The Latticework Letter — Issue #012

Last issue promised the August jobs report would open this one. It did not disappoint — it detonated.

Payrolls jumped 162,000 in August against a consensus near 53,000, with unemployment steady at 4.1% and July revised up 44,000 — from a 23,000 loss to a 21,000 gain. In one print, the entire "cooling labor market" half of the two-handed setup we described last week — the ADP miss, the flat JOLTS, the negative July — evaporated. What remains is the other hand: PCE at 3.7%, a chairman who told Jackson Hole that inflation must reach 2% "at sufficient speed," and now a labor market strong enough that he doesn't have to blink. CME FedWatch odds of a September 16 hike, which stood near 44% in early August, ran to roughly 60% by Tuesday morning and hovered in the high-50s-to-low-60s all week — until this morning's CPI settled the argument. Headline came in at 3.4%, in line; core ran a tick hot at 0.3% for the month; and gasoline rose 3.9%, accounting for over a third of the entire monthly increase. Traders' response: hike odds for next week jumped to roughly 90%, and bond desks now price two hikes before year-end. The market is no longer debating whether Warsh hikes. It's debating how many times.

Then the week poured gasoline on it — literally. The Middle East war, which the Hormuz de-escalation had walked off the front page in June, came back: Iranian-backed Houthi strikes hit Saudi cities and energy facilities, wounding more than 70 and halting operations at several sites, and Brent — up roughly a quarter since early August — cleared $99 Tuesday and closed above $101 Wednesday, its highest level since May. WTI followed into the mid-$90s. The pump did too: AAA's national average hit $4.22 Wednesday, up from $4.15 the prior Friday, with California at $5.81. Stocks slid Wednesday as oil crossed $100; the 10-Year, already selling off on fiscal worries and a record corporate calendar — AI borrowers alone account for more than $1.5 trillion of new debt — pushed toward 4.85%, its highest since October 2023, eased to about 4.84% Thursday — and after this morning's CPI is trading near 4.91%, within shouting distance of 5% for the first time since 2023.

Sit with the stack: a hot jobs print, oil over $100, a hot CPI this morning, and a hawkish FOMC next Wednesday, all priced against a 10-Year at a three-year high. For your discount rate, the supply story and the Fed story now point the same direction, and energy just handed headline inflation a tailwind at the worst possible moment. One useful counterweight: Goldman's own December 2026 Brent forecast is $85 — the futures market is pricing this spike as a war premium, not a new level. Cold comfort if you're refinancing this quarter. Relevant context below, because this week's macro story and this week's sector story are the same story.

Convenience-and-gas is the tightest-priced category in all of net lease — Wawa traded at 4.90–5.20% cap rates in Q1 2026, 7-Eleven quotes 5.00–5.40%, Murphy USA near 5.13%, Circle K 5.35–5.65%, against a Boulder Q2 all-retail average of 6.60%. With Brent over $100, the tempting first-order read is that the sector's moment has arrived: higher prices, higher revenue, happier tenants. The mechanics run almost exactly backwards, and understanding why is the best free lesson in the sector.

Start with what the business actually is now. Per NACS's 2025 data, fuel generates 65% of a c-store's sales dollars but only 38.8% of its gross profit. The inside of the store — 35% of sales — produces 61% of the profit, with foodservice alone at roughly 55% margins throwing off nearly 39% of inside profit. The industry posted a record $341.2 billion of in-store sales in 2025, its twenty-third consecutive annual record, while gasoline demand sits about 4% below its 2018 peak of 9.33 million barrels a day and the store count drifts down from its 2018 high. The gallon has been demoted to a customer-acquisition tool. The store ate the pump.

Which is exactly why a price spike hurts. Fuel retailers earn cents per gallon, not a percentage of price — the trade's gross margin ran above 40 cents a gallon in 2025, roughly double the pre-2020 norm. When the pump goes from $3.11 to $4.22, that 40 cents doesn't grow. What grows is the cost side: interchange fees are charged as a percentage of the full transaction — taxes included — so card fees, already about 8.4 cents per gallon and a fifth to a quarter of the gross margin, rise mechanically with every dime at the pump. Volume softens as drivers economize. And the customer walks into the store with less discretionary money for the 55%-margin food that actually pays the rent. High prices squeeze the tenant from three directions at once; it's falling gas prices that fatten this business. Note also who else told you this exact story on Wednesday: America's Car-Mart named "continued fuel and cost-of-living pressure" as a driver of its charge-offs. The pump is a tax on the same customer both tenants share.

For the landlord, the discipline follows from the arithmetic. First, the sector's sub-5.5% cap rates are pricing the corner and the credit, not the commodity — the analysts underwriting these deals base-case fuel margins at 28–32 cents and treat anything above the low 30s as cyclical upside you don't capitalize; you should hold your tenant's rent coverage to the same standard. Second, the credit spread inside the category is widening the same way drug stores' did: 7-Eleven is running the sector's largest rationalization — 444 North American closures announced in 2024, another 645 sites leaving the network in fiscal 2026 — while roughly 60% of the country's 152,000 stores are single-operator survivors whose fuel margin subsidizes an unprofitable box. Third, watch the format: a new-build food-forward store needs 3.5–4 million gallons a year — three to four times the legacy-site average — to pencil, which means the aging 1,200-square-foot corner with two dispensers is not the same asset class as the 5,000-square-foot kitchen that happens to sell gas. Same logo risk, same lesson as Walgreens: the sector's averages are hiding two different businesses, and $100 oil stress-tests exactly the wrong one.

America's Car-Mart filed the 8-K we've been waiting three issues for — and it was the earnings release, not the resolution. Wednesday's Q1 FY2027 numbers (quarter ended July 31) are what a capital-starved lender-controlled retailer looks like in print: retail units down 81.9% to 2,450, revenue down 57.3% to $145.8 million, a net loss of $69.0 million ($8.28 a share), inventory drawn to $35.2 million from $112.5 million a year ago, net charge-offs at 9.5% of average receivables versus 6.6%, and unrestricted cash of $27.5 million, down from $47.0 million on April 30. The 10-Q carries a going-concern note. The company held no earnings call. Buried in the capital-structure section is the headline: the waiver's scheduled termination was extended on September 4 — not to the September 21 milestone date, but one week, through September 11. And this morning, right on schedule, a fresh 8-K extended it one more week, to September 18. Silver Point is now keeping this company alive in seven-day increments while "discussions with prospective counterparties" continue. For landlords the read is unchanged but sharper: this is the nearest-dated credit event in net lease, the equity is openly flagged for a wipeout scenario, and the real estate question — 94 operating dealerships, down from 154 — is already being answered store by store. The next cliff is Friday the 18th.

Signet Jewelers — the mall-adjacent read we flagged — delivered a clean beat Wednesday: adjusted EPS of $2.19 versus $1.74 expected, up 36%, comps +2.2%, full-year EPS guidance raised more than a dollar at both ends. The stock jumped double digits. The detail worth keeping: revenue was flat — the beat was cost discipline and mix, and the CEO's holiday message was that "value will rule." Macy's followed Thursday morning with the same shape: comps up 2.7%, guidance raised, and the growth concentrated in Bloomingdale's (+11.3%) — the luxury banner — while the namesake stores managed +1.1%. Add last week's Campbell's dividend cut and the dollar stores comping 3%+ and the bifurcation thesis is now wearing a groove: the high end spends, the low end trades down, and everyone in between talks about value. With gas at $4.22, expect the groove to deepen.

Salad and Go housekeeping: objections to the 7 Brew sale are due September 17, the approval hearing remains September 21, and Dutch Bros sits as backup bidder. Landlords in the 73-site pool should have their assumption/assignment notices in hand; the cure-amount schedule is the thing to check line by line before the 17th.

On the calendar: FOMC decides Wednesday, September 16. Salad and Go objections September 17. Car-Mart's extended waiver runs out Friday, September 18. Salad and Go sale hearing September 21 — which is also Car-Mart's first milestone-extension date under the original waiver schedule. OZ 2.0 state nomination window closes September 28.

That is roughly what the card networks collect on every gallon of gasoline sold in America — and unlike your tenant's margin, it is a percentage, not a fixed number of cents.

Here is the mechanism, because it's a small masterpiece of incentive design. Interchange is charged on the full transaction value at the pump — including the 18.4-cent federal excise tax and state taxes that run as high as 70.9 cents in California. The convenience industry paid about $4.6 billion in card fees in 2025, a meaningful slice of it assessed on tax money the retailer merely collects and forwards to governments. At 2025's $3.11 average pump price, that worked out to roughly 8.4 cents a gallon — a fifth to a quarter of the entire gross fuel margin. Now run the 2026 version: at this week's $4.22 average, the same percentage take is mechanically approaching 11 cents, with not one additional service rendered. The networks own the only line item in the fuel P&L that automatically scales with a Middle East war. For net-lease investors the point is structural, not sympathetic: when you underwrite a fuel tenant's coverage, the margin between the pump price and the tenant's rent check contains a counterparty — one with better pricing power than your tenant, your tenant's supplier, or you. The best businesses collect tolls on volume they don't handle. The card networks figured out how to collect a toll on the tax.

The ecologist Garrett Hardin proposed that the mark of sophisticated thinking is the habit of asking one question, relentlessly: "And then what?" Munger admired the formulation enough to make it a staple — first-order consequences are what everyone sees; the lattice earns its keep on the second and third.

Run this week through it. Oil crosses $100. First order: gas is expensive, gas stations sell gas, gas-station landlords win. Second order: the tenant earns cents per gallon, not a percentage — so revenue rises while margin doesn't, card fees scale up mechanically, volume softens, and the inside-store basket that actually carries the rent gets squeezed. Third order: the marginal customer — the one Car-Mart finances at $594 a month collected — diverts income to the pump, and the stress surfaces two tenants away, as subprime auto charge-offs. Fourth order: energy pushed headline CPI up in this morning's print — gasoline was over a third of the entire monthly increase — hardening the case for a hike on Wednesday, which raises the discount rate on every net-lease asset, including the ones with no economic connection to oil whatsoever. The first-order effect was bullish for one sector. The fourth-order effect is bearish for all of them.

The reason this model matters is that first-order thinking is not wrong, exactly — it's incomplete in a predictable direction. It stops at the actor nearest the event. Markets price the first order within minutes; the durable edge in an illiquid asset class like net lease is almost entirely in the later orders, because they arrive on a lag measured in quarters — long enough for a landlord to act. The 1031 buyer looking at a gas station this month at a 5.2% cap is buying the first-order story at a price that assumes it. The question to carry into any underwriting, this week and every week, is Hardin's: and then what? Ask it at least three times. The first answer is in the brochure. The third one is where your risk lives.

The Latticework Letter is published weekly on Friday mornings. It is independent analysis — we have no brokerage relationships, no listings to push, and no financial products to sell. Our only interest is giving you a clearer picture of the market.

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