Executive Summary / Key Takeaways

• CrossAmerica Partners is actively transforming its business mix, strategically converting wholesale lessee dealer sites to higher-margin retail operations, including company-operated and commission agent locations, to increase exposure to retail fuel margins and convenience merchandise sales.
• The partnership is executing a significant real estate rationalization effort, divesting non-core, often lower-performing properties to recycle capital for reinvestment in growth initiatives and balance sheet strengthening.
• Recent financial results reflect this transition, with the retail segment showing strong gross profit growth driven by increased site count and improved margins, while wholesale volume and rent income have decreased due to conversions.
• Despite facing industry headwinds like soft demand, crude oil price volatility, and inflationary pressures, the company is focused on operational efficiency, improving product sourcing costs, and managing expenses, particularly labor, to enhance profitability.
• Management is targeting a credit facility defined leverage ratio of approximately four times, supported by cash flow generation and proceeds from asset sales, and expects continued strategic conversions and divestitures in 2025.

Strategic Transformation in a Dynamic Market

CrossAmerica Partners LP operates at the intersection of fuel distribution and convenience retail, a sector characterized by tight margins, intense competition, and sensitivity to macroeconomic shifts. Formed in 2012, the partnership initially focused on wholesale fuel distribution and leasing sites. Over time, it has strategically expanded into retail operations, recognizing the potential for higher margins and direct customer engagement. This evolution is now accelerating, driven by a deliberate strategy to optimize its portfolio by converting sites from its traditional wholesale lessee dealer model to company-operated and commission agent retail locations.

This strategic pivot is fundamental to CrossAmerica's future. The wholesale segment, while providing stable volume, typically operates on lower per-gallon margins and generates rent income. The retail segment, conversely, offers the potential for higher fuel margins at the pump and, crucially, the opportunity to capture profitable convenience store merchandise sales. By shifting sites to retail, CrossAmerica aims to unlock greater value per location, enhancing overall profitability and cash flow generation potential.

A prime example of this strategy in action is the Applegreen Acquisition, completed on a rolling basis in the first half of 2024. This transaction involved acquiring assets at 59 previously leased locations, converting them into company-operated retail sites. This move alone significantly increased CrossAmerica's retail footprint and exposure. Building on this, the company converted a net 18 sites from wholesale to retail in the first quarter of 2025, following a net 53 conversions in the first quarter of 2024 (including 31 Applegreen sites). This aggressive conversion pace is reflected in the site count changes, with the total retail site count increasing by 64 sites year-over-year as of the end of Q1 2025, primarily driven by the increase in company-operated locations.

Complementing the conversion strategy is an ongoing real estate rationalization effort. CrossAmerica is actively divesting certain assets, often lower-performing properties, to generate capital. In the first quarter of 2025, seven properties were sold for $8.6 million in proceeds. This follows a significant year in 2024 where 30 properties were divested, generating $36.3 million. The goal is to recycle this capital, either by reinvesting in higher-return growth initiatives within the portfolio or using it to strengthen the balance sheet. While these divestitures may reduce site count and potentially segment gross profit in the short term, the company often seeks to maintain a wholesale fuel supply relationship with the divested sites, preserving a portion of the revenue stream.

The company appears to lack a unique, proprietary technological moat in the sense of a distinct manufacturing process or software platform providing quantifiable performance advantages over competitors (like superior energy yield or lower degradation rates). However, the company does invest in systems and information technology as part of its general and administrative expenses. Furthermore, operational improvements, such as efforts to improve fuel sourcing costs and efficient labor management, are highlighted as contributors to margin enhancement and expense control. Improved inventory management is also noted as a factor in working capital improvements. These systematic and operational enhancements, while not a single "technology," represent the company's approach to driving efficiency and profitability in its operations.

Competitive Landscape and Positioning

The fuel distribution and convenience retail market is highly competitive, with players ranging from large integrated refiners to regional distributors and national convenience store chains. CrossAmerica competes directly with entities like Casey's General Stores (CASY), Murphy USA (MUSA), Sunoco LP (SUN), and Marathon Petroleum Corporation (MPC), among others.

CrossAmerica's competitive positioning is shaped by its hybrid model, encompassing both wholesale distribution scale and a growing retail footprint. Its extensive wholesale network, serving approximately 1,600 locations across 34 states with relationships with major oil brands like ExxonMobil (XOM), BP (BP), and Shell (SHEL), provides a foundational strength. The company ranks as one of ExxonMobil's largest distributors by fuel volume and in the top 10 for additional brands, suggesting a degree of scale and established relationships that can act as a competitive advantage in wholesale supply and terms.

However, in the retail arena, CrossAmerica faces formidable competitors with different strengths. Casey's General Stores, for instance, is known for its strong focus on high-margin in-store merchandise, particularly its prepared food offerings, which drive customer loyalty and differentiate it beyond fuel. Murphy USA competes effectively on price and operational efficiency, often leveraging partnerships (like those with Walmart (WMT)) to maintain a low-cost structure. Sunoco LP, while also having retail operations, is primarily a major wholesale distributor, competing directly with CrossAmerica for supply contracts and volume. Marathon Petroleum, as a large integrated player, benefits from refining capabilities that can provide cost advantages in fuel supply.

CrossAmerica's strategic shift to retail is a direct response to the potential for higher profitability in this segment compared to traditional wholesale. While its retail operations are still scaling and optimizing compared to established retail giants like CASY or MUSA, the company's focus on converting existing sites allows for potentially faster retail growth than building new locations from scratch. The company's performance metrics relative to national trends provide some insight into its competitive standing. In recent quarters (Q4 2024, Q3 2024), CrossAmerica's retail same-store fuel volume and inside store sales generally outperformed overall national market trends, suggesting effective execution at the site level despite a challenging demand environment. In Q1 2025, retail same-store volume was approximately in line with the market, while inside sales (excluding cigarettes) continued to outperform. Wholesale same-store volume also slightly outperformed national demand in Q1 2025. This relative outperformance indicates that CrossAmerica is holding its own or gaining ground in certain operational aspects compared to the broader industry, even if absolute demand remains subdued.

Indirect competition from electric vehicle (EV) charging networks and potential future shifts in transportation technology pose a longer-term challenge to all fuel-centric businesses, including CrossAmerica. While the immediate impact is limited, the strategic emphasis on convenience merchandise and food offerings in the retail segment can be seen as a way to diversify revenue streams and maintain site relevance regardless of fuel type.

CrossAmerica's competitive advantages lie in its extensive real estate portfolio, which provides a base for both wholesale and retail operations, and its established wholesale distribution scale and relationships. Its key vulnerabilities include the operational complexities and potentially higher initial costs associated with ramping up company-operated retail sites compared to competitors with more mature retail platforms, as well as exposure to volatile fuel margins and debt levels. The company's strategy of converting sites and divesting non-core assets is aimed at leveraging its real estate base while improving the profitability mix and financial flexibility to better compete in this dynamic environment.

Financial Performance and Liquidity

CrossAmerica's financial performance in the first quarter of 2025 reflects the ongoing strategic transformation and the challenging market conditions. Operating revenues decreased by $79.0 million, or 8%, year-over-year, primarily driven by an $87.0 million decrease in wholesale segment revenues. This wholesale decline was a direct consequence of an 11% decrease in volume (due to site conversions and lost contracts) and an 8% decrease in the average wholesale selling price. Retail segment revenues, however, increased by $8.0 million, or 2%, benefiting from a 17% increase in merchandise revenues driven by the higher company-operated site count, partially offset by a slight decrease in retail fuel sales price.
Despite the revenue decline, gross profit increased by $8.0 million, or 10%, year-over-year, reaching $89.8 million in Q1 2025. This improvement was primarily fueled by a significant increase in retail segment gross profit ($63.2 million in Q1 2025 vs. $54.4 million in Q1 2024), driven by a 20% increase in motor fuel gross profit and a 16% increase in merchandise gross profit. The retail fuel margin per gallon saw a notable 10% increase year-over-year, reaching $0.339 per gallon, benefiting from crude oil price volatility. Wholesale segment gross profit saw a slight decrease ($26.7 million vs. $27.0 million), as the positive impact of an 8% increase in motor fuel gross profit (driven by a 22% increase in margin per gallon from better sourcing and market conditions) was more than offset by a 15% decrease in rent gross profit due to site conversions and sales.

Operating expenses increased by $15.3 million, or 20%, to $92.9 million, largely driven by an $8.6 million increase in retail segment operating expenses associated with the higher company-operated site count. General and administrative expenses also increased by $0.8 million, or 12%. Depreciation, amortization, and accretion expense saw a substantial increase of $7.6 million, or 41%, primarily due to $8.5 million in higher impairment charges related to assets classified as held for sale. The gain on dispositions and lease terminations was a net gain of $5.0 million in Q1 2025, a significant improvement compared to a $16.8 million net loss in Q1 2024, which included a large loss related to the Applegreen lease termination.

The net result was a net loss of $7.1 million in Q1 2025, a notable improvement from the $17.5 million net loss in Q1 2024, which was heavily impacted by the Applegreen lease termination charge. Adjusted EBITDA, a key non-GAAP measure used by management, was $24.3 million in Q1 2025, a slight increase from $23.6 million in Q1 2024. Distributable Cash Flow (DCF) for Q1 2025 was $9.1 million, a decrease from $11.7 million in Q1 2024, primarily due to higher cash interest expense and increased sustaining capital expenditures. The distribution coverage ratio for Q1 2025 was 0.46x, down from 0.59x in Q1 2024. Management notes that the first quarter is historically the seasonally weakest period, with coverage typically below 1x, and highlights the trailing 12-month coverage ratio of 1.04x as of March 31, 2025, as a more representative measure over a full cycle.

Liquidity remains a key focus. CrossAmerica's principal liquidity requirements include financing operations, funding acquisitions, servicing debt, and paying distributions. Sources include cash from operations, asset sale proceeds, and borrowings under its Credit Facility. Net cash provided by operating activities increased significantly to $15.0 million in Q1 2025 from $5.8 million in Q1 2024, benefiting from improved working capital management. Capital expenditures totaled $10.1 million in Q1 2025, including $2.7 million in sustaining capital (which is increasing with the retail footprint) and $7.4 million in growth capital.

As of March 31, 2025, total debt and finance lease obligations stood at $785.1 million. The Credit Facility balance was $778.0 million, with an effective interest rate of 6.10% (applicable margin 2.25%). The leverage ratio, as defined in the Credit Facility, was 4.27 times as of March 31, 2025, slightly down from 4.36 times at year-end 2024. Management's target is to manage this ratio at approximately four times. Interest expense increased to $12.8 million in Q1 2025 from $10.5 million in Q1 2024, primarily due to the maturity of three favorable interest rate swaps in April 2024. However, approximately 50% of the Credit Facility balance is still swapped to a favorable blended fixed rate of approximately 3.4%. Availability under the Credit Facility was $86.8 million at March 31, 2025, and $87.2 million at May 2, 2025.

Risks and Outlook

CrossAmerica operates in an environment subject to several risks. Volatility in crude oil and wholesale motor fuel prices directly impacts costs of sales and gross profit margins in both segments. Competitive conditions in local markets affect the ability to pass on price changes to retail customers. Inflationary pressures increase operating costs, particularly labor and merchandise costs. The business is also subject to seasonality, with lower volumes typically experienced in the first and fourth quarters. Concentration risk exists with fuel suppliers, carriers, and merchandise suppliers. Environmental liabilities, litigation, and regulatory compliance also pose potential risks. Recent events like severe winter weather and uncertainty surrounding tariffs add further complexity to the operating environment.

Despite these challenges, management maintains a clear strategic outlook focused on continued portfolio optimization. They anticipate strategically converting more sites to the retail channel in 2025, building on the momentum from 2024. These conversions are expected to continue increasing gross profit and operating expenses in the retail segment while reducing gross profit in the wholesale segment. The real estate rationalization effort is also expected to continue, with management anticipating divestiture volume in 2025 to be along the lines of 2024, generating proceeds for reinvestment and debt management.

Management acknowledges the current market uncertainty, noting that many companies have withdrawn financial guidance. While CrossAmerica has not provided specific quantitative guidance figures for 2025, their stated strategy indicates a focus on driving profitability through the retail pivot, enhancing operational efficiency (including managing expenses and improving sourcing costs), and maintaining a strong balance sheet by managing leverage and recycling capital through asset sales. They are looking forward to the seasonally stronger spring and summer months. The ability to successfully execute these strategic initiatives and manage costs will be critical to improving financial performance and distribution coverage going forward.

Conclusion

CrossAmerica Partners is undergoing a significant strategic transformation, shifting its focus towards higher-margin retail operations while rationalizing its real estate portfolio. The first quarter 2025 results underscore this transition, showing growth in the retail segment driven by site conversions and operational improvements, even as the wholesale segment contracts due to these same strategic moves. While facing persistent industry headwinds and macroeconomic uncertainty, the company's proactive approach to optimizing its asset base and enhancing retail capabilities positions it to potentially unlock greater value per site over the long term. Key to the investment thesis is the successful execution of the retail ramp-up, the ability to manage associated operating expenses efficiently, and the continued generation of capital through strategic divestitures to support growth investments and debt reduction. Investors should monitor the company's progress in converting sites, managing retail profitability, and maintaining its target leverage ratio as it navigates the dynamic fuel and convenience retail landscape.