ANKENY, Iowa -- In the face of pressure from activist investors to explore strategic alternatives, including a possible sale, Casey's General Stores Inc. has outlined a value-creation plan to increase profitability, improve operational performance and enhance shareholder value. In an update to shareholders coinciding with the release of its third-quarter earnings, the convenience-store company touted several initiatives and announced that it has “refreshed” its board of directors, as reported in a CSP Daily News Flash.
“We are implementing key initiatives that will drive accelerated growth and profitability and deliver enhanced returns for shareholders," said Terry Handley, president and CEO of Casey's. "Together with the board and governance changes Casey's also announced today, we believe we are well positioned to transform our business to drive sustainable value in this rapidly evolving retail landscape."
Here is some background on the investor conversation and more details on those initiatives …
Based in Ankeny, Iowa, Casey’s owns and operates more than 2,000 convenience stores in 15 states.
In early January, shareholder group JCP Investment Management LLC, issued an open letter to all Casey's shareholders suggesting that the chain is “significantly undervalued” and urging the board to “immediately engage a financial adviser to explore all strategic alternatives, including a potential sale, merger or similar transaction in order to maximize shareholder value.”
The letter pointed to decelerating same-store sales and “bloated” operational expenses. It also claimed Casey’s has expanded too rapidly.
In a statement responding to the letter, Handley said the board would review the claims thoroughly.
“The company is focused on generating increased long-term value for shareholders through new initiatives to accelerate same-store growth and returning cash to shareholders through share repurchases and a steadily increasing dividend," he said. "With the combination of the company’s growing acquisition pipeline, new-store construction activity, new initiatives aimed at enhancing operations—such as digital engagement and price-optimization projects—Casey’s expects to deliver substantial value for its shareholders.”
Casey’s did not consult with JCP on the value-creation plan, Handley said as he outlined the plan on the retailer’s earnings call March 7.
- Click here for details on Casey's latest earnings.
Casey's plans to launch a digital engagement program that will enable a “seamless” customer experience, both online and in-store, that offers new digital product categories and facilitates personalized marketing and rewards, including an enhanced website, a redesigned mobile app, a loyalty program, in-store technology and enhanced enterprise infrastructure.
The chain is also test launching digital food-ordering kiosks in some high-volume stores.
“Through this agile, customer-centric capability, Casey's will deliver enhanced value to the customer by leveraging customer data and insights," the company said.
“In partnership with the Deloitte Digital team, we developed a detailed road map of implementation and will onboard a new chief marketing officer very soon who will lead this implementation process,” Handley said. “We expect to realize significant benefits from this program, including same-store sales growth starting in 2020.”
Casey's expects its fleet-card program, led by a team with relevant implementation and execution experience, to increase fuel sales by 2% in its first full year, the company said. This program will increase volume over time and will drive increased store traffic, it said.
“[It] represents a more aggressive approach than we have taken in the past to better address this important customer category,” said Handley. “The primary preferences of fleet customers—ease of access, and food and beverage choices—are well aligned with the Casey’s model, providing a great opportunity to serve new customers.”
Casey's expects to begin realizing fuel and in-store sales benefits by the third quarter of full-year 2019, the company said.
Casey's is transforming its marketing through price-optimization initiatives for both fuel and in-store purchases.
“We have partnered with Impact 21, a consulting, analytics and services company specializing in the convenience-store space, to implement our program,” Handley said. “We established an implementation road map and thoroughly vetted potential solutions providers. Over the coming quarters, we will implement technology that will allow us to leverage the sales data generated by our broad network of stores, combined with the market data, to make centralized, rules-based pricing decisions at the pump and in the store. The technology we are incorporating will allow us to roll out a comprehensive process across every category, improving sales and margins throughout our entire network of stores.”
The first stage of implementation during fiscal 2019 will focus on the optimization of fuel and key in-store items. In the first quarter of fiscal 2020, Casey’s will expand the program to the rest of the categories.
“We believe this program will represent a fundamental shift in our marketing process for both fuel and in-store purchases, due to the increased visibility into our pricing and promotion strategy,” he said.
Casey's is continuing to focus on implementing its ongoing cost-reduction measures and managing its operating expenses. The company expects the cumulative savings of store-level operating expenditures to be $200 million by full-year 2021, it said.
“We have identified and implemented numerous cost-reduction measures focused primarily on labor, our largest category of controllable expenses,” said Handley. “We have also optimized prior initiatives, pizza delivery and 24-hour stores, and enhanced our ability to monitor and adjust these programs across the store base, including new stores.”
As a result of these initiatives, Casey’s has achieved “a significant and measurable” reduction in the store-level operating expenses. In stores not affected by recent growth programs, it has reduced operating expense growth from 9.6% in third-quarter fiscal 2017 to 2.9% in third-quarter fiscal 2018.
The company expects to achieve cumulative store-level operating expense savings of approximately $200 million from fourth-quarter fiscal 2018 to fiscal 2021, which it plans to reinvest in the key initiatives.
“We are also exploring other opportunities to further reduce expenses,” Handley said. “We are currently implementing a new fleet-management system that improves distribution efficiency and reduces cost. Also, in anticipation of the increased sales volume generated by our initiatives and new stores, we are conducting a holistic evaluation of our distribution system to identify optimization opportunities, with a focus on cost and efficiency.”
Reallocation of capital
Casey's plans to allocate additional capital in full-year 2019 and beyond toward opportunities to increase shareholder value, the company said. In full-year 2019, it anticipates at least $150 million of incremental capital available compared to full-year 2018 due to reduced remodel and replacement requirements, as well as anticipated federal tax reform benefits.
“Under the new tax-reform legislation, we expect our new effective tax rate to be around 24% in fiscal 2019,” said Handley. “The reform also generated a one-time non-cash benefit of approximately $170 million, or approximately $4.60 per share, relating to the resetting of our deferred tax liabilities.”
The company’s capital allocation strategy will prioritize investment in high-return growth and profitability initiatives, including its digital engagement and price optimization programs, as well as continued pursuit of disciplined store growth, strategic acquisition opportunities and returning capital to shareholders, Casey’s said.
Casey's has a strong track record of returning capital to shareholders, including 17 consecutive years of dividend increases, the company said. Casey's has approximately $107 million of capacity remaining under the company's existing share repurchase program, and it expects to complete the existing authorization in the first half of calendar-year 2018. The company also has authorized a new $300 million share repurchase program through fiscal-year 2020.
Casey's has appointed three new independent directors and named independent director H. Lynn Horak the new chairman of the board.
“With today’s additions to our board, Casey’s has the right team in place to provide the necessary oversight and governance to successfully embark on its next chapter,” said Handley. “I strongly believe that we have a clear and actionable strategic plan to drive shareholder value.”
In connection with the new director appointments, three incumbent Casey’s directors—departing Chairman Robert Myers, William Kimball and Jeffrey Lamberti—have retired from the board.
The new directors include:
Horak, who was regional chairman with Wells Fargo Regional Banking. He has executive leadership experience and a critical understanding of credit markets, consumer behavior and retail analysis.
Donald Frieson was executive vice president of operations of Sam’s Club, with more than 18 years of fleet management, regional management and operations experience. At Walmart International, he was chief integration officer for Massmart, with more than 300 stores in Africa. He joined Walmart as a district manager for the private trucking fleet from Schneider National Carriers.
David Lenhardt was president and CEO of PetSmart Inc., where he developed its e-commerce and digital business, including the acquisition of online retailer Pet 360 and the deployment of PetSmart’s online ordering and pickup-in-store capabilities. He also completed PetSmart’s strategic review, which resulted in its sale to BC Partners for $8.7 billion in 2015. Previously, he was manager of Bain & Co. Inc., where he led consulting teams for retail, technology and e-commerce clients.
- Allison Wing was chief marketing lead officer and executive vice president of digital channels at Ascena Retail Group Inc., where she launched its loyalty program and insights data production and e-commerce platforms. She has extensive digital, retail and customer insights experience. Previously, she was the CEO, founder and chair of giggle Inc., a retailer, wholesaler and licenser of baby products. She started her career with Nike and spent several years in Silicon Valley as a chief marketing, revenue and customer officer for a variety of online, software and e-commerce companies.
Casey’s also announced other governance changes, including the adoption of proxy access, majority voting in director elections (subject to shareholder approval) and tenure limitations.
“By adopting proxy access and imposing age and tenure limitations for directors, we will provide shareholders with greater access and input into important governance matters facing the company,” Horak said. “If approved by shareholders, our adoption of majority voting for director elections will similarly increase shareholder access and input by providing shareholders with a stronger voice in director elections.”