Mercer Capital’s Convenience Store Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to multi-unit retailing and QSR industries.

1. Value
Focus
© 2014 Mercer Capital // www.mercercapital.com 1
Convenience Store
Industry
Convenience Stores | Grocery Stores | QSR (Fast Food)
Second Quarter 2014
Equity Market Overview. Over the three months ending March 2014, median stock market
pricing for the convenience store and retail grocery indexes was down 5.0% and 4.7%, respectively,
underperforming the Russell 2000 index’s increase of 0.8%. The Mercer Capital fast food index
posted a 3.0% increase in the first quarter.
Valuations Drift Higher, Ranges Tighten. EBITDA multiples were up across the board.
Multiples for public c-store operators increased from 8.8x EBITDA at the end of the fourth quarter
of 2013 to 9.0x at the end of the first quarter of 2014. EBITDA multiples were at their highest levels
for the five-year period ended Q1-2014. Grocery store and fast food publics posted larger gains,
as shown in the following charts. During 2013, comparable EBITDA multiples for our c-store index
ranged from 8.0x to 8.8x EBITDA. At year-end 2012, the median c-store multiple was 7.8x EBITDA.
C-Store, Grocery Store, & QSR Stock Indices
90
100
110
120
130
140
150
160
170
Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14
MCM C-Store Index MCM Grocery Index MCM Food Franchise Index Russell 2000
4/1/13
=
100
Data Source: Capital IQ / Bloomberg
BUSINESS VALUATION &
FINANCIAL ADVISORY SERVICES
1
As measured by the average of (1) end-of-quarter high EBITDA measures of all the companies in the Mercer Capital index and
(2) the end-of-quarter low EBITDA measures of all the companies in the Mercer Capital index. Travel Centers of America is
currently excluded due to underperformance.

2. © 2014 Mercer Capital // www.mercercapital.com 2
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
3
4
5
6
7
8
9
10
Q1
2009
Q2 Q3 Q4 Q1
2010
Q2 Q3 Q4 Q1
2011
Q2 Q3 Q4 Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Mid-Point
3
4
5
6
7
8
9
10
Q1
2009
Q2 Q3 Q4 Q1
2010
Q2 Q3 Q4 Q1
2011
Q2 Q3 Q4 Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Mid-Point
C-Store EBITDA Valuations // Quarterly Range of Mean Highs & Lows
Grocery Store EBITDA Valuations // Quarterly Range of Mean Highs & Lows
Data Source: Bloomberg
Data Source: Bloomberg

3. © 2014 Mercer Capital // www.mercercapital.com 3
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Margins. Nationwide retail gasoline margins ended the quarter at 15.4 cents per gallon, down from 19.3 cents per gallon in the first
week of the first quarter, but in line with the historical five-year average. According to OPIS, gasoline prices are currently supported
by a low supply, especially in the Southeastern United States, while gasoline demand is on the rise. Diesel margins have rallied,
ending the quarter at 30.9 cents per gallon. Diesel margins during the first week of the first quarter were 26.3 cents per gallon. A wide
separation between gasoline and diesel profits exists across many regions of the country. Many U.S. refineries will complete annual
maintenance in the second quarter, and the increase in gasoline supply should push pricing down and support strong margins.
Generally, over 70% of a c-store’s sales are motor fuels; however, fuel contributes only one-third of total convenience store gross margin
dollars. Fuel margins have been consistent on an annual basis, averaging 16.9 cents per gallon for 2008 through 2012.2
There is a
delay between the time crude prices increase and the time that pump prices rise. This lag also occurs when wholesale prices drop.
Retailers tend to reduce their markups when costs are escalating. Conversely, when costs are declining, retailers tend to leave their
pump prices elevated – leading to increased fuel margins – until competition forces pump pricing downward. The time lag between
cost changes and retail price adjustments as well as the duration of cost trends is a significant influencer of the operator’s margin.
On average, it costs retailers approximately 12 to 16 cents to dispense a gallon of fuel. Given that the average five-year markup on
gasoline was 16.9 cents, this translates to a typical two to three cents per gallon of bottom line profit.
Fast Food (QSR) EBITDA Valuations // Quarterly Range of Mean Highs & Lows
3
5
7
9
11
13
15
Q1
2009
Q2 Q3 Q4 Q1
2010
Q2 Q3 Q4 Q1
2011
Q2 Q3 Q4 Q1
2012
Q2 Q3 Q4 Q1
2013
Q2 Q3 Q4 Q1
2014
Mid-­‐Point
Data Source: Bloomberg
2
2013 margin average is forthcoming but not yet available at the time of this publication.

4. © 2014 Mercer Capital // www.mercercapital.com 4
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Tobacco Products. Tobacco products comprised 37% of in-store sales during 2013 and accounted for only 18.7% of gross
margin, according to the NACS. Dollar sales dipped 3.5% in 2013, and unit sales dropped 2.1%. Tobacco sales are the largest inside
product category for c stores. Many industry insiders are predicting the OTP (other tobacco products) category to overtake cigarettes in
the next few years. The OTP category includes e-cigarettes, vapor tobacco products, cigars, and smokeless tobacco. It will take some
time for this to occur, as OTP sales averaged $6,479 per month per store as compared to sales of $44,751 for cigarettes. However,
e-cigarettes posted the strongest growth as a percentage of dollar sales among all c-store product categories, a nearly 177% increase
during 2013.
Taxation remains the biggest challenge to selling cigarettes, and there is a large degree of regulatory uncertainty where the OTP
category is concerned. The FDA is focused on new regulations (or even a ban) on menthol in tobacco products, the decision to
increase the legal age of tobacco purchase to 21 or 25, and new regulations for cigars, pipe tobacco, electronic cigarettes and/or
hookah tobacco.
CVS drug stores are expected to give up $2 billion in tobacco sales as the company exited the category during the quarter. Military
exchanges are considering a ban on tobacco sales as well.
Highway Trust Fund. The Highway Trust Fund (“HTF”) was created by the federal government in 1956 to pay for highway
construction and maintenance. It is funded by an 18.3 cent per gallon federal tax on gasoline and a 24.4 cent per gallon tax on diesel.
These levels have not changed since 1993. Since then, the cost of road construction and maintenance has gone up, and these taxes
have lost more than 40% of their purchasing power, according to the Institute on Taxation and Economic Policy. Over that same time,
vehicles have become more fuel efficient, reducing the total number of gallons purchased and taxes collected per vehicle. A $100
million shortfall is anticipated for the HTC in the third quarter of 2014. Several proposed remedies include:
»» An increase in the cents per gallon tax rate, or indexing the tax to inflation;
»» A mileage-based user fee whereby a recorder would be installed in a vehicle to log miles traveled and report them back
to the appropriate taxing authority;
»» A tax on alternative fuel vehicles;
»» Raising U.S. taxes on companies’ overseas earnings; or
»» Rescinding the restriction on tolling federal interstates.
The U.S. Transportation Secretary estimates 700,000 jobs are at risk if the HTF is allowed to become insolvent. This could represent
a concern for c-store operators as construction workers are often a key customer segment. However, an increase in the gasoline tax
could negatively impact the volume of c-store gallons sold.

5. © 2014 Mercer Capital // www.mercercapital.com 5
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Recent
M&A
Activity
Given that terms were not disclosed relating to these transactions, we are not able to derive valuation multiples. However, industry
insiders are noticing a trend of improving multiples and increased activity. This is expected to continue in 2014.
Factors contributing to higher multiples include the increase of willing lenders to finance transactions at relatively low rates, the
increase of tax-advantaged MLPs and spinoffs, and higher demand for properties in urban centers and smaller format stores. Experts
indicate that while multiples a few years ago were in the 5x - 6x EBITDA range, recent deals have been in the 7x - 8x range.
»» Pantry’s group of dissident shareholders was ultimately successful in placing their chosen nominees to the board of
directors. This may have an influence on the direction of the company in the near term.
»» Several major brands announced significant divestiture programs during the first three months of the year after
conducting analyses of their real estate portfolios. CST Brands, Inc. plans to sell approximately 100 stores, 7-Eleven,
Inc. is divesting 72 stores, and Getty Realty Corporation is selling 50 stores.
»» Hess Retail Corp. gained approval for a spinoff in early 2014, which is expected to be completed by the middle of
the year. Immediately prior to the release of this publication (May 22, 2014), Hess announced its intention to sell the
recently spun-off retail operations to Marathon Petroleum for $2.6 billion, ending months of speculation regarding the
future of the Hess c-stores. The Hess c-store chain consists of over 1,300 locations and will make Marathon one of the
largest owners and operators of c-stores in the U.S. with locations in 23 states.
»» Casey’s General Stores signed an asset purchase agreement to acquire 24 Stop-n-Go locations in North Dakota and
Minnesota, as it looks to expand in the Upper Midwest. The stores are expected to be rebranded upon repurchase.
»» The spin-off trend continues as Western Refining Inc. and Northern Tier Energy LP discussed the possibility of
combining and spinning off their respective gas station and convenience store networks into a standalone company.
This conversation took place in the first joint earnings call following Western Refining’s purchase of 38.7% of Northern
Tier Energy LP from ACON Investments and TPG, two private equity firms. While this transaction was primarily a
refining play, it includes the SuperAmerica retail chain consisting of 163 company-operated c-stores and 74 franchised
locations. Western Refining has 229 gas stations and c-stores.

6. © 2014 Mercer Capital // www.mercercapital.com 6
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Grocery
Stores
Segment Focus The Supermarkets and Grocery Stores industry makes up the largest food retail channel in the United States. Industry revenue totaled
approximately $574.1 billion in 2013, and profit was $9.2 billion. The following chart presents the products and services segmentation
for the industry as estimated for 2014 by IBISWORLD.
This industry has grown over the past five years, benefitting from a strengthening economy and the trend toward organic and all-natural
brands. However, the industry is mature, and revenue is expected to grow at a rate below national GDP over the next five years (1.5%,
annualized). The top four operators account for roughly 30% of industry revenue. Competition from superstores and warehouse clubs
intensified during the recent recession, and remains high. As shown below, other sector operators enjoy modestly lower costs than
grocery store retailers.

7. © 2014 Mercer Capital // www.mercercapital.com 7
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
The industry continues to consolidate, and merger and acquisition activity has been high in recent quarters.
The Kroger Co., the largest pure player in the industry, merged with Harris Teeter Supermarkets in a cash transaction valued at
$2.5 billion in order to boost its market share. This represents a multiple of 7.9x EBITDA.Safeway, with a 6.4% market share, announced
a definitive merger agreement in March 2014 with Albertsons LLC. Albertsons is expected to purchase the struggling Safeway for
$9.2 billion, a multiple of 5.5x EBITDA. Such transactions allow for retailers to lower per-unit costs through economies of scale.

8. © 2014 Mercer Capital // www.mercercapital.com 8
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
The grocery store industry has been facing increasing competition from superstores and discount warehouse clubs, such as Wal-
Mart. According to Wal-Mart’s 10-K for the fiscal year ended January 31, 2014, grocery segment revenues were 56% of total company
revenues. This translates to roughly $264 billion in grocery-related company revenue, making Wal-Mart the nation’s largest grocery
retailer.1
It is estimated that 25% of America’s grocery budget is spent at Wal-Mart.
1
Grocery is defined as “grocery items, including meat, produce, deli, bakery, dairy, frozen foods, alcoholic and nonalcoholic beverages, floral and dry grocery, as well as
consumables such as health and beauty aids, baby products, household chemicals, paper goods, and pet supplies.”

9. © 2014 Mercer Capital // www.mercercapital.com 9
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Fuel Pricing and Supply Charts
Fuel Prices & Supply
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$20
$40
$60
$80
$100
$120
$140
$160
Apr-­‐08
Jul-­‐08
Oct-­‐08
Jan-­‐09
Apr-­‐09
Jul-­‐09
Oct-­‐09
Jan-­‐10
Apr-­‐10
Jul-­‐10
Oct-­‐10
Jan-­‐11
Apr-­‐11
Jul-­‐11
Oct-­‐11
Jan-­‐12
Apr-­‐12
Jul-­‐12
Oct-­‐12
Jan-­‐13
Apr-­‐13
Jul-­‐13
Oct-­‐13
Jan-­‐14
Price/Gallon
Price/Barrel
WTI
Brent
Gasoline
Diesel
Data Source: Calculated by Mercer Capital based on raw data obtained from the US Energy Information Administration (EIA.gov)

10. © 2014 Mercer Capital // www.mercercapital.com 10
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Motor Fuel and Brent Crude Price Fluctuation
-­‐0.2
-­‐0.15
-­‐0.1
-­‐0.05
0
0.05
0.1
0.15
0.2
0.25
Apr-­‐08
Aug-­‐08
Dec-­‐08
Apr-­‐09
Aug-­‐09
Dec-­‐09
Apr-­‐10
Aug-­‐10
Dec-­‐10
Apr-­‐11
Aug-­‐11
Dec-­‐11
Apr-­‐12
Aug-­‐12
Dec-­‐12
Apr-­‐13
Aug-­‐13
Dec-­‐13
Price
Vola9lity
Gasoline
Brent
Diesel
Data Source: Calculated by Mercer Capital based on raw data obtained from the US Energy Information Administration (EIA.gov)
Fuel Pricing and Supply Charts

11. © 2014 Mercer Capital // www.mercercapital.com 11
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Prime Supplier Sales Volumes
-­‐
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
Gas
Diesel
2009
2010
2011
2012
2013
Feb
'13
Mar
'13
Apr
'13
May
'13
June
'13
July
'13
Aug
'13
Sept
'13
Oct
'13
Nov
'13
Dec
'13
Jan
'14
Feb
'14
000's
Gallons/Day
Regular
Mid-­‐Grade
Premium
Diesel
Data Source: US Energy Information Administration (EIA.gov)
Fuel Pricing and Supply Charts

12. © 2014 Mercer Capital // www.mercercapital.com 12
Mercer Capital’s Value Focus: Convenience Store Industry Second Quarter 2014
Data Source: Calculated by Mercer Capital based on raw data
obtained from the US Energy Information Administration (EIA.gov)
Fuel Pricing and Supply Charts
Percentage Change in Non-Motor Fuel Spread by MonthNon-Motor Fuel Prices
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Oct-­‐08
M
ar-­‐09
Aug-­‐09
Jan-­‐10
Jun-­‐10
Nov-­‐10
Apr-­‐11
Sep-­‐11
Feb-­‐12
Jul-­‐12
Dec-­‐12
M
ay-­‐13
Oct-­‐13
M
ar-­‐14
Price/Gallon
No. 2 Heating Oil Propane
-­‐100%
-­‐50%
0%
50%
100%
150%
200%
Jan-­‐14
Jan-­‐14
Jan-­‐14
Jan-­‐14
Feb-­‐14
Feb-­‐14
Feb-­‐14
Feb-­‐14
M
ar-­‐14
M
ar-­‐14
M
ar-­‐14
%
+/-­‐
in
Hea5ng
Oil
Spread
%
+/-­‐
Inc/Dec
in
Propane
Spread
Data Source: US Energy Information Administration (EIA.gov)

13. Mercer
Capital
Convenience Store
Industry Services
Contact Us
Copyright © 2014 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged.
Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an
information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list
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Mercer Capital provides the multi-unit retailing and QSR industries with
corporate valuation, financial reporting, transaction advisory, and related
services.
Industry Segments
Mercer Capital serves the following industry segments:
• Convenience stores
• Grocery stores
• Fast food (QSR)
• Travel Centers
Mercer Capital Experience
• Family and management succession planning
• Buy-side and sell-side transaction advisory assistance
• Conflict resolution and litigation support
• Trust and estate planning
• Buy-sell agreement valuation, design, and funding advisory
Eden G. Stanton, CFA
901.270.7250
stantone@mercercapital.com
Timothy R. Lee, ASA
901.322.9740
leet@mercercapital.com
Mercer Capital
5100 Poplar Avenue, Suite 2600
Memphis, Tennessee 38137
901.685.2120 (P)
www.mercercapital.com
BUSINESS VALUATION &
FINANCIAL ADVISORY SERVICES