8 Highlights From Casey’s 2nd-Quarter 2018

ANKENY, Iowa -- Despite strong fuel results, softer traffic led Casey’s General Stores Inc. to report a decline in net income to $48.92 million for second-quarter fiscal 2018, which ended Oct. 31, compared to $57.18 million for the same quarter a year ago.

• Casey's is No. 4 in CSP's Top 202 convenience-store chain ranking for 2017.

“The quarter started off with strong sales in the month of August,” Terry Handley, president and CEO, said during the Ankeny, Iowa-based company’s earnings call on Dec. 12. “Unfortunately, we were unable to maintain that pace throughout the remainder of the quarter as we experienced softer traffic in the back half of the period, which adversely impacted sales.”

Here are some highlights from the quarter …

Casey’s, which opened its 2,000th convenience store in November, is also on track to open its first c-store in Michigan, Handley said. The 2,000th location opened in Russellville, Ky., on Nov. 30. The 4,600-square-foot store features six pump islands.

The company operates c-stores in 15 states. The nine core states are Iowa, Illinois, Missouri, Kansas, Minnesota, Nebraska, Indiana, South Dakota and Wisconsin. States new to Casey’s within the last 10 years are Arkansas, North Dakota, Oklahoma, Kentucky, Tennessee and Ohio.

"The company surpassed the 2,000-store milestone and now has 200 new-store sites either under agreement or under construction at the end of the quarter," said Handley, including the new Wolverine State store, the location of which he did not disclose.

Casey's fiscal 2018 guidance was to build or acquire 90 to 120 stores, replace 30 existing locations and complete 75 major remodels. At the end of the quarter, it had built and opened 12 new stores, acquired 14 stores, completed 14 replacements and remodeled 28 stores. Also, there were 66 new stores, 18 replacement stores and 14 major remodel stores under construction. And it had 134 sites under agreement for new-store construction.

Casey’s also had 16 acquisition stores under agreement to purchase in the quarter.

“We are also encouraged by the increase in acquisition activity,” said Handley. “We believe this is, in part, related to the continued challenges in the economic environment in our marketing territories. Our store count at the end of this quarter was 2,003. Given our strong balance sheet and expanded geography, we’re positioned very well for future growth.”

He said there has been an “uptick” in mergers and acquisitions (M&A) activity. Casey’s has had “many more” conversations with retailers willing to sell their businesses, he said.

"The acquisition pipeline continues to expand, which further complements the accelerated growth in our new-store construction activity. The company is well-positioned to take advantage of a consolidating market and drive unit growth at faster levels than we have in the past,” said Handley. “We will look to augment our new-store construction activity with acquisitions in both new and existing markets.”

Casey’s fiscal 2018 guidance for prepared foods and fountain was to increase same-store sales 4% to 6%, with an average margin of 61.5% to 62.5%. Same-store sales for the quarter were up 2.1%, which fell well below Casey’s guidance, with an average margin of 61.3%.

"After starting the quarter off strong in the month of August, this category was the most affected in the back half of the quarter, especially in October with … adverse weather patterns that drove negative same-store customer count for the month,” Handley said.

Total prepared food and fountain revenue increased 5.5% to $262 million in the second quarter, while gross profit dollars grew 2.7% to $160.5 million. Year to date, total prepared food and fountain revenue was up 6.5% to $523.8 million, and total gross profit dollars were up 4.8% to $324.2 million. For the first six months, same-store sales were up 2.9%, with an average margin of 61.9%.

Based on the softer traffic experienced in the second quarter, however, Casey’s has revised its prepared food and fountain same-store sales guidance down to 2%-4% from 4%-6%. There were no other changes to the fiscal 2018 guidance.

“We are encouraged about our long-term growth outlook in this area as we continue to benefit from the rollout of our growth programs, new-store openings and the implementation of price optimization, as well as new digital-engagement platforms,” Handley said.

Casey’s recognizes that consumers continue to be value conscious, and it has seen how well the chain’s Fuel Saver program with grocer Hy-Vee has been received, said Handley. So Casey’s has rolled out a new promotion based on a successful test in Indiana in 2014.

“Beginning Dec. 1, we kicked off the Pizza to Pump promotion,” he said. “The program offers a 10-cents-per-gallon coupon on up to 20 gallons of fuel with the purchase of any large pizza. We have offered this promotion in the past in select areas of our market with great success. As retail fuel prices have risen recently, we believe this offer will lessen the strain on our consumers.”

The promotion is coupon-based, and the customer must come into the store to redeem it. That "gives us more opportunities to do a selective-sell proposition," said CFO Bill Walljasper.

Regarding the potential effect of the tax-reform bill making its way through Congress, Walljasper said, “There are many aspects to this reform, and the provisions are still being debated and reconciled between the Senate and the House; however, as it stands currently, taking into account all of the changes in the new tax law, we anticipate it will have a significant, one-time favorable impact on our earnings per share when it becomes effective, as Casey’s will reset its deferred tax liabilities at a new, lower tax rate.

“Going forward," he added, "the company will benefit from the substantially lower corporate effective tax rate.”

"We recently began the consultation phase of our digital engagement and price-optimization projects,” said Handley. “We continue to make investments to enhance ongoing operations and support our long-term vision to create shareholder value."

Traditionally, Casey’s has not charged different prices in different markets, other than for fuel, cigarettes and beer that are taxed differently. And while it has had a successful partnership with Hy-Vee, Casey’s has not had a loyalty program that it runs itself.

On Casey’s last earnings call in September, Handley said the company was in the process of identifying consultants for the programs. It has now engaged consultants. “Each consultant is going through an assessment phase, which will clarify our present stake and provide a roadmap and timeline associated with the development and integration of each program.”

The consultants will complete the assessment phase in January, he said.

“We believe that these programs will give us the opportunity to widen our customer base with better insights into our customers’ needs and buying habits,” Handley said. “We will also have an opportunity to take advantage of differences in market conditions related to the pricing of certain products, allowing us the ability to drive incremental gross-profit dollars.”

In terms of digital engagement, the customer insights will allow Casey’s to offer individual, customer-specific promotions rather than just general promotions.

The company's fiscal 2018 guidance for fuel was to increase same-store gallons sold 1% to 2% with an average margin of 18 to 20 cents per gallon. For the quarter, same-store gallons sold were up 1.9%, with an average margin of 19.7 cents per gallon.

"The company is an industry leader in same-store gallons sold and continues to gain market share in this category," said Handley. "Further, our fuel-pricing strategy positioned us to take advantage of market volatility throughout the quarter to realize a fuel margin near the top end of our guidance."

The company sold 17.3 million renewable fuel (renewable identification number, or RIN) credits for $14.5 million during the second quarter. Total gallons sold for the quarter were up 5.7% to 561.7 million gallons, while gross profit dollars increased 11.7% to $110.7 million. Year to date, same-store gallons sold were up 1.8% with an average margin of 19.5 cents per gallon.

The company's fiscal 2018 guidance for grocery and other merchandise was to increase same-store sales 2% to 4%, with an average margin of 31% to 32%. For the quarter, same-store sales were up 2.5%, with an average margin of 32%.

Same-store sales were on the low end of the guidance because of lower traffic in October that Handley attributed to “multiple adverse weather patterns throughout the month.”

For the first quarter, total grocery and other merchandise revenue increased 5% to $572.2 million, and gross profit dollars were up 4.9% to $183.1 million. Year to date, same-store sales were up 2.8%, with an average margin of 31.9%. Total revenue for the first six months was up 5.3% to $1.2 billion, while total gross profit dollars increased 5.6% to $373.5 million.

“We were pleased with the gains in the category in light of the current environment, and we remain optimistic about our long-term growth opportunities as we benefit from the continued rollout of major remodels, replacement stores and new-store openings,” Handley said.