JCP Investment Management Letter to CST Brands
Kim Lubel, Chief Executive Officer
CST Brands, Inc.
One Valero Way, Building D, Suite 200
San Antonio, Texas 78249
cc: Members of the Board of Directors
JCP Investment Management, LLC ("JCP"), Josh Schechter and Brad Radoff (together with their affiliates, "we") collectively own approximately 1 million of the outstanding shares of CST Brands, Inc. ("CST" or the "Company"). Over the past several months, members of our group have discussed with you various issues we believe have plagued CST's operating and share price performance. As a follow up to our conversations, we outline below for the benefit of the full CST Board of Directors (the "Board") and our fellow shareholders our views regarding the issues facing the Company and the opportunities to create value at CST.
Specifically, we are concerned about the following issues, which have persisted since the 2013 spin off from Valero Energy Corporation:
- Below-industry average merchandise margins;
- Sub-optimal returns on new store builds and related concerns about significant planned CapEx;
- Stagnant merchandise same-store sales relative to peers;
- Mismanagement of CrossAmerica, including distribution coverage ratio that has declined to an unsustainable level;
- Slow growth and unclear Food Service strategy; and
- Staggered board without adequate shareholder representation.
All of the above factors have weighed on the share price causing CST to trade at a significant discount to its peer group and substantially below the strategic value of the franchise. Furthermore, we are not alone in our frustration with the Company's operational and share price performance. Within the last two weeks, another shareholder has publicly voiced concerns and a leading sell-side research analyst appeared to agree with their analysis.
As you well know, the convenience store industry is undergoing rapid consolidation. Within the last eighteen months, multiple transactions have taken place in the industry, most of them at Enterprise Value/EBITDA multiples in excess of where CST currently trades. We understand this trend quite well since two of us were on the Board of Directors of The Pantry, Inc. ( "The Pantry") which was acquired by Alimentation Couche-Tard for approximately $1.8 billion and generated meaningful total shareholder return from the date we joined the Board of The Pantry.
We have studied the 2020 plan for CST, similar to our analysis as Board members at The Pantry and have concluded that the risk of achieving the 2020 vision and the upside to that vision should be compared to the immediate value that could be realized in a strategic sale.
CST is a highly attractive asset. The Company has high market share in several Texas markets and an attractive niche market in eastern Canada. CST owns the vast majority of its real estate and has an attractive land bank. We strongly believe that there would be significant interest in CST from strategic buyers and the Board should explore and consider the opportunities.
We have appreciated our open and constructive dialog with you to date and hope we can continue that discussion with you and the Board.