10-Q: CrossAmerica Partners LP Reports Mixed Results in Q2 2024 Amid Strategic Shift

CrossAmerica Partners LP's second quarter of 2024 saw a decrease in revenue but an increase in gross profit, driven by strategic site conversions and fluctuating fuel prices.

Summary

• CrossAmerica Partners LP reported a decrease in operating revenues to $1.13 billion for the three months ended June 30, 2024, compared to $1.15 billion for the same period in 2023.
• Gross profit increased to $104.8 million from $97.7 million year-over-year.
• The company experienced a net loss of $5.1 million for the six months ended June 30, 2024, compared to a net income of $13.6 million for the same period in 2023.
• The decrease in revenue was primarily due to a decrease in wholesale segment revenue, partially offset by an increase in retail segment revenue.
• The company converted 95 sites from lessee dealer sites to company-operated or commission sites during the first half of 2024, including 59 sites from the Applegreen acquisition.
• Interest expense increased to $14.2 million for the three months ended June 30, 2024, from $10.7 million in the same period of 2023, due to the maturity of favorable interest rate swap contracts and general increases in interest rates.
• The company's effective interest rate on its credit facility was 6.7% as of June 30, 2024.
• The company sold ten sites for $11.9 million in proceeds during the three and six months ended June 30, 2024, resulting in a net gain of $6.5 million.
• The company paid $25.5 million in cash for the Applegreen acquisition and recorded a non-cash write-off of deferred rent income of $1.5 million.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with some positive developments like increased gross profit and strategic site conversions, but also negative aspects such as decreased revenue, net loss, and increased interest expenses. The overall sentiment is neutral to slightly negative.

Positives

• Gross profit increased by 7% for the three months ended June 30, 2024, indicating improved profitability.
• The company successfully converted 95 sites to company-operated or commission sites, which is expected to improve long-term performance.
• The company generated a net gain of $6.5 million from the sale of ten sites, demonstrating effective real estate rationalization.
• Merchandise revenues increased by 26% for the three months ended June 30, 2024, driven by an increase in company operated sites.

Negatives

• Operating revenues decreased by 1% for the three months ended June 30, 2024, indicating a slight decline in overall sales.
• Net income available to limited partners decreased to $11.8 million for the three months ended June 30, 2024, compared to $13.9 million for the same period in 2023.
• The company experienced a net loss of $5.1 million for the six months ended June 30, 2024, compared to a net income of $13.6 million for the same period in 2023.
• Interest expense increased by 33% for the three months ended June 30, 2024, due to the maturity of favorable interest rate swap contracts and general increases in interest rates.
• The company recorded a $16 million loss on lease termination with Applegreen, including a $1.5 million non-cash write-off of deferred rent income.

Risks

• The company is exposed to fluctuations 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 highest in the second and third quarters and lowest in the first and fourth quarters.
• The company faces concentration risk, with a significant portion of motor fuel purchases from four suppliers and merchandise purchases from one supplier.
• The company's debt obligations and interest rate exposure could impact financial performance.
• The company's ability to meet debt service obligations and other capital requirements depends on future operating performance, which is subject to various economic and market conditions.
• The company is subject to various legal and environmental risks, including potential litigation and remediation costs.

Future Outlook

The company anticipates that its 2024 results will be impacted by the conversion of sites, the Applegreen acquisition, higher interest expenses due to the maturity of favorable interest rate swap contracts, and potential future acquisitions. 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 believes that it is not reasonably possible that these proceedings, separately or in the aggregate, will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Industry Context

The report reflects the ongoing trends in the convenience store and fuel distribution industry, including the shift towards company-operated sites, the impact of fluctuating fuel prices, and the importance of strategic acquisitions. The company's focus on real estate rationalization and site conversions aligns with industry efforts to optimize operations and improve profitability.

Comparison to Industry Standards

• The company's performance is mixed when compared to industry benchmarks. While the increase in gross profit is positive, the decrease in revenue and net income is concerning.
• Companies like Sunoco LP and Global Partners LP, which also operate in the fuel distribution and convenience store space, have shown varying results in recent quarters, with some experiencing similar challenges related to fuel price volatility and operational shifts.
• The company's strategic shift towards company-operated sites is a common trend in the industry, with companies like Casey's General Stores and Alimentation Couche-Tard also focusing on expanding their retail operations.
• The company's debt levels and interest rate exposure are comparable to other companies in the sector, but the increase in interest expense due to the maturity of favorable interest rate swap contracts is a specific challenge for CrossAmerica.
• The company's distribution coverage ratio of 0.95x for the six months ended June 30, 2024, is below 1.0x, which may raise concerns about the sustainability of its 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

• The company has various related-party transactions, including wholesale motor fuel sales and real estate rentals with TopStar, an entity affiliated with the Topper Group.
• The company leases real estate from the Topper Group.
• The company incurs expenses under the Omnibus Agreement, including costs for store level personnel and other cost reimbursements.
• The company distributes cash to the Topper Group and affiliates of John B. Reilly, III related to their ownership of common units.
• The company recorded accretion on the preferred membership interests issued to related parties.
• The company purchases certain convenience store products from an affiliate of John B. Reilly, III and Joseph V. Topper, Jr.
• The company leases certain vehicles from an entity affiliated with the Topper Group.
• The company leases office space from an affiliate of John B. Reilly, III and Joseph V. Topper, Jr.
• The company has engaged a company affiliated with John B. Reilly, III for public relations and website consulting services.

Stakeholder Impact

• Shareholders may be concerned about the net loss for the six months ended June 30, 2024, and the distribution coverage ratio below 1.0x.
• Employees may be affected by the ongoing site conversions and operational changes.
• Customers may experience changes in service and offerings as the company transitions to company-operated sites.
• Suppliers may be impacted by the company's strategic shifts and changes in purchasing patterns.
• Creditors may be concerned about the company's debt levels and interest rate exposure.

Next Steps

• The company will continue to evaluate acquisitions on an opportunistic basis.
• The company will pursue acquisition targets that fit into its strategy.
• The company will continue to consider the highest and best use class of trade for each of its properties.

Key Dates

Keywords

motor fuel, wholesale, retail, convenience stores, real estate, lease termination, interest rates, EBITDA, distribution, Applegreen