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SAN ANTONIO — U.S. merchandise sales — considered CST Brands Inc.’s No. 1 bugaboo by venture capital firms — increased 25 percent year over year in its 2016 fiscal first quarter. Chairman and CEO Kim Lubel credited successful in-store initiatives and excellent results from its Flash Foods network acquisition for the strong merchandise sales.
U.S. merchandise gross profits came in at $141 million in CST’s first quarter ended March 31, vs. $113 million in 2015’s first quarter. Discussing specific things the company did better inside the store, executives cited Powerball lottery ticket sales, strong packaged beverage and alcohol sales, and better management of tobacco sales and foodservice sales. Customers also moved toward purchasing more premium products, the parent of Corner Stores added.
Two venture capital firms that own shares in CST Brands, JCP Investment Management LLC and Engine Capital LP, have criticized the retailer in the past for poor merchandise sales. These activists' efforts led CST to recently appoint convenience store industry veterans Tad Dickson and Rocky Dewbre to its board of directors and undertake an “exploration of strategic alternatives to further enhance shareholder value.”
Although the merchandise sales metric improved considerably in its 2016 first quarter, Lubel confirmed the c-store operator is continuing its strategic review to determine how to increase returns for its shareholders.
“The process takes time, so we will not be commenting on it,” Lubel noted during the company's Q1 earnings call Friday morning.
However, she did provide commentary on CST’s announcement Thursday that it will exit the states of California and Wyoming and sell the 79 c-stores there to 7-Eleven Inc. The transaction is considered an asset swap for tax purposes for the Flash Foods properties it acquired in Florida and Georgia. The purchase price of the 79 stores is estimated at $408 million.
MORE ON ASSET SALE
Lubel revealed there was “a lot of interest in these assets,” and said although the stores don’t fit CST’s operating model, they offer a long-tenured employee base and the real estate is quite valuable at the California locations, which comprise 76 of the sites.
“We are very pleased with the purchase price,” she said “...It’s a great transaction for us. It’s a great transaction for 7-Eleven.”
The money obtained when the transaction closes in mid-summer is expected to be used to build new organic convenience stores, the company noted.
When questioned by a Wall Street analyst about future asset shedding, Lubel responded that CST Brands is not looking to divest retail assets in other regions at this time.
Q1 EARNINGS RISE
Overall, CST Brands reported net income of $19 million for its 2016 first quarter, a year-over-year improvement of $5 million. Looking at additional U.S. operating metrics, merchandise and service sales per store, per day came in at $3,872, an increase of $214 per store. U.S. merchandise gross margin percentage, net of credit card fees, was 34.1 percent, a rise of 1.6 percentage points.
At the forecourt, U.S. operating revenues declined by $71 million to $946 million, while motor fuel sales declined by a miniscule 11 gallons per store, per day to 4,990 gallons. However, U.S. fuel sales gross profits rose $12 million year over year to $75 million, which the company attributed to a "favorable margin environment and fuel pricing optimization initiatives."
CST operated 1,054 core U.S. retail c-stores as of March 31, with an additional 495 locations in Canada. It also had what it classified as 165 non-core U.S. retail stores as of March 31.
The San Antonio-based retailer expects to open 55 to 60 new-to-industry stores in the United States and Canada in 2016. Many of these stores will include an expanded foodservice offering based on best practices learned at its acquired Nice N Easy stores.
“It is very gratifying to see 2016 start with a great first quarter,” concluded Lubel. “We are repositioning CST for excellent growth.”