Herzog's Texas Hold 'Em

With competition leading to margin pressures for Susser, CST, Wells Fargo lowers estimates

Texas Hold 'em

NEW YORK -- Wells Fargo Securities LLC has lowered its earnings per share (EPS) estimates on Texas convenience store retailers Susser Holdings Corp. and CST Brands Inc. Susser operates the Stripes c-store chain and CST Brands operates the Corner store brand.

Given Susser and CST's exposure in Texas, "We are lowering our merchandise and fuel margin estimates since we believe both c-stores have been forced to remain competitive to retain share," said Bonnie Herzog, managing director for beverage, tobacco and convenience store research at Wells Fargo Securities, New York.

"We have noticed a trend recently of particularly aggressive pricing to drive customer traffic. We believe [Susser] and CST have been forced to lower prices to maintain share, to the detriment of merchandise margins," she said.

"The Texas economy is booming and as such, competition among retailers has increased. Based on our analysis, there is more retail square footage with fuel and more promotional activity for key merchandise categories recently to drive traffic highlighting the heightened competitive environment," said Herzog.

The Texas economy continues to outperform the U.S. average, she said. "This is both a blessing and a curse for Texas-based c-stores, as it is an important part of driving comp growth, but it is also leading to more grocery and mass chains with fuel centers, thus increasing competition."

Wells Fargo estimates that the total retail square footage of stores with fuel offerings at Texas-based Safeway and Kroger supermarkets alone is up nearly 60% since 2008, "the equivalent square footage of [more than] 1,000 c-stores."

Susser's fuel margins are approximately 10.6 cents per gallon (CPG) and CST's are approximately 8.7 CPG for the first quarter through March 17, Wells Fargo said, citing the Oil Price Information Service (OPIS). "Given that OPIS typically underestimates SUSS's quarterly fuel margins by around 4.4 CPG, we are lowering our Q1 fuel margin estimate from 17.3 CPG to 14.9 CPG. We maintain our Q1 fuel margin estimate of 8.9 CPG for CST."

She said Wells Fargo is lowering its EPS estimates for Susser in full-year 2014 by 27 cents to $2.48 and in full-year 2015 by 32 cents to $3.40 "based on its over-exposure to Texas."

Herzog added that Wells Fargo still likes Susser long term, especially based on its proprietary Laredo Taco Co, which "will support earnings over time, given the near-term pressure we expect to remain through the peak summer selling season"; therefore, Wells Fargo is "reluctantly downgrading" Susser to Market Perform from Outperform and lowering its valuation range by $1 to $68 to $70.

It is also lowering its EPS estimates for CST in full-year 2014 by four cents to $2.01 and maintaining its Market Perform rating, she said.

Susser Holdings Corp. is a third-generation, family-led business based in Corpus Christi, Texas, that operates 627 c-stores in Texas, New Mexico and Oklahoma, with 580 under the Stripes banner and 47 under the Sac-N-Pac banner. Restaurant service is available in approximately 400 of its stores, primarily under the proprietary Laredo Taco Co. brand. Susser Holdings also is majority owner and owns the general partner of Susser Petroleum Partners LP, Houston, which distributes approximately 1.6 billion gallons of motor fuel annually to Stripes stores, independently operated consignment locations, convenience stores and retail fuel outlets operated by independent operators and other commercial customers in Texas, New Mexico, Oklahoma and Louisiana.

Based in San Antonio, Texas, CST has approximately 1,900 locations throughout the southwestern United States and eastern Canada offering a variety of convenience merchandise, beverages, snacks and fresh food. In the United States, CST Corner Stores sell Valero fuels and signature products such as Fresh Choices baked and packaged goods, U Force energy and sport drinks, Cibolo Mountain coffee, FC Soda and Flavors2Go fountain drinks. In Canada, CST is the exclusive provider of Ultramar fuel and its Depanneur du Coin and Corner Stores sell signature Transit Cafe coffee and pastries.