Casey’s General Stores, Inc. (NASDAQ:CASY) Q1 2024 Earnings Call Transcript

Casey’s General Stores, Inc. (NASDAQ:CASY) Q1 2024 Earnings Call Transcript September 12, 2023

Operator: Good day, and thank you for standing by. Welcome to the Q1 Fiscal Year 2024 Casey’s General Stores Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Brian Johnson. Sir, please go ahead.

Brian Johnson: Good morning, and thank you for joining us to discuss the results for our first quarter ended July 31, 2023. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, Chairman, President and Chief Executive Officer; as well as Steve Bramlage, Chief Financial Officer. Before we begin, I’ll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company’s supply chain, business and integration strategies, plans and synergies, growth opportunities, and performance at our stores.

There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including but not limited to the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine and related governmental actions as well as other risks, uncertainties and factors which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey’s disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.

A reconciliation of non-GAAP to GAAP financial measures referenced in this call, as well as the detailed breakdown of the operating expense increase for the fourth quarter can be found at our website at www.caseys.com under the Investor Relations link. With that said, I’d now like to turn the call over to Darren to discuss our first quarter results. Darren?

Darren Rebelez: Thanks, Brian, and good morning, everyone. We’ll get to the excellent first quarter results in a moment. First, I want to thank our team for their dedication and to getting the fiscal year off to a great start. As our guests and communities shifted into back-to-school season, Casey’s held its annual Cash for Classrooms giving campaign in August. Thanks to our generous guests and passionate team members, we raised over $700,000. These funds will support needs and projects for schools, students and teachers in our local communities. The grant application process opens in October, and we encourage schools, teachers and parent-led organizations to apply. Now, let’s discuss some results from the quarter. Diluted EPS finished at $4.52 per share, an 11% increase from the prior year.

Inside sales remained strong, driving inside gross profit dollars up over 10% to $556 million. The company generated $169 million in net income, an increase of 11%, and $316 million in EBITDA, an increase of 8% from the prior year. As you may have seen in our Investor Day presentation, we launched a thin crust pizza offering in the first quarter. This addition to the lineup has been a great success and demonstrates the blueprint for innovation at Casey’s. Our Guest Insights team identified a gap in our menu. Our culinary team created a delicious product. Our marketing team worked with our advertising partner to create a great marketing campaign and, ultimately, our operations team brought to life in our stores and communities across our footprint.

And I think the results speak for themselves. This type of strategic innovation and teamwork is something that will help us achieve our goals for the three-year strategic plan. On the fuel side of the business, we continue to strike an appropriate balance between volume and margin. However, one notable difference with this quarter’s performance is there were no significant macro events that influenced margin. It was a relatively benign quarter from a wholesale cost perspective, and we believe this is a strong indicator that higher industry fuel margins are here to stay. Overall, I think this quarter truly illustrates the strength of the unique Casey’s business model, particularly in a more normal times and shows our three-year strategic plan objectives are very achievable.

The team continues to do an excellent job operating the business efficiently and effectively both inside and outside the store. I would now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 5.4% for the first quarter or 12.1% on a two-year stack basis, with an average margin of 40.6%. We saw notably strong performance in whole pizza pies and bakery, as well as alcoholic and non-alcoholic beverages. Our team, with support from our supplier partners, continues to find the right product mix and promotional activity to drive sales and profitable results. Same-store prepared food and dispensed beverage sales were up 5.9% or 14.8% on a two-year stack basis, with an average margin of 58.2%, up approximately 260 basis points from the prior year.

The previously mentioned innovation with thin crust pizza helped drive sales as we saw great results with our whole pizza pies, in addition to strong performance in bakery. Margin was favorably impacted by softening in commodities, notably cheese during the quarter. Same-store grocery and general merchandise sales were up 5.2% or 11% on a two-year stack basis, with an average margin of 34.1%, an increase of approximately 20 basis points from the prior year. We continued our strong momentum in beverages, with non-alcoholic beverages, specifically energy drink, showing fantastic results. Alcoholic beverages also performed quite well as we continue to leverage our competitive advantage of approximately 1,500 stores with liquor licenses. For fuel, same-store gallons sold increased 0.4% with a fuel margin of $0.416 per gallon.

Our fuel team is striking the right balance between margin and gallon volume and the results speak for themselves. This quarter marks the ninth quarter in a row with fuel margins above $0.345 per gallon and four of the last five quarters have been over $0.40 per gallon. I would now like to turn the call over to Steve to discuss the financial results from the first quarter. Steve?

Photo by Franki Chamaki on Unsplash

Steve Bramlage: Thank you, Darren, and good morning. Each of the three areas of our business performed well in the quarter, and that’s a testament to our business model and the execution of our teams. Total revenue for the quarter was $3.8 billion, a decrease of $585 million or 13% from the prior year due to the lower retail price at fuel. Total inside sales for the quarter were $1.4 billion, an increase of $103 million or 8% from the prior year. For the quarter, grocery and general merchandise sales increased by $74 million to $997 million, an increase of 8%. Prepared food and dispensed beverage sales rose by $29 million to $373 million, an increase of 8.5%. Results were also favorably impacted by operating approximately 3% more stores on a year-over-year basis.

Retail fuel sales were down $669 million in the first quarter due to a 24% decrease in the average retail price per gallon that was partially offset by a 3.6% increase in gallons sold to $714 million. The average retail price of fuel during this period was $3.40 a gallon compared to $4.49 a year ago. As a reminder, we define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey’s had gross profit of $878 million in the first quarter, an increase of $42 million or 5% from the prior year. This is driven by higher inside gross profit of $52.2 million or 10.3%, partially offset by a decrease of $11.2 million or 3.6% in fuel gross profit. Inside gross profit margin was 40.6%, up 80 basis points from a year ago.

The grocery and general merchandise margin was 34.1%, that’s an increase of 20 basis points from the prior year. The slight increase was due to a favorable mix shift with further penetration of private label products, a lower LIFO charge than in the prior year and favorable vendor funding. Prepared food and dispensed beverage margin was 58.2%, that’s up 260 basis points from prior year. The category margin benefited from lower commodity costs, specifically cheese, which was $2.04 per pound for the quarter, that compares $2.49 per pound last year, a decrease of 18%. This positively impacted PF and DB margin by approximately 130 basis points. Margin also benefited from a lower LIFO charge in the prior year, as our input costs softened, which had an approximate 120 basis point impact.

We are in the midst of adjusting certain benefits associated with our Casey’s Rewards platform. And during the quarter, these one-time changes positively impacted PF and DB sales and margin by approximately $4.9 million. However, because we were concomitantly running a summer long promotional campaign of $0.89 fountain drinks, we did not see much of a net benefit from the program change. Fuel margin for the quarter was $0.416 per gallon, down $0.031 per gallon from the all-time high prior year’s quarterly CPG. Fuel gross profit benefited by $20.2 million from the sale of RINs, and that’s up $2.5 million from the same quarter in the prior year. Total operating expenses were up 3.2% or $17.6 million in the first quarter. Nearly 3% of the total operating expense increase is due to unit growth as we operated 82 more stores than the prior year.

Credit card fees decreased approximately $6 million due to lower retail fuel prices and that offset essentially all remaining operating expense increases. Same-store employee expense was approximately flat, as the increase in wage rates was offset by the reduction in same–store hours. Depreciation in the quarter was $82.9 million, that’s up $6.6 million versus the prior year, primarily due to operating more stores. Net interest expense was $12.5 million in the quarter, down $1.3 million versus the prior year, aided by rising interest rates on our cash balances. As a reminder, about 16% of our debt is floating rate. The effective tax rate for the quarter was 23.6% compared to 24.6% in the prior year. That decrease was driven by a one-time benefit that we recorded due to an income tax rate reduction in the state of Nebraska.

Net income was up versus the prior year to $169.2 million, an increase of 10.7%. EBITDA for the quarter was $316.9 million compared to $293 million a year ago, an increase of 8.2%. Our balance sheet remains in excellent condition and we have ample financial flexibility. On July 31st, we had total available liquidity of $1.3 billion. Furthermore, we have no significant maturities coming due until fiscal 2026. Our leverage ratio, calculated in accordance with our senior notes, is now 1.7 times. For the quarter, net cash generated by operating activities of $229 million, less purchases of property and equipment of $69 million, resulted in the company generating $160 million in free cash flow. That compares to generating $194 million in the prior year.

At the September meeting, the Board of Directors voted to maintain the quarterly dividend at $0.43 per share. During the first quarter, we also repurchased approximately $30 million of stock and have $370 million remaining on our existing share repurchase authorization. Investing in EBITDA and ROIC accretive growth opportunities remains our primary capital allocation priority. But as we mentioned at our Investor Day, our balance sheet affords us the opportunity to be more opportunistic than in the recent past with regards to share repurchase. In our press release and during this call, we have and will mention several pending acquisitions. These acquisitions will be funded with cash on hand. The pending transaction with EG Group is subject to regulatory approval and is expected to close this calendar year.

As a result of the pending transactions, Casey’s expects to add at least 150 stores in fiscal 2024. We will revisit the entire annual outlook following our second quarter earnings call. Our August results for the current quarter are as follows: Same-store sales, both inside and fuel gallons, are slightly below the midpoint of their respective annual outlooks. Fuel CPG through August was in the high-$0.30s. At current spot, cheese prices are modestly favorable versus the prior year, but less so than we experienced in the first quarter. Total operating expenses will be near the high end of our annual growth range in the second quarter and that’s primarily due to timing. I’d now like to turn the call back over to Darren.

Darren Rebelez: Thanks, Steve. I would like to express my gratitude to the entire Casey’s team for delivering another great quarter. We’re off to an extremely strong start to our fiscal year in our three-year strategic plan. Our M&A and real estate teams have been hard at work as we’re very excited about the pending acquisition with EG Group and their 63 stores in Kentucky and Tennessee. These stores are located in rural and suburban markets, and we look forward to bringing more of our delicious pizza to Kentucky and Tennessee. It is complimentary to our existing footprint and within our distribution center’s radii, further leveraging our scale and infrastructure. In the first quarter, we also introduced a refreshed app design that makes it easier than ever for our loyalty members to track their points, redeem for rewards, and see how much they’ve saved by shopping with Casey’s Rewards.

The program is nearing 7 million members, and we’re excited to see the way our value proposition is resonating across the Midwest. Our guests have also gravitated to our private label products, and we exited the quarter approaching 350 items in the assortment with over 40 new items in the pipeline for the remainder of the calendar year. And the results are there; achieving nearly 10% unit share and over 10% gross profit share in the first quarter, with same store sales of 26%. On the ESG front, we released our third annual sustainability report in July, and it’s available on our website. Our team has put in a lot of work to build a more sustainable business for Casey’s, and we’re excited to share our progress on this journey. As we look ahead to the second quarter of fiscal ’24 and beyond, I’m excited about what Casey’s has to offer.

Our balance sheet gives us the ability to be disciplined but opportunistic with store growth and our capabilities throughout the organization will allow for that growth to be efficient and innovative. The plan we laid out in June has been well received and we have the team in place to execute on that plan at a high level and continue to deliver the kind of results our investors have come to expect from Casey’s. Looking forward to seeing the results of our hard work in the quarters and years ahead. We will now take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from Anthony Bonadio of Wells Fargo. Your line is open.

Anthony Bonadio: Yeah. Hey, guys. Congrats on the nice quarter.

Darren Rebelez: Good morning.

Anthony Bonadio: So, I guess just starting with fuel margins, clearly a lot stronger than some of us were expecting. Seems like a pretty normal environment in terms of price action, but there does seem to be a growing consensus that breakevens are sort of drifting higher. I guess just any thoughts on underlying drivers of that dynamic? And then, how are you thinking about that mid-$0.30s number that you talked about as a modeling assumption when you gave the ’24 guidance?

Darren Rebelez: Yeah, Anthony, this is Darren. I’ll start with that. Like you said, it was a relatively normal quarter from a fuel margin standpoint. We had some — a little bit of volatility here and there, but nothing of note. And I’d first just say that I think our team did a really great job of balancing that volume and margin. And when we look at volume numbers for the industry, [indiscernible] had those volume numbers down about 4.1% in our geography. So, I think our positive gallon growth was great. In terms of the outlook moving forward, I would prefer to be a little more on the conservative side, but I have to say that the more recent history, as I mentioned in the prepared remarks of nine quarters over $0.345, I think it would suggest that those margins may tick up a bit higher.

And the pressure that we’ve talked about over the last couple of years with the smaller operators is still there. The cost of operating the business is still a challenge for a lot of those folks that don’t have scale. And I think in the current environment the continued erosion of the cigarette category is putting additional pressure on those smaller operators. So, I would say if anything there’s probably an upward bias on fuel margin moving forward.

Anthony Bonadio: Got it. That’s really helpful. And then, just quickly on operating expenses. Obviously, a very impressive quarter on costs. But on guidance, you raised your unit growth guidance by, it looks like, about 2% for fiscal ’24, but left OpEx growth unchanged. So I guess one, why is that? And then two, assuming that still holds and fiscal Q1 is certainly a good data point, I guess what makes you more constructive about your progress there?

Steve Bramlage: Yeah. Hey, Anthony. This is Steve. I’ll maybe start with what’s in or out of the guidance. So, we did raise the unit number that we expect to close for the year just based on the strong start to the year that we’ve had. We don’t know the timing of exactly when any of those units are going to come into the system, so to speak, and the EG transaction, as we mentioned, that does require us to get regulatory approval. So all of our guidance that we gave at the beginning of the year was predicated on that initial unit number and so our numbers from an OPEC standpoint are still based on that original unit count. We haven’t adjusted total OPEC’s expectations for when those new units will come in yet because we just don’t know when we’ll get clearance to close those.

So when we revisit the total outlook at the end of the second quarter, we’ll be halfway through the year, I think we’ll have a lot more clarity around exactly when those units come in and you know what impact they may have on all of the various metrics and we’ll try to be as transparent as we can at that point in time.

Operator: Thank you. One moment please for our next question. Our next question will come from Ben Bienvenu of Stephens Inc. Your line is open.

Ben Bienvenu: Hey, good morning, guys.

Darren Rebelez: Good morning.