranding

“Building our global brand is one of our biggest priorities,” Hannasch said. The rollout of Couche-Tard’s new Circle K global convenience brand “is progressing steadily,” the company said. Close to 1,800 stores in North America and 1,300 stores in Europe now display the new global branding.

"As we continue to expand through acquisitions, we are also pushing enthusiastically to bring our Circle K brand to life. The rollout in Poland and the Baltic countries is going very well, with great customer acceptance, and was recently launched in Canada,” said Hannasch. “Today, more than 3,000 locations in North America and Europe now proudly display the new global brand," said Hannasch. “We’ve clearly seen the positive impact of this rebranding in bringing more customers to our sites as they recognize Circle K’s added value in saving them time at the pump and in the store and making it easy to purchase products as they go about their day.”

In connection with this rebranding, Couche-Tard recorded a depreciation and amortization expense of $3.7 million for the quarter.

First-quarter earnings

Circle K intereior

Couche-Tard closed the first quarter of fiscal 2018, which ended July 23, with net earnings of $364.7 million, compared with $322.8 million for the first quarter of the previous fiscal year, an increase of $41.9 million, or 13%.

"While the overall retail industry continues to face challenging conditions, we were able to continue our growth trajectory in significant key areas, including growth by acquisitions,” Hannasch said. “Our merchandises and service revenues were up 9.8%, total fuel volumes were up 15.8%, and adjusted diluted earnings per share increased by 17.5%. As we continue to work on implementing initiatives to increase customer traffic into our stores without materially impacting margins, our successful acquisition strategy continued to make compelling contributions to our bottom line.”

Revenues

Circle K

Revenues were $9.8 billion for the first quarter of fiscal 2018, up by $1.4 billion, an increase of 16.9% compared with the corresponding quarter of fiscal 2017, mainly attributable to the contribution from acquisitions and a higher average road-transportation-fuel selling price, as well as to organic growth.

Total merchandise and service revenues for the first quarter of fiscal 2018 were $2.8 billion, an increase of $247 million compared with 2017, attributable to acquisitions, which amounted to approximately $208 million, as well as to organic growth. Same-store merchandise revenues increased by 1.4% in the United States, despite the general softness in the retail industry and unfavorable weather conditions.

Total road transportation fuel revenues for the first quarter of fiscal 2018 were $6.8 billion, an increase of $1.2 billion compared with 2017. This increase was attributable to acquisitions, which amounted to approximately $862 million, as well as to a higher average road-transportation-fuel selling price, which had a positive effect of approximately $209 million. Same-store road-transportation-fuel volumes increased by 0.4% in the United States.

“In the U.S., we continue to see a positive response from customers to our fuel-rebranding initiatives, particularly in The Pantry area, and to our micro-market strategies,” said Hannasch.

Gross profit

Circle K store

Gross profit was $1.7 billion for the first quarter of fiscal 2018, up by $219.4 million, an increase of 14.4% compared with the corresponding quarter of fiscal 2017, mainly attributable to the contribution from acquisitions as well as to organic growth.

In the first quarter of fiscal 2018, merchandise and service gross profit was $961.6 million, an increase of $98.3 million compared with 2017, attributable to the contribution from acquisitions, which amounted to approximately $78 million, and to organic growth. Gross margin increased by 0.1% in the United States to 33.3% because of the changes in product mix toward higher-margin categories.

In the first quarter of fiscal 2018, road-transportation-fuel gross profit was $724.9 million, an increase of $113 million compared with 2017. In the first quarter of fiscal 2018, the road-transportation-fuel gross margin was 20.75 cents per gallon (CPG) in the United States, a decrease of 0.11 CPG attributable to lower margins in the CST network. Excluding CST stores, gross margin in the United States would have been 21.20 CPG.

EBITDA

Circle K Europe

During the first quarter of fiscal 2018, Couche-Tard’s earnings before interest, taxes, depreciation and amortization (EBITDA) increased from $614.7 million to $689.7 million, a growth of 12.2% compared with the same quarter last year.

Couche-Tard's network included 9,471 c-stores in North America, 8,129 with fuel. Its North American network consists of 18 business units, including 14 in the United States covering 42 states and four in Canada covering all 10 provinces. Also, through CrossAmerica Partners LP, Couche-Tard supplies motor fuel under various brands to more than 1,200 U.S. locations.

In Europe, Couche-Tard operates a retail network of 2,754 stores across Scandinavia, Ireland, Poland, the Baltics and Russia through 10 business units. Also, more than 1,700 stores operate under the Circle K banner under licensing agreements in 13 other countries and territories (China, Costa Rica, Egypt, Guam, Honduras, Hong Kong, Indonesia, Macau, Malaysia, Mexico, the Philippines, the United Arab Emirates and Vietnam), which brings Couche-Tard’s total worldwide network to more than 15,000 stores.