CrossAmerica Partners LP (CAPL)

Executive Summary / Key Takeaways

• Strategic Metamorphosis Through Asset Arbitrage: CrossAmerica Partners is executing a deliberate portfolio transformation, converting low-margin wholesale sites into higher-margin retail operations while simultaneously selling non-strategic real estate for record proceeds ($100 million year-to-date in 2025), creating a dual engine of margin expansion and balance sheet deleveraging that fundamentally alters the partnership's risk profile.

• Interest Rate Arbitrage as Hidden Value Driver: With 55% of debt swapped at a blended 3.4% fixed rate and leverage declining from 4.36x to 3.56x in nine months, CAPL has engineered a material interest expense reduction ($2.4 million quarterly savings) that directly flows to distributable cash flow, providing a rare margin of safety in a capital-intensive, rate-sensitive business.

• Retail Margins Face Cyclical Headwinds But Structural Tailwinds: While Q3 2025 retail fuel margins compressed 5% year-over-year due to reduced crude volatility, the segment's merchandise gross profit expanded 5% with 100 basis points of margin improvement, demonstrating that CAPL's convenience store investments are building a more durable, less commodity-dependent earnings stream.

• Wholesale Decline by Design, Not Demand Destruction: The 10% wholesale gross profit decline reflects intentional site conversions rather than competitive share loss, with same-store volume performance tracking national demand trends, validating that CAPL is actively choosing higher-margin retail exposure over wholesale volume—a trade-off that enhances long-term earnings quality.

• Critical Execution Pivot in 2026: The investment thesis hinges on management's ability to sustain retail conversion momentum while moderating asset sale volume, as the record 2025 divestiture pace cannot continue indefinitely; success will be measured by same-store retail growth and merchandise margin expansion, not just portfolio reshuffling.

Setting the Scene: The Fuel Distribution Value Chain Under Siege

CrossAmerica Partners LP, founded in 1992 by Joseph V. Topper, Jr. and headquartered in Allentown, Pennsylvania, operates at the intersection of two mature, structurally challenged industries: motor fuel distribution and convenience retail. The partnership's core business model involves distributing branded gasoline and diesel to approximately 1,750 wholesale sites while directly operating or leasing roughly 1,150 retail locations across 34 states. This dual structure creates a unique economic profile: wholesale provides stable, fee-based cash flows through long-term supply contracts with major oil companies (ExxonMobil (XOM), BP (BP), Shell (SHEL)), while retail offers higher-margin opportunities from both fuel sales and convenience merchandise.

The industry context matters profoundly. National gasoline demand declined approximately 2.5% in Q3 2025, continuing a multi-year trend of gradual consumption erosion driven by fuel efficiency improvements, remote work persistence, and the looming electric vehicle transition. This structural headwind compresses volume growth across the entire sector, forcing operators to compete fiercely for existing gallons while extracting more profit per transaction. The real battleground has shifted from fuel pumps to convenience stores, where merchandise margins (CAPL's Q3 2025: 28.9%) dwarf fuel margins (retail: $0.384 per gallon, wholesale: $0.088 per gallon) and offer insulation from commodity volatility.

CAPL's strategic response to this environment—what management calls "class of trade conversions" and "real estate rationalization"—represents a fundamental repositioning. Rather than passively collecting wholesale distribution fees on shrinking volumes, the partnership is actively acquiring control of sites, upgrading convenience offerings, and monetizing non-core real estate. This transformation, accelerated by the January 2024 Applegreen acquisition (59 sites converted for $16.9 million), signals a recognition that the future value lies in controlling the customer relationship at the point of sale, not merely moving product through the supply chain.

Strategic Differentiation: Three Moats in a Commodity Business

Branded Dealer Network and Supply Partnerships

CAPL's position as one of the top 10 independent U.S. distributors for ExxonMobil, BP, and Marathon (MPC) creates a defensible moat that smaller regional distributors cannot replicate. Why does this matter? Because in a business where fuel is fundamentally undifferentiated, the brand on the sign drives customer traffic and the distribution contract ensures CAPL captures margin regardless of which retailer ultimately sells the gallon. This moat manifests in the wholesale segment's consistent $0.09 per gallon margin, which remained stable despite volume declines and crude price volatility.

Real Estate Ownership and Lease Control

With approximately 1,150 owned or leased sites, CAPL functions as both a fuel distributor and a property company. This dual role provides multiple layers of value capture: wholesale rent from lessee dealers, retail fuel margins from company-operated sites, and potential real estate appreciation. This has profound strategic implications. When CAPL sells a non-strategic property for $22 million in Q3 2025 while retaining the fuel supply contract, it monetizes the real estate value at attractive multiples (management cited "attractive effective multiples") while preserving the ongoing fuel distribution revenue stream. This ability to separate and independently optimize the real estate and fuel components creates a capital allocation flexibility that pure-play distributors or retailers lack.

Retail Convenience Operations as Margin Buffer

The retail segment's merchandise gross profit growth—up 5% in Q3 2025 despite flat overall sales—demonstrates the strategic value of convenience store operations. By expanding food offerings (46 branded QSR locations, 100+ proprietary made-to-cook programs), CAPL is building a higher-margin, less cyclical revenue stream that diversifies away from pure fuel dependency. The 100 basis point improvement in merchandise margin to 28.9% reflects both category mix shift and operational improvements, including transitioning from scan-based trading to direct ownership. This matters because as fuel volumes gradually decline industry-wide, the ability to capture inside-store spending becomes the primary determinant of site profitability and asset value.

Financial Performance: Evidence of Strategic Execution

The wholesale segment's Q3 2025 performance—gross profit down 10% to $24.8 million—requires careful interpretation. The headline decline masks a deliberate strategic choice: converting lessee dealer sites to retail operations. Volume fell 5% to 177.7 million gallons, but same-store volume declined only 2.5%, essentially matching national demand trends. This confirms CAPL isn't losing share; rather, it's actively upgrading its portfolio. The fuel margin per gallon decreased modestly from $0.09 to $0.088, primarily due to lower prompt pay discounts from reduced gasoline prices, but this was partially offset by improved sourcing costs. Wholesale, therefore, remains a stable, cash-generative business that serves as a funding source for retail expansion rather than a growth engine in its own right.

Rent gross profit declined 18% to $7.8 million, reflecting site conversions and real estate sales. While this appears negative, the economic reality is more nuanced. The rent dollars from converted sites don't disappear; they reappear in the retail segment as higher-margin fuel and merchandise sales. This accounting artifact of segment reporting obscures the underlying value creation: CAPL is trading $1 of rent gross profit for $2-3 of retail gross profit, a highly accretive exchange that enhances overall partnership returns.

Retail Segment: Margin Volatility Amid Structural Improvement

Retail segment gross profit decreased 4% to $80 million in Q3 2025, driven entirely by fuel margin compression from $0.406 to $0.384 per gallon due to reduced crude oil volatility. This cyclical headwind, however, masks significant operational progress. Same-store merchandise sales increased 3% overall and 4% excluding cigarettes, outperforming flat national convenience store trends. This outperformance, driven by packaged beverages, other tobacco products, and food, demonstrates that CAPL's investments in product mix and foodservice are gaining traction with consumers.

The merchandise gross profit percentage improvement of 100 basis points to 28.9% is particularly meaningful. It indicates that CAPL isn't just driving top-line sales through discounting; it's improving category management, negotiating better supplier terms, and shifting toward higher-margin proprietary food programs. The transition from scan-based trading to direct ownership of certain products, while operationally complex, provides better margin control and inventory management. This structural improvement in merchandise profitability provides a partial hedge against fuel margin volatility, making the retail segment's earnings more predictable over time.

Same-store fuel volume declined 4%, with company-operated sites down slightly less than 3% and commission sites down 7%. The commission site underperformance reflects deliberate pricing strategy adjustments to balance volume and margin. This indicates management prioritizes profitability over market share, a disciplined approach in a declining volume environment. The fact that company-operated sites outperformed commission sites suggests CAPL's direct control model yields better execution than third-party operators.

Balance Sheet Transformation: From Leveraged to Lightly Levered

The most compelling financial story is CAPL's balance sheet repair. Year-to-date asset sales of $100 million in 2025 represent the partnership's biggest divestiture year ever, with Q2 alone generating $64 million from 60 site sales. These sales, primarily of lower-performing Kansas and Colorado properties, achieved attractive multiples while often retaining fuel supply relationships. The proceeds have been aggressively applied to debt reduction, cutting the credit facility balance by $62 million year-to-date and $21.5 million in Q3 alone.

The leverage ratio improvement from 4.36x to 3.56x is transformative for a capital-intensive MLP . This deleveraging directly reduces financial risk and lowers the cost of capital.

The interest expense savings are material: Q3 2025 cash interest of $11.3 million versus $13.7 million in Q3 2024, a 17% reduction that flows directly to distributable cash flow. With 55% of debt swapped at a blended 3.4% fixed rate and the effective rate on the total facility at 5.8%, CAPL has locked in advantageous financing that will continue providing savings as variable-rate debt pays down.

The credit facility availability of $232.6 million as of October 31, 2025, provides strategic flexibility. This liquidity cushion, combined with the stabilized expense profile that CFO Maura Topper highlighted ("we are experiencing a stabilization of our expense profile"), positions CAPL to either accelerate retail conversions, pursue opportunistic acquisitions, or further reduce leverage depending on market conditions.

Outlook and Execution: The 2026 Inflection Point

Management's guidance reveals a clear strategic roadmap with embedded assumptions. The partnership expects continued asset sales through 2025 and into 2026, though CEO Charles Nifong cautioned that 2026 volume "won't be the record volume" of 2025. This signals a transition from portfolio pruning to organic growth execution. The critical variable for 2026 will be same-store retail performance, particularly merchandise sales growth and margin expansion, as the easy gains from asset sales diminish.

The retail expansion strategy remains focused on foodservice, with growth capital expenditures of $4.8 million in Q3 directed toward company-operated locations. The 46 branded QSR locations and 100+ proprietary made-to-cook programs represent a small but growing footprint. Management's commentary that these investments "have and will continue to contribute to our merchandise sales and margin results" suggests confidence in the strategy, but the absolute numbers remain modest relative to CAPL's 1,150+ site footprint. The execution risk lies in scaling these programs efficiently without the overhead inflation that typically accompanies retail expansion.

The leverage ratio target of "approximately 4x on a credit facility-defined basis" provides a clear financial anchor. At 3.56x current leverage, CAPL has headroom to either take on debt for acquisitions or continue deleveraging. The partnership's distribution policy, with a 10.29% yield and 176.47% payout ratio, implies either distribution cuts or continued asset sales to fund payouts. Management's explicit statement that "there can be no assurance we will continue to pay distributions" serves as a clear risk disclosure while also suggesting they recognize the current payout is unsustainable without ongoing divestitures.

Risks: The Asymmetries That Could Break the Thesis

Interest Rate Swap Maturity Cliff

Three favorable interest rate swap contracts matured on April 1, 2024, contributing to the $2.3 million year-over-year interest expense increase in Q1 2025. While current swaps cover 55% of debt at 3.4%, the remaining unswapped portion exposes CAPL to rising rates. If the Federal Reserve resumes tightening, the effective rate could climb above the current 5.8%, eroding the interest savings that have supported recent cash flow growth. This risk is mitigated by continued debt paydown but remains a material threat to the interest expense tailwind.

EV Transition and Fuel Demand Destruction

The gradual but inevitable shift toward electric vehicles poses an existential long-term risk. While CAPL's convenience store operations provide some hedge, fuel distribution remains the core business. The partnership's same-store volume declines (retail down 4%, wholesale down 2.5% in Q3) already reflect structural demand weakness. If EV adoption accelerates beyond current projections, CAPL's asset base could face obsolescence before the retail transformation fully matures. The real estate rationalization strategy partially addresses this by monetizing properties at peak values, but it doesn't solve the fundamental business model challenge.

Execution Risk on Retail Conversion

The Applegreen acquisition and subsequent conversions represent a major operational bet. Converting 107 sites in 2024 and 37 year-to-date in 2025 requires significant management bandwidth and capital. The elevated expenses that CFO Topper referenced—"elevated expenses to onboard and upgrade the converted locations"—create a temporary margin drag that should normalize in 2025. However, if integration costs persist or converted sites fail to achieve targeted merchandise margins, the ROI on these conversions will disappoint. The departure of Senior Vice President of Retail Stephen Lattig in October 2025 adds execution uncertainty at a critical juncture.

Commodity Margin Volatility

Management explicitly stated that Q3 2025's lower retail fuel margins resulted from "much less volatile" crude oil markets. This highlights CAPL's dependence on market volatility for fuel profitability. In stable commodity environments, both retail and wholesale fuel margins compress, leaving merchandise sales as the sole growth driver. While this volatility is cyclical, not structural, it introduces earnings unpredictability that can pressure the distribution and valuation.

Competitive Context: The Middleweight With Precision Punches

Against Sunoco LP (SUN), CAPL operates at a fraction of the scale (1,750 sites versus SUN's 11,000), but with greater strategic focus. SUN's Q3 2025 record $496 million EBITDA reflects massive scale advantages, yet CAPL's asset sale strategy achieves similar balance sheet outcomes through capital efficiency rather than operational leverage. CAPL's 10.29% dividend yield exceeds SUN's 6.55%, but SUN's 128.36% payout ratio is more sustainable given its superior scale and cash generation. CAPL's moat lies in its targeted brand partnerships and real estate optimization, while SUN competes on network density.

Global Partners LP (GLP) presents a closer comparison as a regional Northeast operator. GLP's Q3 2025 wholesale product margin grew to $78 million (up from $71.1 million) while CAPL's wholesale gross profit declined, reflecting GLP's stronger terminal infrastructure and blendstock focus. However, CAPL's retail merchandise margin (28.9%) significantly exceeds GLP's overall margin profile, suggesting superior convenience store execution. CAPL's asset sale strategy contrasts with GLP's $85-105 million capex expansion, highlighting different capital allocation philosophies in the face of industry headwinds.

World Kinect Corporation (WKC) operates at global scale with diversified aviation and marine exposure, making it less directly comparable but illustrative of industry trends. WKC's Q3 gross profit declined 32% due to bunker price volatility , demonstrating the margin risk CAPL faces in fuel-only businesses. CAPL's retail diversification provides better insulation, though at the cost of operational complexity.

The indirect competitive threat from EV charging networks and hyper-convenience operators like Buc-ee's pressures all traditional fuel retailers. CAPL's smaller scale makes it more vulnerable to share loss than SUN, but its real estate ownership and brand partnerships create higher switching costs than pure commission agents. The key differentiator is CAPL's ability to monetize real estate while retaining fuel supply—an arbitrage play that pure operators cannot replicate.

Valuation Context: Yield Trap or Value Inflection?

At $20.40 per share, CAPL trades at a 17.14 P/E ratio, 0.21 price-to-sales, and 10.63 price-to-operating-cash-flow. The 10.29% dividend yield appears attractive but reflects a 176.47% payout ratio that is clearly unsustainable without continued asset sales. The negative book value (-$2.41) and price-to-book of -8.48 reflect accumulated depreciation and partnership accounting, making traditional equity valuation metrics less meaningful.

The enterprise value of $1.61 billion and EV/EBITDA of 11.97x sits between SUN's 10.19x and GLP's 9.34x, suggesting fair relative valuation. However, CAPL's forward P/E of 92.73 indicates market skepticism about earnings sustainability, likely due to the high payout ratio and margin volatility. The more meaningful metrics are price-to-free-cash-flow (20.83x) and price-to-operating-cash-flow (10.63x), which capture the partnership's ability to generate cash from operations and asset sales.

The 0.32 beta reflects low equity market correlation, typical for MLPs with stable cash flows, but this masks the significant commodity and execution risk embedded in the business model. The return on assets of 3.89% lags SUN's 4.25% but exceeds WKC's 2.27%, suggesting reasonable capital efficiency despite the smaller scale.

Valuation ultimately hinges on whether investors view CAPL as a declining wholesale distributor or a transforming retail operator. The market appears to be pricing in skepticism, as evidenced by the high yield and low P/S multiple. However, if management successfully executes the retail conversion strategy and stabilizes the expense profile, the current valuation could represent an attractive entry point for income-oriented investors willing to accept the distribution sustainability risk.

Conclusion: The Asset Arbitrage Thesis

CrossAmerica Partners is not a growth story in the traditional sense; it is a strategic asset arbitrage play. The partnership is systematically converting low-multiple wholesale cash flows into higher-multiple retail earnings while monetizing real estate at peak valuations to de-risk the balance sheet. This transformation, while creating near-term earnings volatility and distribution sustainability questions, is building a more durable business model less dependent on commodity cycles and fuel demand.

The central thesis rests on two critical variables: management's ability to execute retail conversions with improving merchandise margins, and the timing of the asset sale windfall's conclusion. The record $100 million in 2025 divestitures provided a temporary cash flow bridge that masked the underlying retail ramp-up. As this pace normalizes in 2026, investors will see the true earnings power of the converted portfolio.

For income-focused investors, the 10.29% yield is both the opportunity and the risk. The payout ratio above 175% is mathematically unsustainable without continued asset sales, implying either distribution cuts or a successful retail transformation that generates sufficient cash flow to support the current distribution. The interest rate savings and deleveraging provide a margin of safety, but the EV transition and fuel demand erosion represent long-term headwinds that no amount of financial engineering can fully offset.

The investment decision boils down to confidence in management's ability to complete the portfolio transformation before the asset sale window closes. The early evidence—merchandise margin expansion, expense stabilization, and strategic site selection—is encouraging. However, the execution risk is real, and the margin for error is slim. CAPL is a show-me story entering its critical prove-it phase.