CrossAmerica Partners (CAPL) Q1 2024: Retail Site Count Jumps by 85 as Wholesale Margins Slide
CrossAmerica Partners leaned into retail expansion, boosting company-operated sites by 85, but wholesale fuel margin and volume declines weighed on profitability. The Apple Green lease termination and segment conversions drove a $15.9 million charge and higher operating costs, reflecting a strategic shift toward retail fuel and merchandise margin capture. Management expects improved coverage and profitability as the seasonal demand uptick and site optimization play through the remainder of the year.
Summary
- Retail Shift Accelerates: Segment conversions and Apple Green transition increased company-operated sites, changing profit mix.
- Margin Compression: Wholesale fuel margins and volumes fell, offsetting retail merchandise gains.
- Coverage Recovery Expected: Management signals stronger cash flow as summer driving season begins and new sites mature.
Business Overview
CrossAmerica Partners (CAPL) is a wholesale distributor of motor fuels and a retail operator of convenience stores, primarily in the United States. The business generates revenue through two main segments: wholesale fuel supply (selling fuel to lessee dealers and independent operators) and retail operations (company-operated and commission agent convenience stores), with increasing emphasis on in-store merchandise and fuel margin capture at company-run sites.
Performance Analysis
Q1 2024 marked a transitional quarter for CAPL, as the partnership’s retail footprint expanded sharply while wholesale operations contracted. The wholesale segment posted a 14% drop in gross profit, driven by both a 9% decline in fuel volume and a 5% drop in per-gallon margin. The segment’s performance was further pressured by the conversion of lessee dealer sites to company-operated or commission agent status, shifting volume and rent dollars out of wholesale and into retail.
The retail segment, in contrast, delivered a 7% increase in gross profit, with merchandise gross profit up 18% and margin percentage improving by 30 basis points, reflecting both higher store count and ongoing margin management initiatives. However, retail fuel margins slipped 3% per gallon due to rising crude prices and persistent industry-wide demand softness. The Apple Green lease termination triggered a $15.9 million charge, driving the net loss for the quarter, while adjusted EBITDA and distributable cash flow fell sharply year-over-year.
- Wholesale Volume and Margin Pressure: 184 million gallons sold, down 9%, with margin per gallon falling to 7.9 cents, reflecting both market and mix headwinds.
- Retail Merchandise Outperformance: Merchandise profit rose 18%, led by packaged beverages and deli categories, even as overall inside sales were flat to slightly down post-quarter.
- Operating Expense Shift: Retail operating expenses rose 20% due to a 22% jump in company-operated store count, partially offset by labor hour efficiency and shrink control.
Distribution coverage fell to 0.59 times for the quarter, but remains above 1.3 times on a trailing 12-month basis, and management anticipates a seasonal rebound as the expanded retail base matures.
Executive Commentary
"You can see that we were extremely active during the quarter with site conversions and executing on our strategy to increase our exposure to retail fuel margins and the retail business overall."
Charles Nifong, CEO and President
"Company-operated locations are our highest per-site expense class of trade, and so that site count increase drove the majority of the year-over-year increase in operating expenses... Our team drove a strong focus on ensuring our company operated locations were staffed efficiently and operating at the right hours."
Maura Topper, Chief Financial Officer
Strategic Positioning
1. Retail Expansion and Site Conversion
CAPL’s aggressive conversion of lessee dealer and Apple Green sites to company-operated and commission agent models signals a deliberate pivot to capture more downstream margin. The company added 85 retail sites year-to-date, with 100 conversions over the past year, materially raising its exposure to retail fuel and merchandise economics.
2. Margin Management and Merchandise Focus
Efforts to improve merchandise margin and shrink control are evident, with an 18% merchandise profit increase and 30 basis point margin expansion. Labor hours per store declined 4%, reflecting early success in operating discipline as site count grows.
3. Wholesale Rationalization
Wholesale segment contraction was partly intentional, as CAPL declined to renew certain dealer contracts, focusing on higher-value locations and prioritizing retail conversion. While this shrinks top-line wholesale numbers, it aims to improve quality of earnings and long-term profitability.
4. Balance Sheet and Liquidity Management
Leverage rose to 4.49 times due to Apple Green payments and working capital usage, but management is targeting a return to approximately 4 times as asset sales and seasonal cash flows improve. Interest expense is expected to rise as legacy swaps roll off, but half of debt remains swapped at attractive fixed rates.
5. Asset Sale Pipeline
Q1 saw minimal asset divestiture, but management expects “materially” higher transaction pace for the remainder of 2024, which should support deleveraging and capital rotation as retail operations scale up.
Key Considerations
This quarter’s results highlight the operational and financial consequences of CAPL’s retail-centric strategy, with immediate cost and margin impacts but longer-term potential for higher quality earnings.
Key Considerations:
- Retail Integration Complexity: Rapidly onboarding 100 new company-operated sites introduces operational risk, requiring sustained focus on staffing, merchandising, and process control.
- Wholesale Margin Volatility: Variable-priced wholesale contracts and crude price trends can drive unpredictable swings in segment profitability, as seen with Q1’s margin compression.
- Distribution Sustainability: Sub-1 times quarterly coverage is not unprecedented for Q1, but improvement is necessary to maintain investor confidence in the payout structure.
- Asset Sale Execution: The pace and pricing of planned divestitures will influence leverage and liquidity flexibility as retail expansion continues.
- Seasonal Recovery Reliance: Management’s outlook is predicated on a typical summer demand uptick, which may be vulnerable to macroeconomic or fuel price shocks.
Risks
CAPL faces execution risk as it integrates a large number of new retail sites, with cost control and margin optimization critical to offsetting higher operating expenses. Wholesale fuel margin and volume declines may persist if industry demand remains soft or if crude prices continue to rise. Leverage has increased and relies on asset sales and seasonal cash flow for normalization, while interest expense is set to rise as swaps expire. Any disruption in the planned asset sale pipeline or a weaker-than-expected summer driving season could pressure both liquidity and distribution coverage.
Forward Outlook
For Q2 and the remainder of 2024, CAPL management guided to:
- Improved distribution coverage and profitability as summer driving season lifts volume and margins, especially at newly converted retail sites.
- Material increase in asset sale activity, supporting deleveraging goals and capital flexibility.
For full-year 2024, management expects:
- Stronger performance as retail integration matures and expense control persists.
Management highlighted several factors that will shape results:
- Retail site operational ramp and continued focus on margin management.
- Ongoing monitoring of industry demand trends and wholesale margin volatility.
Takeaways
CAPL’s Q1 2024 results reflect a business in transition, with the retail segment set to become a larger driver of profitability and risk. The ability to execute operationally on a much larger company-operated store base will be the main determinant of success as wholesale headwinds persist.
- Retail Exposure Rises: The Apple Green and other site conversions have structurally increased CAPL’s exposure to retail fuel and merchandise margin, but also to higher operating costs and integration risk.
- Wholesale Drag Remains: Margin and volume declines in wholesale are partly by design, but also reflect industry softness and pricing headwinds that could persist into peak season.
- Summer Ramp Is Critical: Investors should watch for evidence of retail site operational improvement and margin recapture as the summer progresses, as well as the pace of asset divestitures to manage leverage.
Conclusion
CrossAmerica Partners’ Q1 exposed the cost and complexity of pivoting to a retail-heavy model, with immediate margin and coverage pressure but a path to higher-quality earnings if operational execution and asset sales deliver in the coming quarters.
Industry Read-Through
CAPL’s quarter highlights a broader industry trend: fuel distributors and convenience store operators are shifting toward company-operated models to capture downstream margin, even as this raises operating complexity and cost risk. Margin volatility tied to crude price trends and softening demand is a common theme across the sector, with many operators facing similar trade-offs between wholesale rationalization and retail expansion. Asset rotation and disciplined cost control will be key themes for peers as they navigate the same headwinds and opportunities in the evolving fuel and convenience landscape.