CST Sees Solid Results Ahead of Couche-Tard Merger
SAN ANTONIO -- Expansion via Flash Foods and new-to-industry (NTI) stores, gains from the sale of convenience stores in two western states and merchandise sales increases in the United States and Canada all helped CST Brands Inc.’s bottom line in third-quarter 2016.
CST’s acquisition by Alimentation Couche-Tard Inc. will close in early 2017, Kim Lubel, chairman and CEO of CST said in a press release announcing the company’s earnings. Citing the pending acquisition, CST did not host an earnings call.
Entering into an agreement with Circle K Stores Inc. on Aug. 21, 2016, CST will merge with a subsidiary of Circle K, a wholly owned subsidiary of Laval, Quebec-based Alimentation Couche-Tard Inc.
The company will hold a special meeting of CST stockholders to consider the agreement on Nov. 16, 2016.
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CrossAmerica sees its place in Couche-Tard
San Antonio-based CST has more than 2,000 convenience stores throughout the southwestern United States, Georgia, Florida and New York under the Corner Stores, Nice N Easy Grocery Shoppes and Flash Foods brands. In eastern Canada, CST provides Ultramar fuel through its Depanneur du Coin and Corner Stores.
CST also owns the general partner of CrossAmerica Partners LP, a master limited partnership (MLP) and wholesale distributor of fuels, based in Allentown, Pa.
Upon closing of the CST acquisition, Couche-Tard will indirectly own 100% of CrossAmerica’s general partner and its incentive distribution rights and approximately 20% of CrossAmerica’s common units, while CrossAmerica will continue to own 17.5% equity interest in CST fuel supply.
“We believe this transaction presents a tremendous opportunity for us and our investors by offering several potential strategic benefits to the partnership in the years to come. Through our transition discussions, it is already evident that the two organizations share many cultural and operational similarities, such as our experience in acquisition and integration and our focus on growing cash flow through prudent cost management,” said Jeremy Bergeron, president of CrossAmerica during that company’s third-quarter 2016 earnings call.
“In addition to what we share, we are just as excited with the scale, global reach, financial strength and numerous programs that we could leverage with Couche-Tard controlling our general partner. Not only will we be part of America’s largest convenience and fuel retailing network, with the potential combination of Couche-Tard’s U.S. dealer network of approximately 700 sites and of CrossAmerica’s network of more than 1,200 locations, the combined organization will also be one of the largest wholesale fuel distributors in the U.S.”
CST third-quarter 2016 results
“[CST] performed well during the quarter despite the comparison with a very strong fuel margin in third-quarter 2015,” Lubel said. “Our U.S. business grew merchandise and services gross profit 19% on increased sales and margins, while our Canadian stores grew merchandise and services gross profits 5% with a 3% improvement in same-store sales. We also continued to execute on our organic growth plans with the addition of 13 new-to-industry stores during the quarter and 29 stores year to date.”
For the three months ending Sept. 30, 2016, CST reported net income of $260 million, compared to net income of $85 million for the same period in 2015.
A $347 million gain on the sale of the company’s California and Wyoming convenience stores to 7-Eleven Inc. and an increase in both U.S. and Canadian merchandise and services gross profit drove the improvement.
EBITDA was $461 million for the period, compared to $174 million for the same period in 2015, a 165% increase. The company attributed the increase to the sale of the California and Wyoming c-stores.
U.S. merchandise and services gross profit increased 19% vs. third-quarter 2015, driven by an increase in merchandise and services sales and gross profits in the company’s U.S. core and NTI store sales, aided by acquisition and organic growth, including the company’s acquisition of the Flash Foods c-stores. Same-store merchandise and services sales per store per day declined 3% because of a decrease in economic activity in the energy sector in parts of south Texas.
Motor fuel gross profit in the United States for third-quarter 2016 was $95 million vs. $150 million in the same quarter of 2015. The company said a 13% increase in motor fuel gallons sold, due to the company’s expanded core network including Flash Foods, offset the decline.
CrossAmerica third-quarter 2016 results
“Despite the comparison to a very strong fuel margin in third-quarter 2015, [CrossAmerica] generated solid cash flow this quarter thanks to our sustained focus on integration and expense control,” said Bergeron. “With the recent State Oil acquisition as well as various other initiatives, we continue to position the partnership for further growth, while maintaining a strong balance sheet and coverage ratio.”
CrossAmerica reported operating income of $10 million for third-quarter 2016 compared to $14.8 million achieved in third-quarter 2015. The company attributed the decrease to a decline in motor fuel gross profit in the wholesale and retail segments, as the volatility and decline in wholesale gasoline prices in the third-quarter 2015 did not repeat itself, contracting dealer tankwagon wholesale gross profits and retail gross profits.
The company also saw an additional decline in retail gross profit as it continued to execute its strategy of converting company-operated stores to dealer-operated sites, moving acquired assets out of the retail segment and into the wholesale segment. An increase in rental income in the wholesale segment and a reduction in operating and general and administrative expenses offset these reductions.