CSP Magazine

Analysis: Corner Store Shakeup

Can CST Brands assuage shareholder opposition?

Over the past two months, Wall Street and two activist shareholders—Houston-based JCP Investment Management LLC and New York-based Engine Capital LP—have raised concerns CST Brands is failing to leverage its 1,900-store size to maximize shareholder value.

San Antonio-based CST, the three-year-old spinoff of Valero Energy Corp., agrees there’s more to be done to increase value, but it counters that it has and is taking necessary steps to drive shareholder value, boost same-store sales and leverage its real-estate base.

Our story explains what CST says it is doing to boost its value, the concerns shareholder activists are raising, and what analysts and industry experts have to say about both sides of the battle.

What CST Brands says it is doing to generate greater value:

  • Added more than 200 stores through the acquisition of two premium retail chains: Nice N Easy Grocery Shoppes of Canastota, N.Y., and Flash Floods of Waycross, Ga.
  • Acquired the general partner of CrossAmerica Partners, formerly known as Lehigh Gas, enabling CST to tap the favorable tax advantages of a master limited partnership (MLP).
  • In January, as part of a response to critical shareholders, CST launched a sale-leaseback strategy to spur greater liquidity and reinvest those funds into new, ground-up, larger store formats. The company expects the initiative to enhance new-store returns from an unleveraged 15% to more than 30% within the next few years.
  • Financing growth through the sale-leaseback strategy, including 120 new builds over the next two years and 350 store openings over five years.
  • Maximizing profitability of its existing network. Through September 2015, adjusted EBITDA increased 13% year over year, total merchandising sales grew 7%, total merchandising gross profits climbed 7% and fuel volumes inched up 2%.
  • In the past year, CST returned roughly $100 million to stockholders while continuing to fund its growth plan.
  • It created two new positions: president of retail operations (to be filled by Hal Adams) and senior vice president of growth and strategy (to be filled by Stephane Trudel). The new role for Adams—who previously was senior vice president, chief marketing officer—combines marketing and merchandising with operations. Trudel’s new position comprises oversight over acquisitions, divestments, strategic planning and business analytics, construction and real estate, and Canadian wholesale operations. He previously was CST’s senior vice president of mergers and acquisitions.

Concerns raised by shareholder activists, JCP Investment Management LLC and Engine Capital LP:

  • CST’s stock value falls well below other publicly traded c-store chains, notably Casey’s, Speedway and Alimentation Couche-Tard.
  • Below-industry-average merchandise margins and stagnant merchandise same-store sales relative to peers.
  • Suboptimal returns on new-store builds and related concerns about significant planned capital expenditure.
  • Mismanagement of CrossAmerica, including distribution coverage ratio that has declined to an unsustainable level.
  • Unclear foodservice strategy.
  • Staggered board without adequate shareholder representation.
  • Executive team too heavy in petroleum experience and lacking sufficient retail operations talent.

From Engine Capital: “CST must quickly demonstrate it can increase its ... productivity if it is to be one of the enduring consolidators in the industry.”

What financial experts are saying:

Bonnie Herzog, analyst for Wells Fargo Securities, New York:

“It’s true that none of us have patience on Wall Street. But investors do appreciate a sound long-term strategy. And because CST’s story has been so convoluted and complicated … and because they have not been as transparent as the investment community would like to see, they have not won over the confidence and trust that they are seeking.

“I am still optimistic about CST, but they have to drive faster growth. Hopefully, this new structure [sale-leaseback] will help accomplish this. But it’s the first of [additional] steps they’ll have to take.”

Ken Shriber, managing director of New York-based Petroleum Equity Group:

“They’ve done a very nice job transitioning the company to a new public entity, their forecourts are updated, and the Corner Store backcourt concept is competitive. However, when you look at their total collection of assets, they’re a very regional (Texas-centric) branded supplier/operator that has not yet been able to leverage the supply side, nor have they developed proprietary food programs that really stand out ...

“The investment community agrees and has not responded positively as their stock price until very recently has traded in a tight range of $30 to $35 per share, performance far below that of other publicly traded downstream marketers and convenience-store chains, Casey’s in particular.”

Benjamin Brownlow, research analyst for Raymond James, St. Petersburg, Fla.:

“In a few of these [shareholder] letters, they are pushing [CST Brands] to be a little bit quicker in terms of foodservice and other development. I’ve seen others fail at it, though. The Pantry, over a 10-year timeline, continued to work on developing a proprietary foodservice brand, and they failed.

“I think CST is diligently approaching the foodservice side of the business. They identified some of the best-in-class operators that are private operators that do foodservice well. That was part of the Nice N Easy operation. That was part of Flash Foods. They’re picking up these smaller, niche, attractive acquisitions, learning from them and then testing offerings in their core markets and making sure that they are making the appropriate decision to maximize long-term shareholder value, as opposed to quickly rolling something out and then learning five years down the road it doesn’t work.

“This is a very well-capitalized company that has a good management team at the helm.”

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