10-Q: CrossAmerica Partners LP Reports Mixed Q3 Results Amid Strategic Shift

CrossAmerica Partners LP's Q3 2024 results show a decrease in revenue but an increase in gross profit, driven by strategic shifts in their business model.

Summary

• CrossAmerica Partners LP reported a decrease in operating revenues to $1.079 billion for the third quarter of 2024, compared to $1.210 billion in the same period of 2023.
• Gross profit increased to $111.2 million, up from $100.4 million in the third quarter of 2023.
• Net income available to limited partners was $10.1 million, down from $11.7 million in the prior year's quarter.
• The company experienced a decrease in wholesale segment revenue due to lower fuel prices and volumes, while retail segment revenue increased due to higher volumes from converted sites.
• For the nine months ended September 30, 2024, operating revenues were $3.154 billion, compared to $3.372 billion in the same period of 2023.
• Net income available to limited partners for the nine months was $3.7 million, a significant decrease from $24.0 million in the prior year period.
• The company converted 106 sites from lessee dealer to company operated or commission sites during the first nine months of 2024, including 59 sites from the Applegreen acquisition.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are positive aspects like increased gross profit and retail growth, the significant decrease in net income, wholesale revenue, and increased interest expense raise concerns. The strategic shift is a positive long term move but the short term results are mixed.

Positives

• Gross profit increased by 11% in Q3 2024, indicating improved profitability despite lower revenues.
• Retail segment revenue increased by 6% in Q3 2024, showing growth in this area of the business.
• Merchandise revenues increased by 23% in Q3 2024, demonstrating success in retail operations.
• The company sold 19 sites for $19 million in proceeds during the nine months ended September 30, 2024, indicating successful asset rationalization.
• The company converted 106 sites to company operated or commission sites, which is expected to improve future performance.

Negatives

• Operating revenues decreased by 11% in Q3 2024, indicating a decline in overall sales.
• Net income available to limited partners decreased in Q3 2024, showing a decline in profitability.
• Wholesale segment revenue decreased by 26% in Q3 2024, indicating a significant decline in this area of the business.
• Interest expense increased by 34% in Q3 2024, impacting overall profitability.
• The company recorded a $16 million loss on lease termination with Applegreen during the nine months ended September 30, 2024.

Risks

• The company is exposed to volatility in crude oil and wholesale motor fuel prices, which can significantly impact revenues and cost of sales.
• The company's business is subject to seasonality, with sales volumes typically lower in the first and fourth quarters.
• Inflation could negatively impact the cost of goods sold and operating expenses.
• The company's debt levels and interest rate exposure could impact financial performance.
• The company faces concentration risk with a limited number of suppliers, carriers, and customers.
• The company is subject to various legal and environmental risks.

Future Outlook

The company anticipates that the conversion of sites from lessee dealer to company operated or commission sites will increase gross profit and operating expenses in the retail segment and reduce gross profit in the wholesale segment. They also expect to continue divesting certain assets, which may result in gains or impairment charges. Higher interest expense is anticipated due to the maturity of favorable interest rate swap contracts. The company will continue to evaluate acquisitions on an opportunistic basis.

Management Comments

• Management believes that the disclosures made are adequate to keep the information presented from being misleading.
• Management reviews its estimates based on currently available information.
• Management has assessed the matter based on current information and made a judgment concerning its potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success.

Industry Context

The results reflect a broader trend in the convenience store and fuel distribution industry where companies are shifting towards company-operated retail sites to capture higher margins. The volatility in crude oil prices and its impact on fuel margins is a common challenge faced by companies in this sector. The company's strategic shift towards retail operations and asset rationalization is in line with industry trends to optimize profitability.

Comparison to Industry Standards

• Compared to companies like Sunoco LP and Global Partners LP, CrossAmerica's revenue decline in the wholesale segment is notable, reflecting its strategic shift away from traditional wholesale distribution.
• The increase in retail segment revenue and merchandise sales is similar to trends seen in other convenience store operators like Casey's General Stores, which are focusing on in-store sales and company-operated locations.
• The company's debt levels and interest rate exposure are comparable to other midstream energy companies, but the impact of the matured interest rate swaps is a specific challenge for CrossAmerica.
• The company's distribution coverage ratio of 1.08x for the nine months ended September 30, 2024, is lower than some peers, indicating a need to improve cash flow generation to support distributions.

Legal Proceedings

• The company is from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business.
• The company records an accrual when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
• The company discloses matters for which management believes a material loss is at least reasonably possible.

Related Party Transactions

• Revenues from TopStar, an entity affiliated with the Topper Group, were $10.9 million and $33.4 million for the three and nine months ended September 30, 2024, respectively.
• Rent expense under lease agreements with the Topper Group was $2.6 million and $7.6 million for the three and nine months ended September 30, 2024, respectively.
• Expenses under the Omnibus Agreement totaled $32.6 million and $93.5 million for the three and nine months ended September 30, 2024, respectively.
• The company distributed $7.7 million to the Topper Group related to its ownership of common units during each of the three months ended September 30, 2024 and $23.1 million for the nine months ended September 30, 2024.
• The company distributed $2.6 million to affiliates of John B. Reilly, III related to their ownership of common units during each of the three months ended September 30, 2024 and $7.9 million for the nine months ended September 30, 2024.
• Merchandise costs from an affiliate of John B. Reilly, III and Joseph V. Topper, Jr. amounted to $5.1 million and $14.5 million for the three and nine months ended September 30, 2024, respectively.
• Rent expense for office space from an affiliate of John B. Reilly, III and Joseph V. Topper, Jr. amounted to $0.3 million and $0.9 million for the three and nine months ended September 30, 2024, respectively.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the lower distribution coverage ratio.
• Employees may be affected by the strategic shift towards company-operated sites.
• Customers may experience changes in service and offerings as sites are converted.
• Suppliers may see changes in demand as the company adjusts its operations.
• Creditors may be concerned about the company's debt levels and interest rate exposure.

Next Steps

• The company will continue to evaluate the highest and best use class of trade for each of its properties.
• The company anticipates continuing to divest certain assets.
• The company will continue to evaluate acquisitions on an opportunistic basis.

Key Dates

Keywords

motor fuel, wholesale, retail, convenience stores, fuel distribution, real estate, Applegreen, lease termination, EBITDA, financial results