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SAN ANTONIO — CST Brands Inc. leader Kim Lubel is a self-proclaimed “deal junkie,” so it’s no surprise that in the 18 or so months since spinning off CST Brands from Valero Energy Corp., she and her team have wasted no time in getting “their fix” of deals.
On May 1, 2013, CST spun off with 1,033 U.S. convenience stores in nine states. Today, the San Antonio-based retailer has a coast-to-coast national network of assets consisting of more than 2,150 U.S. sites — over 1,150 company-operated stores and another 1,000-plus dealer/wholesale sites — in 25 states, plus a strong presence in Canada.
“When we looked at the retail space and the CST growth potential [before spinning off from Valero], we saw that consolidation in the industry was going to be one of our greatest opportunities,” recounted Lubel, who was recently celebrated as Convenience Store News' inaugural Retailer Executive of the Year award winner.
This August, CST announced its purchase of 100 percent of the membership interests of Lehigh Gas GP LLC, the general partner of Lehigh Gas Partners LP, for approximately $85 million. The transaction closed Oct. 1, at which point Allentown, Pa.-based Lehigh Gas Partners changed its name to CrossAmerica Partners LP.
This partnership presents many strategic benefits for both parties, including:
- CST Brands gaining access to capital through a growth-oriented master limited partnership (MLP) vehicle to execute its long-term strategic plan;
- Drop-down asset sales to CrossAmerica Partners and an expanded set of external opportunities to drive cash flow growth for CST Brands; and
- CrossAmerica Partners gaining access to a pipeline of drop-down asset acquisitions from CST Brands to drive future fuel distribution increases.
According to Lubel, CST Brands always knew it wanted to do a MLP, but under its spinoff agreement with Valero, the retailer was going to have to wait until next summer.
“We were able to find a different approach with our CrossAmerica partnership. It's helped us move into a new level of activity and growth,” she said.
For instance, the recent acquisition of Canastota, N.Y.-based Nice N Easy Grocery Shoppes, which closed Nov. 3, was doable because the CrossAmerica piece was in place. CST Brands and CrossAmerica jointly purchased Nice N Easy, operator of 77 corporate and franchise convenience stores in central New York State.
Before CrossAmerica, Lubel said her company was also financially limited on how many new store builds (Corner Store locations in the United States and Dépanneur du Coin stores in Canada) it could execute; it was based on a percentage of the prior year's EBITDA.
“You can't grow fast enough that way,” she remarked.
Now, with CrossAmerica and the MLP structure, those financial limitations are no longer there. Under the arrangement, CST Brands will sell the real estate and stores to CrossAmerica and then rent them back, with CrossAmerica providing fuel to the sites. CST Brands will use the cash from the real estate sales to build more new stores.
“Our growth today is dependent on how much can the organization absorb, how much can we integrate at one time,” Lubel noted. “There are a lot of states we haven't touched yet. I could see us doing a third-party acquisition and then a few years later, doing new builds in that area. A little Pac-Man strategy — buy and build around it, buy and build around it.”
For 2014, CST Brands committed to opening 38 new-to-industry stores in the U.S. and Canada. By the end of this year, the retailer will have built and opened 60 new-to-industry stores in the last two years alone, 11 more than the total built over the previous five years, Lubel reported during the company's third-quarter earnings call on Nov. 11.
As for 2015, the capital budget is still a work in progress, but Lubel anticipates building between 45 and 55 new-to-industry sites in the U.S. and Canada. CST's new larger-format stores generate almost twice the in-store and fuel sales of its core of smaller legacy stores.
Further growth via acquisitions is also the intent for 2015.
“It's a pretty fragmented industry; there are very few large chains. What we have to offer as a potential acquirer is different from other potential acquirers,” the chief executive said. “We have a great deep employee culture that's focused on retail and customer service. We have a really tenured workforce. We’re not just in it for today; we are about retail operations and customer service. And even though we're big, we have a strong entrepreneurial spirit.”
For more on Kim Lubel and the Convenience Store News Retailer Executive of the Year award, check out the December issue of Convenience Store News.