Sunoco Selling More C-Stores, Possibly to 7-Eleven

By 
Greg Lindenberg, Editor, CSP

Sunoco gas station

DALLAS -- Sunoco LP is putting 42 convenience stores in Tennessee and Georgia on the market, according to a new filing with the U.S. Securities and Exchange Commission (SEC). This sale is in addition to Sunoco’s sale of more than 1,000 c-stores to 7-Eleven Inc. and in addition to putting more than 200 sites up for sale separately.

The sales are part of “a transformative first step in a decision to divest convenience stores,” Sunoco LP President and CEO Bob Owens said during the company's first-quarter 2017 earnings call on May 4. “We anticipate that Sunoco will have substantially exited the retail convenience-store space in the continental United States by the end of 2017.”

Sunoco is making a strategic shift away from company-operated c-stores to focus on its fuel supply business.

Here are additional details on the transactions and quarterly results …

42 sites

7-Eleven

Sunoco will sell the 42 properties in Tennessee and Georgia--mostly Tigermarket locations--in an “all or nothing” bid format. It said it expects bids to be due by late May 2017. “If the 42 sites in Tennessee and Georgia are not sold in connection with this process, per the asset purchase agreement with 7-Eleven, they will be included in the [previous] transaction and sold to 7-Eleven,” the filing said.

Irving, Texas-based 7-Eleven is acquiring approximately 1,100 company-operated c-stores from Sunoco in 18 states—approximately 110 in Florida, 450 in New York and 550 in Texas—for $3.3 billion, the companies said in April. It is also acquiring the trademarks and intellectual property of the Stripes c-store brand and the Laredo Taco Company foodservice brand, which Sunoco gained when it purchased Susser Holdings Corp. for about $1.9 billion in 2015.

Fuel supply deal

Sunoco fuel truck

Sunoco and 7-Eleven’s SEI Fuels have entered into a 15-year fixed-rate, take-or-pay fuel supply agreement under which Sunoco will provide base volumes of approximately 2.2 billion gallons per year, with committed growth of 500 million gallons in the first four years.

“7-Eleven is a creditworthy strategic partner, and with the 15-year fuel supply agreement, we will look to build on this partnership as we also build our partnerships with best-in-class dealers and distributors,” Owens said. “Sunoco will continue to utilize its diverse channels of trade and fuel brands. This credit enhancing transaction will allow Sunoco to recapitalize the balance sheet and sets the stage for strategic optionality targeting [master-limited-partnership] MLP-qualified income.”

“Concentrating the Sunoco business model around the simplified wholesale business provides significant scale and cost efficiencies,” he said. “Retail divestments will immediately improve Sunoco's financial profile and sets the stage for strategic optionality to take advantage of consolidation opportunities in a fragmented wholesale market or to move into new markets and qualify businesses with stable cash flows.”

Separate sale

Stripes

With the sale to 7-Eleven, Sunoco also announced that it would sell 208 Stripes c-stores in western Texas, New Mexico and Oklahoma in a separate auction process. These stores are located in markets where 7-Eleven is “prohibited from operating convenience stores,” Sunoco said in the SEC filing.

“We are encouraged by the initial response from bidders and also anticipate closing on this transaction by the fourth quarter of 2017,” said Owens.

The average store in this group is approximately 3,800 square feet and built on 1.5 acres. About 20% of these sites are new-to-industry (NTI) stores built since 2008. Seventy percent of the locations have a fast-casual restaurant, most of them the Laredo Taco Company concept.

100 sites

Sunoco store

Meanwhile, in January, Sunoco LP said it would sell or consider alternatives for more than 100 real-estate assets, including company-owned c-stores with gasoline, undeveloped greenfield sites and other excess real estate.

The properties are located in 15 states: Florida (5), Louisiana (1), Massachusetts (2), Michigan (1), New Hampshire (1), New Jersey (10), New Mexico (3), New York (17), Ohio (1), Oklahoma (3), Pennsylvania (14), Rhode Island (1), South Carolina (2), Texas (31) and Virginia (7).

The stores include Sunoco- , APlus- and Stripes-branded locations, among others. Fuel brands include Sunoco, Conoco, Diamond Shamrock and Phillips 66.

This sale, through NRC Realty & Capital Advisors LLC, Chicago, “is ongoing,” said Owens. “7-Eleven was involved in the bid process for a number of operating sites, and at this time approximately 30% of the active retail sites from the initial NRC process have migrated over to the 7-Eleven transaction.

“Additionally, approximately 20% of the active retail sites have been awarded to outside bidders and approximately 10% have migrated to the marketing efforts underway by J.P. Morgan. The progress of awarding the land bank, excess land and remaining active sites is ongoing,” he said.

What's left

APlus store

Sunoco has previously said it will maintain a presence in retail through two avenues.

The company "will continue with a platform for the iconic Sunoco fuel brand and successful APlus [c-store retail] franchise," according to a Sunoco spokesperson. There are about 400 APlus stores, according to company reports.

Also, Sunoco will maintain ownership of Aloha Petroleum, an integrated, stand-alone operation within Sunoco with 54 retail locations in Hawaii.

Financial results

Sunoco model car

For the three-month period ended March 31, 2017, Sunoco LP said revenue totaled $4.4 billion, an increase of 36.7%, compared to $3.2 billion in the same period in 2016. The increase was the result of the average selling price of fuel being 56 cents per gallon higher than last year, additional wholesale gallons sold and increased merchandise sales.

Total gross profit was $503 million, compared to $511 million in first-quarter 2016. The key driver of the decrease was lower wholesale motor fuel profits partly offset by increases in retail motor fuel and merchandise profits.

Net income for first-quarter 2017 was $1 million, vs. $62 million in the same period in 2016.

Net income for the wholesale segment was $42 million compared to $87 million a year ago. Total wholesale gallons sold were 1.313 billion, compared to 1.233 billion in first-quarter 2016, an increase of 6.5% as a result of growth in both the Southwest geography and unbranded business. Sunoco earned 10.6 cents per gallon on these volumes, compared to 11.4 cents per gallon a year earlier.

Net loss for the retail segment was $41 million compared to a net loss of $25 million a year ago. Total retail gallons sold decreased by 2.1% to 595 million gallons as a result of the decreased demand across the company’s operating geography, particularly along the East Coast. Sunoco earned 23.1 cents per gallon on these volumes, compared to 21.3 cents per gallon a year earlier.

Total merchandise sales increased by 3.1% from a year ago to $540 million, reflecting the contribution from third-party acquisitions and NTI locations opened during the past 12 months. Merchandise sales contributed $170 million of gross profit with a retail merchandise margin of 31.6%, a decrease of 0.1 percentage points from first-quarter 2016.

Same-store merchandise sales decreased by 1.1% during the first quarter, reflecting weakness in c-store and restaurant operations in Texas, partly offset by growth in the company’s East Coast and Hawaiian operations. Same-store gallons decreased by 5.7% as a result of weakness throughout Sunoco’s retail geography.

As of March 31, 2017, Dallas-based Sunoco LP operated 1,355 c-stores and retail fuel outlets along the East Coast, in the Southwest and in Hawaii. Third-party wholesale customers totaled 7,825.