Company News

Fuel Sales Shine in Casey’s Third Quarter

Fresh food struggles in period of aggressive promotional activity

ANKENY, Iowa -- Fuel beat out food as a sales driver for Casey’s General Stores Inc. in its third-quarter fiscal 2018, the three months ending Jan. 31, 2018.

Same-store fuel gallons rose 3.8% in the third quarter vs. Casey’s fiscal 2018 guidance of a 1% to 2% increase. This was Casey’s best quarterly same-store gallons performance in its past two fiscal years. Total fuel sales rose 8.3%, with an average retail price of $2.40 per gallon compared to $2.12 per gallon for third-quarter 2017. Same-store gallons year to date grew 2.4%, again beating the guidance.

Higher wholesale costs later in the quarter pressured Casey’s margins down to 18.6 cents per gallon (CPG), compared to 19.2 CPG year to date. Fuel gross-profit dollars rose 12.3% for the quarter to $100.3 million. That said, Casey’s was able to generate $14.6 million in the third quarter from selling Renewable Identification Numbers (RINs), blending credits under the Renewable Fuels Standard for mixing alternative fuels with gasoline. RINs are trading around 45 cents, which was comparable to fourth-quarter 2017.

Casey’s plans to further drive its fuel performance by ramping up its fleet-card business, which execs admitted is underdeveloped compared to its peers, with a new program to launch in early fiscal 2019. The retailer expects it to lift fuel sales 2% within its first full year and have the potential to increase in-store sales with the higher traffic.

It will also be introducing a price-optimization program that will centralize its fuel pricing and adopt a rules-based approach, beginning in fiscal 2019. Both are part of a value creation plan that Casey’s is launching to drive longer-term growth and shareholder value.

Gathering Gallons

One reason execs gave for the better-than-expected gallons for the third quarter was Casey’s pizza-to-pump promotion, which launched in December 2017 and offered a 10-cents-per-gallon coupon on up to 20 gallons of fuel with the purchase of any large pizza.

“We did see a rising fuel cost environment,” CFO Bill Walljasper said during a March 7 earnings call, citing the higher pump prices during the quarter. “I think that helped. People become more cognizant of the value proposition with the pizza-to-pump program.”

At the same time, execs said the promotion underperformed, particularly with whole pizzas (as compared to slices).

“Certainly, from a sales perspective, when it comes to whole pies, that did not quite meet our expectations at this point,” said Walljasper. “I would say, though, when last time we ran that promotion back in 2014, we did see a slower ramp-up in the first several months before it really started to catch stride.”

Same-store sales of prepared food and fountain rose 1.7% in third-quarter fiscal 2018 vs. guidance of a 2% to 4% increase. Margin averaged 60.5% vs. guidance of 61.5% to 62.5%.

Casey’s blamed tougher competition for prepared food and the pizza-to-pump program’s underperformance.

“In the QSR and prepared-food space, you are seeing much more aggressive promotional activity, whether it's McDonald's dollar menus or Domino’s two-pizzas-for-a-price promotion,” said Casey’s President and CEO Terry Handley. “Everyone is struggling for market share. Everyone is in a fight and in a battle.”

Growth Outlook

Longer term, Casey’s plans to leverage the price optimization effort inside the store and particularly in foodservice, as its rural customer base faces an economically tough environment.

“But in the meantime, in that bridge, we need to make sure that we are responding not only to what the competition is doing, but we need to be aware of what the customer is feeling,” said Handley. “And quite frankly there remain challenges in this economy here in the Midwest, and so people are looking for value. And we certainly feel a responsibility to our customers especially in our smaller markets that we provide that value.” Execs described the economic downturn as cyclical, similar to a period in 2009 when farm income was depressed.

Total prepared food and fountain revenue for the quarter rose 5.4% to $240.6 million, with gross-profit dollars up 3.4%. Year to date, total prepared food and fountain revenue is up 6.1%, with total gross-profit dollars up 4.3%.

Casey’s is seeing increased demand for “healthier-for-you” food options, which is driving its decision to test multiweek deliveries, and considering the addition of a third-party distributor to its current distribution setup.

In grocery and other merchandise, same-store sales rose 2.5% for the quarter, on the lower end of its fiscal 2018 guidance of 2% to 4%, and average margin was also within range at 31.9%. Execs credited Casey’s expansion of cooler doors in its larger stores and its remodel and replacement program, as well as strong sales of energy drinks.

For fiscal 2018, Casey’s guidance was to build or buy 90 to 120 sites, replace 30 existing stores and remodel 75. By the end of third-quarter fiscal 2018, it had built and opened 32 new stores, bought 17, replaced 20 and remodeled 41 sites. Casey’s had 66 new stores, 14 replacement stores and 33 major remodels under construction. An additional 140 sites were under agreement for the construction of new stores, and 14 to purchase. This includes Casey’s first store in Michigan, which will be among 50 new sites opening in its fourth quarter.

Casey’s had been mentioned as a possible acquirer of Kroger’s c-stores, which went instead to U.K.-based EG Group. Execs declined to comment on that deal, but said Casey’s would continue to consider acquisitions. Walljasper said the retailer had noticed “an uptick in opportunities of people willing to talk to us about selling their business” in the first three quarters, although that momentum may shift with the recent tax reforms.

“It will be interesting to see how that goes forward … because with the tax reform, it feels like there might be a pause out there as some of the potential sellers are trying to evaluate what that means to them,” he said. “We will continue to push forward on acquisition opportunities and certainly make those decisions as we move forward.”

Ankeny, Iowa-based Casey’s has more than 2,000 c-stores in 15 mostly Midwestern states, located primarily in towns with populations of 5,000 or fewer people. The chain ranked No. 4 in a year-end update of CSP’s2017 Top 202 list of the largest c-store chains in the United States.

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