Gas and Convenience Stores

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value gas and convenience stores, these methods are:

1. Asset-based valuation
   The basic formula to use for this method is: The fair market value of a company’s assets less the fair market value of its liabilities = the fair market value of a company’s equity. This is approach also sometimes referred to as a cost based approach where the value of the business is equal to the cost of acquiring its assets with the same utility. This approach is seldom used for a gas and convenience store because the value of a convenience store is more closely related to its earnings and cash flow.
2. Income approach to value (capitalization of earnings)
   This method is most the accurate for gas and convenience stores that have a constant growth of earnings and have a long history of operations. This method is equal to the cash flow projection for one year divided by the capitalization rate.
3. Income approach to value (discounted cash flow)
   The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established convenience stores with low growth rates as well as newly opened stores with higher rates of growth.
4. Market approach to value
   This method utilizes market indications of value such as publicly traded comparable company stock as well as acquisitions of privately held gas and convenience stores.

Description of the Industry

According to the National Association of Convenience Stores (“NACS”) the gas and convenience store industry has approximately 145,000 stores in the United States which account for $624 billion in annual sales. It is estimated that 80% of these stores sell gas in addition to food, beverage, and other products. This industry falls into SIC code 5411 and NAICS code of 445120.

A typical convenience store is about 2,800 square feet in size and services about 1,100 customers per day. The gas and convenient store industry is highly fragmented. Seventy percent of stores are owned by companies that have ten or less stores while 62% of convenient stores are owned by someone who has only one store.

The number of stores in the US has grown at a compound annual rate of 1.2% since 2004. However, the total number of gas and convenient stores decreased by 1% in 2008. This decrease was only the third time that the industry experienced a small degree of retraction over the last 15 years. According to NACS, much of this decrease was experienced by single store owners while larger companies are opportunistically growing market share during the current global recession. 7-Eleven, Inc. one of the nation’s largest convenience store operators announced in May of 2009 that they expect to ass 200 more stores by the end of the year. They plan to do this through both organic growth and acquisition.

According to The Convenience Store News, the 2008 top 10 gas and convenience store companies operating in the U.S. are:

1. 7-Eleven, Inc.
2. BP North American
3. Shell Oil Products
4. Exxon Mobile Corp.
5. ChevronTexaco Corp.
6. Alimentation Couche-Tard
7. Speedway SuperAmerica LLC
8. CITGO
9. Sunoco, Inc.
10. The Pantry, Inc.

Seven of the top ten gas and convenience store companies listed above are owned by large oil companies. Only 7-Eleven, Alimentation (Circle K), and The Pantry, are purely retail companies. The recently oil companies have been shifting from an owner operator model to a franchisor/franchisee model in their gas and convenient store business segment. In addition to increasing the number of franchisees, these oil companies have also been selling off a significant number of stores. Big oil companies are not the only examples of shifting to the franchise model. 7-Eleven has also continued to increase its percentage of franchises over recent years preferring to focus on branding, real estate acquisition, logistics, and systems and leaving the merchandising to franchisees who are more familiar to their customer base. Out of the top 10 companies only The Pantry remains a wholly owned operator of all its stores.

Industry Trends

The following are some trends within the Gas and Convenience store industry:

1. The distribution of gas is highly regulated by states and federal agencies. In addition there is a current ongoing lawsuit in a US District court that involves the temperature at which gas is pumped. The people that brought the suit allege that when gas is pumped at temperatures greater than sixty degrees consumers get less gas than they should due to expansion. If successful, the suit would require retrofitting pumps which would be a significant cost for all gasoline retailers
2. The financial performance of convenience stores that offer gasoline has been negatively impacted during recent periods of high gas prices. Reduced gasoline consumption due to high prices is not only impacting the volume of gas sold at retailers, but is also reducing the amount of customers that come in to buy food and beverages when they fill up their tank. Food and beverage sales offer higher margins than gasoline sales and the loss of these sales has had a negative impact.
3. Credit card fees continue to be a significant and growing expense for convenience stores. The total industry credit card fees have grown at a rate of 27% over the past 5 years and are the second largest expense at the store level. One way that convenience stores are attempting to combat these fees is by offering incentives to pay with cash when buying gasoline.
4. Many convenience stores have evolved from gas stations that sell food to restaurants that also sell gas. Food prepared in the store has grown to represent almost 50% of food service sales. Fresh food sales great margins and if done well can actually cause the food to be the product that draws customers in addition to the gas.

Financial Benchmark Statistics

The following benchmarking data is based on a study of over 200 U.S. convenience store companies each with less than $250 million in annual sales.

As noted above, the dealership industry experiences a relatively high degree of leverage due to the large amount of physical assets that can be used by lenders to secure loans.

Industry Organizations and Publications

1. National Association of Convenience Stores
2. Convenience Store News

Availability of Publicly Traded Guideline Firms

Many of the top convenience store retailers are publicly traded; however, most of these public companies are primarily oil companies and are not good comparisons to a convenience store with or without gas. 7-Eleven, Inc., the largest convenience store operator measured by number of stores, was taken private in 2005. The largest publicly traded pure play convenient store operator in the U.S. is The Pantry, Inc. which operates 1,664 wholly owned gas and convenience stores. The pantry has a price to earnings ratio of 11.1 and a price to cash flow ratio of 1.6 as of the date of this report.

Availability of Purchase Transactions

Since there are relatively few publicly traded comparable convenience store operators in the U.S., a valuation professional would need to place significant reliance on acquisition data for privately held convenience stores when performing an appraisal. One database that tracks acquisitions records 86 purchases convenience store businesses in the U.S. since 2002. The size of these acquired companies range from $150,000 to $4,142,000 in annual sales. From 2002 to the present, the multiple of:

1. Market value of invested capital to Net Sales (MVIC/Sales)valuation multiples ranged from 0.1 to 1.45 times
2. MVIC to earnings before interest, taxes and depreciation (MVIC/EBITDA) valuation multiples ranged from 1.5 to 22.0 times.

Stores that sell gasoline typically have a higher multiple than stores that do not. This range of market multiples is too variant to be useful without further analysis. A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which obviously affect convenient stores as investment opportunities. Specific factors that are unique for each store or business must be considered. Some of these factors include:

1. Is the real estate owned or leased
2. The duration of the lease and landlord/tenant relations
3. The proximity of the facility to highly populated areas and freeway access
4. The condition of the store
5. The history of the operations and financial performance
6. The competitive environment of the local area
7. Franchise or Non-franchise

Fulcrum Inquiry performs business appraisals for as and convenience stores, as well as other businesses.