CrossAmerica Partners, a major player in the US fuel distribution and convenience store market, recently released its Q1 2024 earnings transcript. While the headline figures painted a picture of a challenging quarter – a net loss of $17.5 million and a distribution coverage ratio of 0.59 times – a closer look reveals a fascinating, almost silent, shift in CrossAmerica's core strategy.

Beneath the surface of these seemingly disappointing results lies an aggressive push towards retail dominance. CrossAmerica is quietly, yet rapidly, transforming itself from a primarily wholesale distributor into a retail powerhouse, a move that could have significant implications for its long-term profitability and investor returns.

The most striking evidence of this strategic pivot is the dramatic increase in CrossAmerica's company-operated retail site count. Since Q4 2023, the company has added a staggering 85 retail sites, bringing the total increase over the past year to a remarkable 100 company-operated locations. This growth stems primarily from the conversion of lessee dealer and commission agent sites into company-operated retail sites, most notably the 59 locations previously leased to Applegreen.

The Applegreen transaction, completed in April 2024, is a key piece of the puzzle. GAAP accounting for this lease termination resulted in a significant one-time charge of $15.9 million, heavily impacting the quarterly net loss. However, this accounting technicality obscures the true nature of the transaction, which is essentially an acquisition of profitable retail locations.

This aggressive expansion of company-operated sites allows CrossAmerica to capture a larger share of retail fuel margins, which have historically been more stable and profitable than wholesale margins. While wholesale margins are often susceptible to volatile crude oil prices and razor-thin margins, retail margins offer greater control over pricing and a broader opportunity to generate revenue through in-store merchandise sales.

The strategic rationale behind this shift is clear. While the first quarter results may seem underwhelming, particularly the decline in wholesale fuel volume and gross profit, they are largely a consequence of this very conversion strategy. Gallons that were previously accounted for in the wholesale segment are now contributing to the retail segment, ultimately driving a higher margin for the company.

"This strategic maneuver could be likened to a game of chess, where a player willingly sacrifices a pawn to gain a strategic advantage later in the game. CrossAmerica is sacrificing short-term wholesale gains for the long-term potential of a robust retail network."

Shifting Fuel Volumes: Wholesale vs. Retail

The chart below illustrates the shift in fuel volume from the wholesale to the retail segment as CrossAmerica converts its sites.

But this is not just about capturing fuel margins. CrossAmerica is simultaneously making significant strides in its merchandise sales. Despite soft overall demand, the company reported an 18% increase in merchandise gross profit, driven by a higher store count and an impressive 30 basis point improvement in merchandise gross profit margin. This performance underscores the company's focus on enhancing in-store profitability and capitalizing on the high-margin potential of convenience store products.

The question now is: will this gamble pay off?

While it's still early days, several factors suggest that CrossAmerica's strategic pivot has the potential for long-term success. Firstly, the company is demonstrating strong cost management within its retail segment. Despite the significant increase in company-operated locations, operating expenses at these sites are under control. Notably, the company achieved a 4% decrease in same-store labor hours year-over-year, highlighting its focus on efficient staffing and operational optimization.

Secondly, the company's efforts to enhance merchandise margins are yielding positive results, as evidenced by the impressive growth in merchandise gross profit and margin percentage. By leveraging its scale, optimizing pricing strategies, and focusing on higher-margin products, CrossAmerica is successfully building a more profitable in-store business.

Finally, the company is actively optimizing its asset portfolio through strategic divestitures. While divestiture activity was slow in Q1, with only two properties sold, the company is building a pipeline of divestitures and anticipates a significant increase in transaction volume for the remainder of the year. This approach will further strengthen the balance sheet and allow for continued investment in the expanding retail network.

CrossAmerica's strategic shift is a bold move, one that requires patience and a long-term perspective from investors. The initial impact on financial results may appear less than stellar, but the underlying strategic rationale and early indications of successful execution suggest that CrossAmerica is positioning itself for a brighter and more profitable future. This silent shift, overlooked by many, could be the defining move that propels CrossAmerica to the forefront of the US retail fuel and convenience market.

"Fun Fact: The average convenience store in the United States sells over 3,000 different items! CrossAmerica's increased focus on retail opens up a world of possibilities for expanding its product offerings and capturing a larger share of consumer spending."