Casey’s General Stores, Inc. (NASDAQ:CASY) Q2 2024 Earnings Call Transcript

Casey’s General Stores, Inc. (NASDAQ:CASY) Q2 2024 Earnings Call Transcript December 12, 2023

Operator: Good day and thank you for standing by. Welcome to Casey’s General Stores Second Quarter Fiscal Year 2024 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. I would now like to hand the conference over to Brian Johnson, Senior Vice President of Investor Relations and Business Development. Please go ahead.

Brian Johnson: Good morning and thank you for joining us to discuss the results from our second quarter ended October 31, 2023. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, Board Chair, President and Chief Executive Officer; and 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 that 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 on this call as well as a detailed breakdown of the operating expense increase for the second quarter can be found on our website at www.caseys.com under the Investor Relations link. With that said, I would now like to turn the call over to Darren to discuss our second quarter results. Darren?

Darren Rebelez: Thanks, Brian, and good morning, everyone. We’ll discuss the excellent second quarter results in a moment. First, I want to thank our team, including the new team members in our 17th state of Texas for their dedication and hard work. We’re excited to welcome the great state of Texas to the Casey’s community. I know that I speak for our entire team when I say we’re extremely humbled by the response from our caring guests and dedicated team members to our annual veterans giving campaign in November. This year’s campaign resulted in over $1.2 million, just an outstanding outcome and for two great causes. Hope For The Warriors and Children of Fallen Patriots. We are so grateful to our communities and guests for their generous act of rounding up their purchase.

As a veteran and myself, I know the great sacrifices these families have made and the challenges they face. Thank you to our partners at PepsiCo, who contribute to this campaign, our Casey’s team members and especially to our guests who truly do good when they shop at Casey’s. Now let’s discuss the results from the quarter. Diluted earnings per share finished at $4.24 per share, a 16% increase from the prior year. Inside sales remained strong, driving inside gross profit dollars up 10% to $553 million. The company generated $159 million in net income, an increase of 15% and $306 million in EBITDA, an increase of 13% from the prior year. Inside the store, same-store sales were up despite lapping a very strong second quarter last year, while margins improved both sequentially and year-over-year as ingredient costs improve.

On the fuel side of the business, we continue to strike the right balance between volume and margin. Similar to the first quarter, there are no significant macro events that impacted wholesale fuel costs. With each passing quarter, it becomes more evident that higher industry fuel margins are here to stay. With another strong quarter, which led to our highest EBITDA in the first six months in the company’s history, the strength of our unique business model was again on full display. The team continues to do an excellent job operating the business efficiently and effectively, both inside and outside the store, as evidenced by same-store labor hours being down 2%, while our overall guest satisfaction score was up over 400 basis points over the prior year.

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 2.9% from the second quarter or 11% on a two-year stack basis with an average margin of 41.1%. We saw notably strong performance in whole pizza pies, bakery and dispensed beverage. We’re also very pleased with the continued inside margin expansion this quarter. Same-store prepared food and dispensed beverage sales were up 6.1% or 17.2% on a two-year stack basis with an average margin of 59%, up approximately 230 basis points from the prior year. Whole pies performed well in the quarter, and we also saw a strong performance with appetizers and sides. Margin was favorably impacted by softening in commodities, notably cheese during the quarter.

Same-store grocery and general merchandise sales were up 1.7% or 8.7% on a two-year stack basis with an average margin of 34%, an increase of approximately 70 basis points from the prior year. We saw positive momentum in the category, notably in alcoholic beverages, and our private label program continues to be a great value option with bottled water and Casey’s Chips performing well in the quarter. For fuel, same-store gallons sold were flat with a fuel margin of $0.423 per gallon. Our fuel team is striking the right balance between volume growth and margin and the results continue to show it. This quarter marks for the tenth quarter in a row with fuel margins about $0.345 per gallon and five of the last six quarters have been over $0.40 per gallon.

Our volume continues to outperform our geographic market as well as OPIS fuel gallon sold data shows the mid-continent region, down approximately 5% in the quarter. I’d now like to turn the call over to Steve to discuss the financial results for the second quarter. Steve?

Steve Bramlage: Thank you, Darren, and good morning. Our performance was excellent in the second quarter as we saw great results inside and with fuel, while we continue to operate the stores efficiently. This was despite a challenging comparison from the second quarter last year and that’s a testament to the resiliency of our business model and our team’s execution. Total revenue for the quarter was $4.1 billion, an increase of $86 million or 2% from the prior year due primarily to higher inside revenues. Total inside sales for the quarter were $1.3 billion, and that’s an increase of $78 million or 6% from prior year. For the quarter, grocery and general merchandise sales increased by $47 million to $964 million, an increase of 5.2%.

Prepared food and dispensed beverage sales rose by $31 million to $382 million, an increase of 8.9%. Results were also favorably impacted by operating more stores on a year-over-year basis. Retail fuel sales were up $11 million in the second quarter, as a 4% increase in gallons sold to $730 million was partially offset by a 3.5% decrease in the average retail price per gallon. That average retail price of fuel during the period was $3.62 a gallon compared to $3.75 a year ago. We define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey’s had gross profit of $886 million in the second quarter, an increase of $75 million or 9.2% from the prior year. This was driven by both higher inside gross profit of $48.8 million or 9.7% and higher fuel gross profit of $24.4 million or 8.6%.

Inside gross profit margin was 41.1% and that’s up 130 basis points from a year ago. The grocery and general merchandise margin was 34%, an increase of 70 basis points from prior year. The increase was due primarily to favorable vendor-funded promotions and volume discounts, a lower LIFO charge than in the prior year as well as private label increasing its share of our mix. Prepared food and dispensed beverage margin was 59%, up 230 basis points from prior year. The category margin benefited from lower commodity costs, specifically cheese which was $2.12 a pound for the quarter compared to $2.24 a pound last year, a decrease of about 5%. Margin also benefited from a lower LIFO charge in the prior year as generally input costs softened. Fuel margin for the quarter was $0.423 per gallon up $0.18 per gallon from the prior year.

Fuel gross profit benefited by $8.4 million from the sale of RINs, down $2.7 million from the same quarter in the prior year. Total operating expenses were up 7.5% or $40.5 million in the second quarter. Over 3% of the total OpEx increase is due to unit growth as we operated 129 more stores year-over-year. Same-store employee expense accounted for another 1% of the increase, as increases in wage rates were partially offset by the reduction in same-store hours, Darren previously mentioned. The company also incurred higher variable incentive compensation, repair, maintenance and insurance expense that composed 2% of the total increase. Depreciation in the quarter was $85.6 million, and that’s up $7.5 million versus prior year, primarily due to operating more stores.

Net interest expense was $12.3 million in the quarter, down $1.2 million versus the prior year, aided by rising interest rates on our cash balances. The effective tax rate for the quarter was 23.6%, consistent with the prior year. Net income was up versus prior year to $158.8 million, an increase of 15.4% and EBITDA for the quarter was $305.9 million, compared to $271.7 million a year ago, an increase of 12.6%. Our balance sheet remains in excellent condition, and we have ample financial flexibility on October 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 1.6 times. For the quarter, net cash generated by operating activities of $253 million was purchases of property and equipment of $107 million resulted in the company generating $146 million in free cash flow.

This compares to generating $115 million in the prior year. At the December meeting, the Board of Directors voted to maintain the quarterly dividend at $0.43 per share. During the quarter, we also repurchased approximately $30 million of stock and have $340 million remaining on our existing share repurchase authorization. Investing in EBITDA and ROIC accretive growth investments remains our primary capital allocation priority, but as we mentioned in our Investor Day, our balance sheet affords us the opportunity to be more opportunistic than in the recent past with regards to share repurchase. Our M&A pipeline remains strong, and our integration capabilities continue to expand. The transaction with EG Group mentioned last quarter has closed and that transaction as well as the other announced deals are being funded with cash on hand.

The majority of these payments either occurred in the second quarter or they will occur in the third quarter. And this includes the transaction of 22 stores in our 17th state of Texas, which closed on November 16. As a result of the strong financial performance and unit growth year-to-date, we are updating our fiscal 2024 outlook as follows. Fiscal 2024 EBITDA growth is expected to be in line with the long-term strategic plans goal of 8% to 10%. The company also expects to repurchase at least $100 million in shares throughout the fiscal year. Same-store inside sales are now expected to increase 3.5% to 5%. Net interest expense is expected to be approximately $53 million, and the tax rate is now expected to be approximately 23% to 25% for the year.

As discussed in the first quarter, the company expects to add at least 150 stores in fiscal 2024. That’s more than the originally planned 110. As a result of this, total operating expenses are now expected to increase approximately 6% to 8%, though same-store operating expenses, excluding credit card fees are expected to only increase approximately 3% for the year. Depreciation and amortization are now expected to be approximately $350 million for the year. The company is not updating its outlook for the following metrics. We expect inside margin to be approximately 40% to 41%. The company expects same-store fuel gallons sold to be between negative 1% and positive 1%. And the purchase of property and equipment is expected to be $500 million to $550 million.

Our results for the current quarter are as follows. First, November inside same-store sales are consistent with the updated range of the annual outlook. Fuel gallons are near the midpoint of the annual outlook and CPG is nearly $0.40 per gallon. Current cheese costs are modestly favorable versus the prior year. And now on a final note, as a reminder, in the third quarter of fiscal ’23, we had a onetime operating expense benefit of approximately $15 million due to the favorable resolution of a legal matter. This benefit will not recur. Thus, total third quarter operating expenses will be up near the low teens in percentage terms, and that’s primarily due to lapping the onetime benefit as well as store growth and several million dollars of onetime integration costs.

If we were not lapping this onetime benefit from the prior year, total OpEx would be up approximately 8% to 9% in third quarter. I’d now like to turn the call back over to Darren.

Darren Rebelez: Thanks, Steve. I’d like to thank the entire Casey’s team for another quarter of outstanding results. We know that it’s a challenging time for consumers everywhere. And we’re so proud of the ability of our team members and stores to serve those guests with high-quality products. Our private label program continues to shine, and we saw positive growth in units and gross profit dollars during the quarter and continue to see a favorable impact on inside margin. And our guests are gravitating towards Casey’s Rewards as we have over 7.3 million members today. On the prepared food and dispensed beverage side, Thin Crust Pizza continues to do well and has achieved a 13% share of whole pies throughout the quarter. The innovation team also moved to the breakfast daypart for the launch of the Ultimate Waffle breakfast sandwich, which has come out of the gate strong.

Our continuous improvement team deserves price for all it has done to operate the stores efficiently and effectively while maintaining or improving guests and team member satisfaction. The team was able to take out another 2% of same-store labor hours in the quarter. We continue to expand our store count with complementary geographic growth. Recent acquisitions have strengthened our Eastern footprint in Kentucky and Tennessee, while we’ve also ventured into Texas, which we think is a hand and glove fit in our Southwest footprint. All of the stores are within our existing distribution radius, it fit the Casey’s playbook of rural and suburban geographies. On the fuel side of the business, we had another strong quarter, both in fuel margin and gallons.

With each passing quarter, we are becoming more confident that our industry has the necessity due to higher operating expenses, reset to a higher fuel margin environment. And with our team and the capabilities that we’ve stood up, we’re focused on continuing to maximize gross profit dollars. As we look ahead to the second half of fiscal ’24 and beyond, I’m excited about Casey’s and our ability to execute our strategic plan. Our balance sheet affords us the ability to be disciplined but opportunistic with our store growth and our capabilities throughout the organization will allow for that growth to be efficient and innovative. We’ll now take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Ben Bienvenu with Stephens. Your line is open.

Ben Bienvenu: Hey, thanks. Good morning, guys.

Darren Rebelez: Good morning, Bienvenu

Ben Bienvenu: Good morning. Steve, I want to follow up on the commentary you gave on quarter-to-date. You noted that the inside same-store sales results in the month of, I guess, November, and I don’t know if that includes the stub period of December, but it’s within the range of the annual guidance. Does the composition of the same-store sales growth looks similar to 2Q and that prepared foods is outpacing grocery. And any color that you can offer on kind of that divergence grocery moderating in the second quarter while same-store sales in prepared foods remains very strong, would be helpful.

Steve Bramlage: Sure, Ben. I’ll answer the first part of that and let Darren talk a little bit about the experience in the second quarter. The commentary is meant to be quarter-to-date, so it includes a little bit of a stub period into December. And yes, generally, were within the annual range for total inside and prepared food quarter-to-date is running a little bit stronger than Grocery similar to what we experienced in the second quarter. Darren, do you want to add a couple of comments on that second quarter experience.

Darren Rebelez: Yes. In the second quarter, Ben, we saw a little bit of softness on the grocery and general merchandise side that was primarily in the tobacco category, specifically cigarettes. And I think you’ve seen that throughout the industry that cigarette volume was significantly softer in the second quarter, and so that offsets some strength in some of the other categories. We also encountered a little bit of weather anomalies, which I don’t typically like to talk about, but it does impact the beverage business to a certain degree, and we saw some of that in October as well. But I didn’t see anything trend-wise outside the cigarettes that was very concerning. And I think what was encouraging to us is that our prepared food growth actually accelerated from the first quarter into the second. And so a very strong two-year comps plus 17%. And so we’re seeing the overall business perform very well.

Ben Bienvenu: Okay. Great. My second question is related to your operating expense growth guidance. You raised that — you noted that 3Q growth year-over-year will be elevated and implied in kind of the updated guidance that you’ve given in the 3Q commentary that you’ve given is a pretty substantial step down in growth from 3Q to 4Q. Is it just a function of comparisons or what else is going on there? You made nice progress in the period on labor hours.

Steve Bramlage: Yes, I’ll start with that, Ben. I would expect year-over-year total OpEx growth to be the highest in the third quarter, and that’s purely a function of lapping the benefit we had last year and then you’re combining that with the fact that now all of these year-to-date acquisitions, all of which have closed relatively recently, certainly the EG and the Texas transactions, we’ll have several million dollars of integration-related activity and almost all of that will hit us in the third quarter. And so I would expect that we would be back to almost back into the number mechanically in the fourth quarter, but we would be back into a more normalized run rate in the fourth quarter, albeit with a higher number of units coming into the system.

But that 3% number we gave for same-store OpEx, excluding credit cards, that number should be very consistent quarter in and quarter out, just — and that’s a testament to how well the mothership is managing OpEx at the stores right now.

Operator: Thank you. [Operator Instructions] Next question comes from the line of Anthony Bonadio with Wells Fargo. Your line is now open.

Anthony Bonadio: Yeah, hey, good morning, guys. Congrats on the nice quarter. So I just wanted to ask about fuel margins in the context of the new guidance. I’m getting something in the mid $0.30 per gallon, maybe a little higher implied in the back half to get to that new 8% to 10% EBITDA growth number. I guess, one, is that the right way to think about it? And then two, can you just talk about why that’s the right number? And then just different puts and takes around that.

Darren Rebelez: Yes, sure, Anthony. With respect to the fuel margin, we tend to prefer to be a little bit conservative on those forecasts because as you well know, it’s a pretty volatile category. That being said, we’ve seen five out of the last six quarters be in that $0.40 range. So we’re not — we don’t see anything specifically that would cause a pullback in fuel margin, but we’re just being conservative on that front. And so that’s really about it in terms of the modeling.

Anthony Bonadio: Okay. Got it. And then just on inside margins. Obviously, another very strong quarter there. I know you guys have kind of talked about being comfortable around that 40% level over the long term. It seems like the current environment, as I think about things like mix as well as a lot of the things you guys are doing internally sort of remains favorable. I guess can you just talk about the sustainability of what we’re seeing today? And just how you’re thinking about the trade-off between sort of flowing that through versus investing in value?

Darren Rebelez: Yes. Well, we think the margins are sustainable for a couple of reasons. When you look at how the mix is evolving with the tobacco category being one of the lower-margin categories in the assortment and that the size of that category shrinking as a percentage of the total business, that’s favorable to a margin rate as that mix becomes more heavily reliant on the higher-margin categories. The second piece of that is our prepared foods business. Our prepared foods business continues to grow, and you saw the margin expansion in that business. And so when you combine those two, that’s a more sustainable margin mix. And the third thing I would say is our private label continues to grow inside the portfolio, which also blends up the margin.

So those three things are all working for us. Now with respect to investing in value, we do invest in value to a certain extent today primarily through our private brand. And so with our private label products, even though they represent significant value to the guest, those are highly margin accretive to us. So that works out well. And more recently, what we’re seeing from a consumer standpoint is it at the lower end of the economic spectrum, you’re starting to see consumers shift heavier over to prepared foods as opposed to grocery and general merch. I think that’s just a function of the relative value that our prepared food represents versus some of the other snack products and packaged good products you see on the other side. So all of that is constructive to margins and so that’s why we think that’s sustainable and we don’t need to engage in extreme value offerings to maintain and drive the traffic.