CST Brands opened 50 new-to-industry stores in 2016 with 38 in the U.S. and 12 in Canada.
With its acquisition of Flash Foods in the rearview and its pending merger with Alimentation Couche-Tard Inc. set to close in the first half of 2017, CST Brands Inc. wrapped up a year of extensive changes in 2016. The chain has released its financial results for the fourth quarter and year ended Dec. 31, 2016.
“2016 was a year of significant growth and change for CST, beginning with the Flash Foods acquisition in February, the completion of 50 new-to-industry stores across the U.S. and Canada, and our shareholder approval of the pending merger with Circle K Stores, Inc., a wholly-owned subsidiary of Alimentation Couche-Tard Inc.,” said Kim Lubel, chairman and CEO of CST Brands. “The merger is on track to close during the second quarter 2017. I am grateful to the entire CST team for their continued commitment to the Company and to our mission to Delight More Customers Every Day.”
Three Months Results
For the three month period ended Dec. 31, 2016, the Company reported net income of $18 million, or 23 cents per diluted share compared to net income of $25 million, or 34 cents per diluted share, for the same period in 2015. Included in net income for the fourth quarter of 2015 is approximately $16 million, net of tax, related to asset impairment charges, acquisition expenses, legal expenses, professional fees and net tax effects on repatriation. Excluding these items, net income would have been $42 million, or 55 cents per diluted share, for the three-month period ended Dec. 31, 2015.
During the fourth quarter of 2016, the Company incurred acquisition expenses, legal expenses and professional fees. However, these items were not substantial, were offsetting and did not affect net income or earnings per share for the period.
The decline in net income was primarily driven by a 25% decrease in U.S. motor fuel gross profit, as the Company experienced very strong fuel margins in the fourth quarter of 2015. Motor fuel gross profit in the U.S. for the fourth quarter of 2016 was $66 million versus $88 million in the same quarter of 2015. The decline in motor fuel gross profit was primarily attributable to a 31% decline in motor fuel gross profit, on a per gallon basis (“cents per gallon” or “CPG”) decreasing from 19.4 CPG in the fourth quarter of 2015 to 13.4 CPG in the fourth quarter of 2016. The decline in fuel margins was partially offset by a 10% increase in total motor fuel gallons sold, resulting from the Company’s expanded core network. This volume increase was achieved despite the divestment of stores in California and Wyoming that was completed earlier in the year.
U.S. merchandise and services gross profit increased 19% when compared to the fourth quarter of 2015, primarily driven by an overall increase in merchandise and services sales and gross profits in the Company’s U.S. core and New-to-Industry (“NTI”) store sales, aided by acquisition and organic growth. Core same store merchandise and services sales per store per day declined 3% during the fourth quarter of 2016, primarily due to continued softness in parts of South Texas caused by a decrease in economic activity in the energy related sector. Core same store merchandise and services gross profit dollars were relatively flat when compared to the same period in 2015, as a result of a 60 basis point improvement in gross margin capture during the quarter.
In Canada, motor fuel gross profit increased 4% and merchandise and services gross profit increased 5% when compared to the fourth quarter of 2015, primarily driven by an increase in volume of motor fuel sold along with an improvement in merchandise and services sales driven by an increase in the average number of retail sites. On a same-store basis, merchandise and services sales per site per day increased 2% in Canada when compared to the fourth quarter of 2015, primarily due to growth in the grocery and packaged beverage business.
Twelve Months Results
For the year ended Dec. 31, 2016, the Company reported net income of $324 million, diluted earnings per common share of $4.24 and EBITDA of $717 million. For the year ended Dec. 31, 2015, the Company reported net income of $149 million, diluted earnings per common share of $1.95 and EBITDA of $422 million.
Included in 2016 net income are certain special items totaling approximately $217 million, net of tax, or $2.83 per share, consisting of a gain from the Company’s sale of its California and Wyoming convenience stores, offset by certain acquisition expenses, merger-related expenses, legal expenses and professional fees.
Included in 2015 net income are asset impairment charges, acquisition expenses, legal expenses, professional fees, a gain on the sale of assets and net tax effects on repatriation totaling approximately $18 million, net of tax, or 24 cents per share. Excluding these items, net income would have been $107 million, or $1.41 per diluted share, and $167 million, or $2.19 per diluted share, for the year ended Dec. 31, 2016 and 2015, respectively.
The 70% growth in EBITDA in 2016 over 2015 was driven by a gain on the sale of the Company’s California and Wyoming convenience stores during the third quarter and by continued improvement in the Company’s merchandise and services gross profits.
For the full year 2016, motor fuel gross profit in the U.S. was $309 million versus $360 million in the same period of 2015. The decline in motor fuel gross profit was primarily attributable to a decline in motor fuel gross profit on a CPG basis, which was partially offset by a 12% increase in total motor fuel gallons sold, due to the Company’s expanded core network, despite the divestment of stores in California and Wyoming that was completed during the summer.
U.S. merchandise and services gross profit increased 22% when compared to 2015, primarily driven by an overall 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. Core same store merchandise and services sales per store per day declined 1% during 2016. However, core same store merchandise and services gross profits grew by 2% in 2016, resulting from a 100 basis point improvement in margin capture.
In Canada, motor fuel gross profit increased slightly and merchandise and services gross profit increased 4% when compared to 2015, primarily driven by an increase in volume of motor fuel sold along with an improvement in merchandise and services sales driven by an increase in the average number of retail sites. On a same-store basis, merchandise and services sales per site per day and merchandise and services gross profits increased 4% in Canada when compared to 2015, primarily due to growth in the grocery and packaged beverage business.
Liquidity and Capital Resources
For the year ended Dec. 31, 2016, cash flow provided by operating activities totaled $211 million. Cash flow used in investing activities was $411 million, primarily related to capital expenditures and the Flash Foods acquisition. Total capital expenditures, excluding acquisitions, for the year ended December 31, 2016 and 2015 were $349 million and $341 million, respectively. Cash flow provided by financing activities was $19 million, including net payments on CST Brands’ revolving credit facility of $90 million, dividends paid of $15 million and payments of $69 million on CST Brands’ term loan. The effect of foreign currency translation changes was an increase in cash of $4 million. Overall, cash decreased by $177 million. Cash, as of Dec. 31, 2016, was $136 million.
As of Feb. 24, 2017, approximately $112 million was available for future borrowings under CST Brands’ revolving credit facility.
Withdrawal of Guidance and Conference Call
As previously reported, on Aug. 21, 2016, CST Brands entered into an Agreement and Plan of Merger with Circle K Stores Inc., a Texas corporation (“Circle K”). Under the terms of the merger agreement, CST will be merged with a subsidiary of Circle K. Circle K is a wholly-owned subsidiary of Alimentation Couche-Tard Inc. The closing of the merger is subject to certain conditions, including, among others, the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and receipt of clearance under the Canadian Competition Act. CST stockholders approved the merger on Nov. 16, 2016. The merger is expected to close in the second quarter of 2017.
In light of the pending merger, CST will not be issuing financial guidance regarding the Company’s projected financial performance and will not be hosting a fourth quarter/year-end earnings conference call.
