6 Highlights From Casey’s 3rd-Quarter Fiscal 2019

ANKENY, Iowa — “We are optimistic about the direction we are moving the company,” Terry Handley, president and CEO of Casey’s General Stores Inc., said during the convenience-store retailer’s third-quarter fiscal 2019 earnings call on March 12, issuing an update on the chain’s value creation plan.

“The multiyear, long-term plan is comprised of several key programs and value drivers, including a new fleet-card program, retail price optimization, a new suite of digital platforms for our customers, as well as a continued focus on controlling operating expenses and capital allocation,” said Handley.

The company began e-commerce and mobile commerce system integration testing; completed fuel price optimization pilot and scheduled a fiscal fourth-quarter rollout; hired a director of fuel procurement; piloted food and grocery price optimization software; and implemented enhancements to store labor management, he said.

Here are some of the highlights of Casey’s progress on the value creation plan, as well as a look at its quarterly financials …

Casey’s completed the execution of its fuel optimization plan. It converted 184 more stores to premium during the third quarter, bringing the total new fuel conversion in the fiscal year to 328. Year to date, it has also converted 592 stores to biodiesel. Diesel, biodiesel and premium fuel have higher margins than other fuel products, Handley said.

Casey’s new director of fuel procurement, as yet unnamed officially, “has hit the ground running” already with the acquisition of nine c-stores from Fantasy’s Inc., Omaha, Neb., he said. Through that deal, Casey’s has a fuel agreement with Phillips 66.

The fuel procurement director and her team were “very instrumental … in pulling that together,” said Handley. “She understands and recognizes opportunities within our market area and is working very hard to establish some additional relationships and opportunities with current suppliers, as well as maybe some others that we necessarily haven't been working with in the past. So, we believe that this is going to continue to be a ramp-up for us in fiscal '20 and can be very impactful, in terms of not only gallon opportunity, margin opportunity, but we are very confident that this is a great direction for us, and we'll continue to develop our fuel procurement strategy throughout fiscal '20.”

“Price optimization represents a fundamental shift in our marketing process for both fuel and in-store purchases, supported by an increase in visibility into our pricing and promotion strategy,” Handley said. “Price optimization will allow us to leverage the sales data generated by our broad network of stores to combine with market data to make centralized rules-based pricing decisions at the pump and in the store, which we anticipate will improve gross profit dollars across all categories throughout our network.”

Handley also said that Casey’s has completed the price optimization pilot in the fuel category using PriceAdvantage and recently began a phased rollout to all stores.

“Leveraging Dunnhumby as our price optimization platform for grocery and prepared foods, we began a test in Q3 to help identify and finalize the categories that would be used for the pilot, which began in February and will continue through the fourth quarter,” he said. “The broader rollout of price optimization inside the stores is scheduled to occur in Q1 of fiscal '20; however, the timing will depend on the outcome of the pilot.”

“We continue to progress with our digital engagement program and have reached several key milestones over the last quarter,” Handley said.

Casey’s has completed the development of its e-commerce platform and is in the middle of systems integration testing. “We have development teams that are focused on fixing some of the friction points within that e-commerce platform,” he said.

The company is continuing to develop a new mobile app and loyalty program, with pilots planned in first-quarter fiscal 2020. It also expects to launch a new site during the fourth quarter.

“The integration of the new suite of digital platforms for customers, including e-commerce, will create a seamless customer experience, both online and in-store, that enhances our digital capabilities and facilitates personalized marketing and rewards,” said Handley. “This digital platform will allow us to gain a better understanding of our customers and better serve them by providing value and target-effective promotions that will drive additional customer visits.”

Casey’s launched its new fleet card program in late October, currently with approximately 960 accounts and more than 5,700 cards issued. “Early results show that we are on target with adding new accounts and cardholders,” Handley said. “However, the utilization of these cards is ramping up slower than we expected due, in part, to the timing of the launch toward the end of the calendar year. Our fleet card partner continues to leverage their expertise by utilizing additional marketing campaigns for new members as well as an ongoing buildout of their sales team. In conjunction with this new rollout, we continue to engage universal card providers as part of the overall approach to our fleet card strategy.”

As of April 30, 2018, Casey’s had 2,073 convenience stores. Store growth through the third-quarter fiscal 2019 included:

• New-store construction: 41
• Acquired stores: 13
• Acquired stores not opened: 1
• Prior acquired stores opened: 5
• Stores closed: 8

These changes resulted in Casey’s operating 2,123 c-stores in 16 states in the Midwest and the South as of Jan. 21, 2019. It is No. 4 in the Top 40 update to CSP’s 2018 Top 202 ranking of c-store chains by number of retail outlets.

The company had 17 acquisition stores under agreement to purchase and a new-store pipeline of 133 sites, including 48 under construction as of Jan. 31. “We are on track to achieve our overall unit growth target,” Handley said. “However, due to the recent inclement weather, we may have a handful of new-store constructions roll over into May.”

In March, Casey’s acquired nine Fantasy’s c-stores and Ride the Wave car washes in the Omaha, Neb., area.

“We are encouraged with our current growth opportunities,” said Handley. “We are in strong financial position to continue to build and acquire stores, and we will maintain a disciplined approach to allocating capital for unit growth.”

For the three months ending Jan. 31, 2019, Casey’s reported net income of $41.8 million, compared to net income of $193 million for the period ending Jan. 31, 2018.

Total average fuel margin was 22.1 cents per gallon for the quarter, while same-store gallons sold were down 3.4%. Total gallons sold for the quarter were up 2.7% to 554.5 million gallons, while total gross profit dollars increased 22.2% to $122.6 million.

Same-store grocery and other merchandise sales for the quarter were up 3.4% with total average margin of 31.9%. Total grocery and other merchandise revenue increased 8.2% to $543.8 million, and total gross profit dollars were up 8.3% to $173.5 million.

Same-store prepared food and fountain sales for the quarter were up 1.5%, with total average margin of 62.3%. “Targeted price increases, along with more favorable commodity prices helped expand margin 180 basis points in a competitive environment,” said Handley. Total prepared food and fountain revenue increased 6.5% to $256.1 million in the third quarter, while total gross profit dollars grew 9.6% to $159.7 million.

Total operating expenses increased 5.7% to $341.5 million. Same-store operating expenses excluding credit-card fees were down 2.1% for the quarter. The increase in total operating expenses was primarily attributable to operating 103 more stores than the same quarter in the prior year.

“The results in our third quarter continue to demonstrate our commitment to effectively manage operating expenses,” Handley said. “Same-store hours were down in the quarter, partially due to enhancements made to store labor management. We are pleased with our efforts to better align labor hours with consumer traffic and demand.”