Wells Fargo weighs in on CST Brands’ acquisition of Flash Foods.
On the heels of its agreement to acquire Flash Foods, CST Brands announced it is exploring strategic options for the company’s California network, comprised of 76 stores, to enhance shareholder value, including, among others, a potential tax-efficient like-kind exchange for properties proposed to be acquired in Georgia and Florida as part of the planned Flash Foods acquisition.
There can be no assurance that the company’s review of strategic options for its California network will result in any transaction being entered into or consummated. CST does not intend to disclose further developments regarding the exploration of strategic options until the Board has approved a definitive course of action.
CST Brands also announced its financial results for the third quarter ending Sept. 30, 2015.
Wells Fargo weighed in on the results: “We remain optimistic about the near- and long-term growth trajectory for CST particularly following its announcement of its largest acquisition ever,” said Bonnie Herzog, managing director beverage, tobacco and convenience store research for Wells Fargo Securities. “Bottom line – we continue to see tremendous upside for CST as it leverages its partnership with CrossAmerica to support acquisitive and new to industry (NTI) store growth as well as focus on initiatives to drive margin expansion.”
Herzog added, “We believe CST’s acquisition of Flash Foods makes tremendous sense and is consistent with investors’ desire for stepped up acquisitions while the divestiture of California stores will allow CST to focus on opportunities within its existing strategic priorities, namely NTI builds and expanded focus on merchandise, which will improve its mix by diversifying away from fuel. Further, we expect this deal will: (1) drive margin expansion due to the acquired distribution center in Georgia; (2) drive increased synergies across CST’s store network as it improves its geographic footprint; and (3) provide best practices for foodservice through the 21 quick service restaurants being acquired.”
For the three-month period ending Sept. 30, 2015, the company reported net income of $85 million, or $1.12 per diluted share, driven by an increase in fuel and merchandise gross profit during the quarter. Net income was $63 million, or $0.83 per diluted share, for the comparable period in 2014.
“While our third quarter 2015 results reflect strong fuel margins across our system, I’m even more pleased with our 4% increase in same store merchandise sales in Canada and the U.S., and the terrific 13% improvement in U.S. merchandise gross profit dollars over third quarter 2014,” said Kim Lubel, chairman and CEO of CST Brands Inc. “The strength of the third quarter reflects the continued success of our strategic growth planks in both organic, New-to-Industry store growth and acquisitions, including the Nice N Easy and Landmark stores purchased in the last 12 months.”
Motor fuel gross profit (per gallon) in the U.S. for the third quarter of 2015, after deducting credit card fees and amounts distributed to CrossAmerica, was $0.31 compared to $0.25 in the third quarter of 2014, which was primarily caused by a declining crude oil and wholesale gasoline pricing environment in the third quarter of 2015. U.S. merchandise gross profit increased 13% when compared to the third quarter of 2014, primarily driven by an overall increase in merchandise sales as well as by the company’s acquisitions of Nice N Easy and Landmark stores and an increase in the number of NTI stores.
