Casey’s Is in Acquisition Mode
By Greg Lindenberg on Jul. 23, 2017ANKENY, Iowa -- Signaling to the convenience-store industry that it is in growth mode despite “soft” traffic, Casey’s General Stores Inc. said during an Investor Day presentation that it plans to increase the pace of acquisitions and new-store development, according to a research note by Wells Fargo Securities LLC analyst Bonnie Herzog, who attended the July 20 event.
On the company’s earnings call June 6, Terry Handley, president and CEO of Casey’s, said, “During our fiscal year, like many others in the convenience- and grocery-store sector, as well as the broader foodservice industry, we experienced downward pressure on customer traffic, which adversely impacted same-store sales across all of our categories. We believe this pressure is related to the agricultural economy in our marketing area, the growing spread in pricing between food away and food at home, as well as the increased promotional activities of competitors.”
“We have been hearing fairly consistently from Casey’s and many of our other retailer contacts, as well as from staples companies such as PepsiCo, that c-store traffic—particularly in-store traffic—has slowed down, with little explanation given the broad health of the consumer, high-consumer confidence, low unemployment rate and relatively cheap gas prices,” said Herzog, managing director of tobacco, beverage and convenience-store research at the San Francisco-based firm.
She attributed the slowdown to higher light-duty truck sales driving incremental traffic at the pump, and noted there's more money being spent to fill larger tanks in lower-mileage automobiles, and that's translating to less money for in-store purchases. Herzog also mentioned concerns about healthcare costs rising which are causing consumers to tighten their purse strings slightly, grocers’ pricing initiatives, food deflation pressuring prepared-food sales, and cigarette taxes.
Here are the details of the acquisitions and organic-growth strategies that Casey’s executives discussed at the meeting. …
Acquisitions
Casey’s has approximately 1,980 convenience 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.
After missing its 4% to 6% unit growth target for several years, Casey’s has a renewed focus on hitting its target, particularly in light of the soft traffic trends, according to Herzog.
“Management indicated it needs to improve its messaging to the industry that it is willing and able, with hundreds of millions of dollars in buying power, to acquire assets, including outside its geographic footprint, as it seems to have missed out on several recent opportunities including Holiday and PDQ,” she said.
Herzog was referring to Laval, Quebec-based Alimentation Couche-Tard Inc.’s agreement earlier this month to acquire 522 Holiday Stationstores from Bloomington, Minn.-based Holiday Cos., and La Crosse, Wis.-based Kwik Trip Inc.’s deal last week to acquire 34 c-stores from PDQ Food Stores Inc., Middleton, Wis.
Casey’s has been “patient” about acquisitions in recent years, company executives have said. Its last sizeable purchase was in May 2014, when it closed on 24 Stop-n-Go stores in North Dakota and Minnesota.
Distribution dynamics
“Casey’s was not invited to participate in the sale process of Holiday or PDQ,” Herzog said. “In recent years, with M&A multiples elevated, management has maintained a discipline around M&A, which we think has been the right strategy for the most part. However, we can’t help but wonder whether legacy acquisition multiples in the c-store industry of 6x to 8x will be seen any time soon if ever again, and if not, whether Casey’s should raise its bar (and perhaps lower its return threshold) to reaccelerate unit growth and leverage the benefit of its distribution network.”
Casey’s first distribution center is in its home base of Ankeny, Iowa. The company opened its second facility in Terre Haute, Ind., in early 2016, to spearhead expansion in the East, opening its first stores in Ohio this year. The company is contemplating a third distribution center. Although executives have not offered any hints as to where that might be, the map shows opportunities especially in the West.
“Casey’s enjoys a clear competitive advantage by self-distributing approximately 90% of its merchandise given its in-store margins are about 300 to 400 basis points higher and, as a result, it is able to better capture synergies in any potential acquisitions it makes,” Herzog said.
Organic growth
Casey’s annual goal for fiscal 2017 was to build or acquire 77 to 116 stores, replace 35 existing locations and complete 100 major remodels. For the fiscal year, Casey’s built and opened 48 new stores, acquired 22 stores, completed 21 replacements and remodeled 103 stores. As of April 30, it had 27 new stores, 21 replacement stores and 11 major remodel stores under construction. At the fiscal year end, the company had 116 sites under agreement for new-store construction and five stores under agreement to purchase.
Its 2018 goal is to build or acquire 80 to 120 stores.
Casey’s has identified more than 2,700 out of the approximately 3,850 communities with populations between 1,000 and 20,000 in its 15-state marketing area that do not have a Casey’s c-store.
“Management is focused on the large number of small-town communities in its current and new markets that it has yet to enter, particularly Illinois and Wisconsin,” Herzog said. “While we are encouraged by management's desire to accelerate acquisitions, we have concerns about the availability of targets and whether legacy returns and multiples are still reasonable and achievable.”
“The runway for organic growth in small-population markets remains long. A key competitive advantage Casey’s has had has been its small-town focus—communities with populations between 1,000 and 20,000 where 80% of its stores are located—where there is more limited competition in c-stores and fast-food pizza chains,” she said.
Herzog said Wells Fargo is “broadly encouraged” by this opportunity for Casey’s to expand.