ANKENY, Iowa -- Casey's General Stores Inc. "will be out of the franchise business at the end of this calendar year," William J. Walljasper, senior vice president and CFO of Ankeny, Iowa-based Casey's said, according to an interview by The Wall Street Transcript Online provided to CSP Daily News. "All remaining franchise agreements will expire by the end of the calendar year."
The retailer beat its margin goals across all categories and in mid-June reported a 17.6% increase in total gross profit and a 37.2% increase in net earnings for the fiscal year ended April 30, 2008. At that time, [image-nocss] president and CEO Robert J. Myers said in a statement, "These results show the value of adhering to our long-term strategic plan and at the same time having the flexibility to adapt to a changing business environment."
Myers shared four corporate performance goals for fiscal 2009: Increase same-store gasoline gallons sold 2% with an average margin of 10.8 cents per gallon; increase same-store grocery and other merchandise sales 7% with an average margin of 33.2%; increase same-store prepared food and fountain sales 6.8% with an average margin of 61.6%; and increase the total number of stores 4%. (Click here for recent CSP Daily News coverage.)
Walljasper offered details on the company's strategy, as well as comments on a wide variety of industry topics, in the in-depth interview with The Wall Street Transcript:
The Wall Street Transcript: We would like to begin with a brief historical sketch of the company and a picture of the things you are doing now.
Walljasper: We opened our first store back in 1968 and since then we have grown from one store in the State of Iowa to encompass a nine-state area of the states here in the Midwest. Currently, we have over 1,450 locations. We are really unique in the convenience store industry and with our business model, locating stores in smaller rural communities throughout the Midwest. The majority of our stores are in towns of 3,000-person population or less. We serve not only as the gas station but also in many cases the grocery store and restaurant. Some of the things that differentiate our company in the convenience store industry would be the fact that we do have a proprietary prepared food program. We make from scratch not only pizza, but donuts, as well, and offer a wide variety of other products. In fact, we are a top 10 retailer of pizza and donuts in the nation. We also own all of our assets, which is unique in the business, and self-distribute about 90% of the grocery products in our store; it comes out of our distribution center centrally located here at corporate headquarters.
TWST: Would you tell us more about the reasons for the company's success?
Walljasper: I think it all starts back when we actually opened our first store. The next two stores actually were in communities of smaller populations than our first. I think at that point we found a niche of servicing some of the smaller rural communities that haven't had this type of service before. So in that regard, being located in smaller communities, there is less competition not only from a convenience store perspective, but less competition from a quick- serve restaurant perspective, from an entry-level labor perspective, lower cost to build and even lower cost to purchase when we go under acquisition strategy. So it has been a nice, evolving product. We are very vertically integrated and we have stayed vertically integrated since the start of the company and I think that's a good reason for the success that we have. Also by nature the company has been what I will call relatively conservative and I think that's been a very positive thing for the company, not growing just for the sake of growing, but having to manage that growth plan. We have very low debt, a very strong balance sheet. In fact we would be considered investment grade. So I think all those components kind of rolled up sum up the success of our company.
TWST: Are there any other companies trying to compete with you at your level?
Walljasper: There are some regional players that in some locations will have a similar competitive strategy, but for the most part, it's very fragmented in our nine-state area. In fact, roughly two-thirds of all the convenience stores in our marketing area are operators of 10 stores or less. So there is not a tremendous presence in the smaller community. One thing, I should also say is that smaller communities also will insulate us to some degree from some of the big box retailers that have gotten more into the convenience store arena.
TWST: I believe that you used to have a number of franchises. Why have you cut down on franchising?
Walljasper: That is correct. We currently, at least as of April 30, 2008, have 14 franchise locations. We used to have over 200 franchise locations. We started franchising back in the 1970s as a way to grow critical mass; we didn't have the capital to grow at that point. We haven't issued a new franchise since we went public back in 1983. Since that point, we have purchased many of those stores back and converted them over to corporate locations, and we will be out of the franchise business at the end of this calendar year. All remaining franchise agreements will expire by the end of the calendar year.
TWST: Would you tell us about your acquisition strategy?
Walljasper: That's something that started roughly back in about 2000, 2001. Prior to that, we were strictly organic driven, building 80, 85 stores per year, roughly. We decided at that point to make a decision to try to implement some technology. We first started with Pay at the Pump and then point-of-sale. We completed the point-of-sale in February 2006. At that point, we started to purchase some of the franchise locations back and saw the economics of buying versus building and knowing that the area was very fragmented, the competitive landscape and the industry was consolidating, so we started going down and track-focused more on acquisitions at that point than new store construction. It's been very successful for us obviously continuing in the small communities, but nevertheless looking to maybe purchase more than build.
TWST: Would you tell us how you have handled the personnel situation both in the stores and in the headquarters over time?
Walljasper: At the store level—whether we build a new store in a community or purchase a new store in a community—we try to make sure that we hire the staff from that community, especially the store manager. As you can imagine in a smaller community, you want to get integrated into that community and a good way to do that is try to hire someone from within that community to run that store. It has worked very well; it has been a nice strategy for us. We started as a family-run company and even though we are a larger company, we still have the flavor of a family-run company. People are treated very well, benefits are very competitive, and I would think individuals are treated very fairly and, consequently, we have a tremendous longevity. I have been with the company 18 years and on the executive management team that would be one of the least amount of years with the company.
TWST: You mentioned that you have had a big success with pizza. How have you managed to do that?
Walljasper: That is the flagship of our prepared food program. It encompasses roughly about 65% of the revenue of the prepared food program. We started that back in the 1980s and, as I mentioned, it is truly a made-from- scratch product. We start with flour and water, make the dough at the store and then we have pizza rollers at the store. It's a very fresh product. The vegetables are shipped out of here whole and chopped up at the location to make the necessary pizzas. It's been a tremendous success. We offer customers the option to buy the whole pie or a single slice. I would say it truly is a destination item for us, which is another thing that does set us apart from some of our peers in the industry. It actually is the second highest gross profit contributor to the company as a whole, representing roughly 28% to 30% of the overall gross profit.
TWST: You used the word restaurant. Do you have seats in some of your stores?
Walljasper: We don't have very many seats at this point, but the new store design that we are starting to roll out this fiscal year incorporates some seating areas. We have actually taken over a few acquisitions that had seating areas and they have been very popular. So we are starting to get into that a little more where the situations warrant it.
TWST: Would you tell us about the origin of the company name?
Walljasper: It's a little unusual. It's obviously Casey's General Stores. The company was incorporated in 1967. A gentleman by the name of Don Lamberti was the operator of a convenience store on the north side of Des Moines. An oil business person by the name Kurvin C. Fish came into that location, saw some very positive things going on there and enticed Lamberti to be a partner with him to open up and expand this concept. Well, when they were thinking about what name to use, they used the first two initials of Kurvin C. Fish's name, KC, and it stuck from there. Fish is no longer associated with the company, but that's how it originated. It's kind of a unique name.
TWST: How is the price of gas affecting you?
Walljasper: The price of gas certainly has been more of a challenging issue here recently. It's affecting us in several ways. First of all, gasoline consumption—it's no secret that gasoline consumption nationwide has been down over the last year, somewhere around 2% to 3%. Our same-store gallons over the most recent fiscal year we completed ending, April 30, 2008, were down 2%. We have seen some elasticity in demand with gas gallons; however, given that, coupled with a little more challenging economic time nationwide, our same-store customer count continues to be very solid. People are still coming into our stores, they are still buying the soda or the cup of coffee or donut or a slice of pizza or whatever they are buying. They are continuing that process. They are filling up with fewer gallons per stop, which means they are coming back perhaps a little bit more often to our stores.
TWST: How will ethanol come into the picture for you?
Walljasper: Ethanol has been in our picture a long time. I have been here 18 years and ever since that time, even prior to that, we have been selling an E10 product, 10% ethanol. We basically sell two types of gasoline, E10, which is an 89-octane product, and then an 87-octane product, which is a clear unleaded product. It's been there for a long time, but we do not have any locations that currently sell E85. Right now, there is just no demand in our market area, but if the demand comes forward, then certainly we will have to reconsider that and perhaps put in the space for E85.
TWST: What are the main opportunities and challenges that lie ahead for you?
Walljasper: I think the opportunities for us stem from a comment I made earlier about the fragmented nature of our market area. Just to reiterate, about two-thirds of the convenience stores in our market area operate with 10 stores or less, which means they have a different critical mass than we do and a different infrastructure than we do. We purchase direct from the vendors, we don't go through a food broker, which gives us some buying power in that regard. We also have a very strong balance sheet, which enables us to get very good credit and payable terms. For example, with gasoline, several years ago a load of gasoline would cost $10,000. Now a load of gasoline is somewhere between $30,000 and $35,000. We turn our gasoline about every three days and our payment terms are 10 days. I am pretty confident that some of the smaller operators would not have that same type of payment term. It's been, quite frankly, a crunch on working capital for some of the smaller operators. So that creates an acquisition opportunity. Anytime there is pressure in our industry, I believe it creates opportunities to perhaps purchase some of the operators that don't have the same type of structure that we do. So the opportunities in that regard going forward from within are not only our nine-state market area, but we also did a warehouse expansion several years ago, which will enable us to add another 1,000 stores above the ones we currently have, which means that we may look to go into other states that border our current market areas, states such as Michigan, Ohio, Kentucky, Tennessee and Arkansas. Those are states that we are looking to penetrate and I think there are opportunities to be had in those states.
TWST: Will you continue to focus on small communities?
Walljasper: Absolutely. That's our bread and butter and that will continue to be our focus. Yet at the same time, we are not going to turn our back to some of the suburban areas as well. It's highly unlikely that we will go into deep urban areas like in the middle of Chicago or Saint Louis, places like that. But certainly, we look to penetrate some of the suburban areas as well.
TWST: Is there anything you would like to add regarding the company's strategies as you look out over the next few years?
Walljasper: From a strategy standpoint, we are looking to grow our unit base 4% to 5% each year and are looking for some margin expansion in all lines of our business. And at the same time, we're trying to hold operating expenses in check as well, which can be a little more challenging, given the rise in credit card fees, which are eating away at some of the profits not only of our company but all companies. We have very aggressive goals on a yearly basis for same-store sales and are looking to drive those somewhere in the mid-single digits.
TWST: What would you reasonably expect the company to look like in about three years?
Walljasper: I think that the picture would be very similar to what it is now, but just on a broader, larger scale. In other words, our unit base would grow, our margins from where they are at will grow and, hopefully, we will have some form of sustainability in same-store sales over that period of time. So doing all of this with, obviously, either our cash or operating cash flow of the company, we are a very low-leveraged company and are having to build to lever up and take care of opportunities that present themselves.
TWST: Would you tell us about the backgrounds and the expertise of several of the key people in the company, including yourself?
Walljasper: I have been with the company 18 years. Currently, I'm the [CFO] for the company. I've held numerous positions within Casey's that have given me a very broad perspective of the company, which has been very beneficial for me. Prior to becoming the CFO, I was the vice president of finance and prior to that, i was the vice president of human resources, overseeing not only human resource and training functions, but also risk management and safety issues as well. Some of the other key individuals in our company are our [CEO], who has been with the company over 20 years. He has held an even [COO] to vice president overseeing all of the store development, store construction and service; he is a very good logistical individual. Our [COO], Terry Handley, has been with the company I believe, almost 30 years, if not over 30 years. He grew up with the company and he has worked about every operational position in the company, and has worked himself up into his current position. He has a tremendous knowledge of store operations and the convenience store industry.
TWST: Do you think that the investment community understands you fairly well?
Walljasper: Yes. I think for the most part. We do a very aggressive job in getting the word out about Casey's General Stores and currently have seven sellside analysts who follow the company. We travel on a regular basis around the United States to try to educate potential investors about our company and some of the different metrics with our company, some of the different trigger points. The area that is probably the most challenging for some of the institutional investors is the gas margin. There is volatility in that on a short-term basis and it makes it little bit more challenging to try to model from a future perspective.
TWST: What would be the two or three best reasons for the long-term investor to look very closely at Casey's?
Walljasper: We certainly have a very strong balance sheet. When I look at our company and when most investors look at our company, they will see that there is not a financial obstacle for growing this company. Our average long- term debt-to-total capital ratio is about 26%, 27%. We have the ability and the appetite to lever that up, given the right opportunities. However, we are not going to grow just because somebody wants us to grow. We are going to grow in a very logical format and make sure we keep our eye on the return on invested capital, which happens to be one of the metrics that executive officers are compensated on. So that's one of the reasons. From an infrastructure standpoint as well, we do not have an obstacle for growth. As I mentioned earlier, we did double the size of our distribution center, which will give us capacity for another 1,000 stores beyond what we have and not only within the nine-state area, but we'll be taking advantage of opportunities in the border states. I think there is a tremendous amount of opportunity given the fractured nature of the competitive landscape in our market area. I believe that we are positioned very well to continue to move forward.
TWST: Is there anything significant in the area of population shifts or trends that could affect you?
Walljasper: I wouldn't say that there is anything significant. Census data is one of the criteria that we do look at when we look to build or purchase in a given community. We certainly want to make sure that there is going to be a population base to support that location. But I can tell you this: we have stores in towns with populations as low as 430 individuals. A store can be supported in that type of community. The key is making sure that the highway coming through that town is a well-trafficked highway that is going to perhaps make a larger community and I think you will continue to have store traffic.
TWST: Is a great deal of your business repeat business from local people?
Walljasper: That's absolutely correct. We feel repeat business for us is key, but even though a highway goes through the town, I wouldn't call it transient traffic. Commuter traffic is coming on that route probably at least two times in the day. People will purchase their items in a convenience store either where they work or where they live or somewhere in between and that's where we want to be focused.
TWST: I have seen lot of Wawas in the East. Are your stores similar?
Walljasper: I was just out on the East Coast and visited a few of their locations. I have been into several before, but I would say that we are probably more different than we are similar in the fact that most of the Wawa stores would be located in more urban areas and it has a much larger footprint. Also some Wawas don't have gasoline. All of ours do sell gasoline. Our typical setup, we have four pump islands, what we call a four quad setup, and some of the larger Wawas have tremendously more dispensers than that and a much larger footprint than ours.
TWST: You have ATMs in your stores?
Walljasper: That's correct.
TWST: How much do you charge typically?
Walljasper: That depends on who we are partnered with. We don't own all the ATMs. We own some of them. We would partner with local banks, get the ATMs in there as a traffic driver and whatever the banks charge will fluctuate by the bank. I know Wawa does not charge and it's one of their trademarks. We don't own all of ours, so it's a little more of a challenging question.
TWST: Is there anything that you would like to add?
Walljasper: Just to reiterate, we are different from some of those convenience stores that we are compared to. We do own all of our assets, including the distribution center, and it includes the fleet of trucks. We are very vertically integrated; we deliver 70% of gasoline to our stores in our own tankers that are scattered throughout our nine-state area. We own the real estate, we own the buildings, we are conservative by nature, which I think has benefited us over the years. As I mentioned previously, there is not an obstacle to growth from a financial perspective, it is just a matter of locating the appropriate acquisitions and building in the right community. We have seen recently a little bit of disconnect between buyers and sellers in the acquisition arena given the fact that the Midwest area over the last 12 months has seen record gas margins. I think that doesn't give much incentive for smaller operators to sell their business when they are seeing increased cash flows. But I think that disconnect will narrow as we get back to a more normalized margin environment.
TWST: Over the history of the company, there must have always been tremendous attention to detail.
Walljasper: Without a doubt I think that is a very true statement. It ranges from the prepared food segment that we talked about; there has always been an attention to detail of having a quality product first. We have never tried to shortcut that and I think it has been to our benefit over the years, not just with pizza but with other products we bring in. There is a pretty high quality standard that needs to come forward before we put our name on that product. Cleanliness of our facilities, that is a key factor, well-lit facilities are another key factor, that shows a lot of attention to detail I think. You take care of the smaller things and typically those bigger things take care of themselves.
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