Casey’s General Stores, Inc. (NASDAQ:CASY) Q3 2024 Earnings Call Transcript

Casey’s General Stores, Inc. (NASDAQ:CASY) Q3 2024 Earnings Call Transcript March 12, 2024

Casey’s General Stores, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to Casey’s General Stores, Third Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there’ll 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 your first speaker today, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead, sir.

Brian Johnson : Good morning, and thank you for joining us to discuss the results from our third quarter ended January 31, 2024. I’m 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, they 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 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 a detailed breakdown of the operating expense increase for the third quarter, can be found on our website at www.casey.com under the Investor Relations link. With that said, I would now like to turn the call over to Darren to discuss our third quarter results. Darren.

Darren Rebelez : Thanks, Brian. Good morning, everyone. We’re thrilled to discuss third quarter as it once again demonstrated the strength of the Casey’s team and the resilience of our business model. Now, let’s review the results. Diluted EPS finished at $2.33 per share, 13% decrease from the prior year. The company generated $87 million in net income, a decrease of 13% and $218 million in EBITDA, a decrease of 2% from the prior year. As we mentioned in last quarter’s call and the press release, all of these metrics were comparing against the prior year and included a one-time operating expense reduction due to the resolution of a legal matter. This resolution benefited the prior year by approximately $15 million or $0.31 per share.

I’m proud of our team members for producing solid third quarter results. As the team navigated a less favorable fuel cost environment than in the past year, as well as challenging weather in most of our footprint in January. I’d now like to go over our results and share some of the details in each of the categories. Inside, same source sales were up 4.1% for the third quarter or 9.9% on a two-year stack basis, with an average margin of 41.3%. Same store prepared food and dispensed beverage was particularly strong, and sales were up 7.5% or 12.9% on a two-year stack basis, with an average margin of 59.6%, up approximately 230 basis points from the prior year. Whole pies performed well in the quarter, but we also saw strong performance with hot sandwiches and dispensed beverages.

Margin was favorably impacted by softening commodity costs, notably cheese, as well as modest menu pricing adjustments during the quarter. Prepared food continues to be a key differentiator for Casey’s, and I’m very pleased with the sales growth in March. Same store grocery and general merchandise sales were up 2.8% or 8.8% on a two-year stack basis, with an average margin of 33.9%, a decrease of approximately 10 basis points from the prior year. We saw positive momentum in the category, notably in both alcoholic and non-alcoholic beverages, and our private label program continues to be a great value option for our guests, with Casey’s chips and bottled water performing well in the quarter. For fuel, same store gallons sold were nearly flat, with a fuel margin of 37.3 cents per gallon.

This marked the 11th consecutive quarter, with fuel margins above 34.5 cents 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. Our fuel team is doing an exceptional job balancing volume growth and margin, and the results continue to show it. Operating expenses were up 10.3% versus the prior year, but only 2.5% on the same store excluding credit card fee basis. Our team continues to get more and more efficient operating stores, while at the same time integrating multiple acquisitions. This is a testament to the outstanding work and maturity of our integration team. I’d now like to turn the call over to Steve to discuss financial results from the third quarter.

Steve?

Steve Bramlage : Thank you, Darren, and good morning. I’d also like to thank the team for their great work during the quarter. Our results were solid, especially inside the store, where we continue to grow sales and expand margin. This was accomplished during a quarter of heavy integration that required stores across our footprint. Overall, this was another quarter of effective operational execution in what is shaping up to be a great fiscal 2024. Total revenue for the quarter was $3.3 billion, a decrease of $3 million or 0.1% from the prior year, due primarily to the lower retail price of fuel. Total inside sales for the quarter were $1.2 billion, an increase of $106 million or 9.5% from the prior year. For the quarter, prepared food and dispensed beverage sales rose by $36 million to $349 million, an increase of 11.4%.

Grocery and general merchandise sales increased by $70 million to $866 million, an increase of 8.8%. Results were also favorably impacted by operating approximately 7% more stores on a year-over-year basis. Retail fuel sales were down $106 million in the third quarter, as an 11% decline in the average retail price of fuel was partially offset by a 6.9% increase in fuel gallons sold. The average retail price of fuel during this period was $2.98 a gallon compared to $3.34 a gallon 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 $787 million in the third quarter, an increase of $49 million or 6.7% from the prior year. This is primarily driven by higher inside gross profit of $50.9 million or 11.3%, offset by lower fuel gross profit of $5.3 million or 2%.

Inside gross profit margin was 41.3% and that’s up 70 basis points from a year ago. Prepared food and dispensed beverage margin was 59.6%, up 230 basis points from prior year. The category margin benefited from lower commodity costs, specifically cheese, which was $2.06 per pound for the quarter compared to $2.30 per pound last year, a decrease of 10% or approximately 80 basis points. Margin also benefited from a lower LIFO charge than in the prior year as our broader input costs softened, benefiting margin by over 40 basis points. Modest menu pricing adjustments also helped. The grocery and general merchandise margin was 33.9%, a decrease of 10 basis points from the prior year. The change was primarily due to lapping favorable vendor-funded promotions in the prior year, partially offset by lower LIFO charge and private label continuing to increase its share of our mix.

Fuel margin for the quarter was 37.3 cents per gallon. That’s down 3.4 cents per gallon from the prior year. Fuel gross profit benefited by $3.4 million from the sale of RINs, and that’s up $0.5 million from the same quarter in the prior year. Total operating expenses were up 10.3% or $53.2 million in the third quarter. Approximately 3% of the increase is due to lapping a one-time benefit to operating expense last year from the resolution of a $15 million legal matter. Approximately 6% of the total operating expense increase is due to unit growth and integration spending as we operated 167 more stores than the prior year. Same store employee expense accounted for approximately 1% of the increase, as modest increases in wage rates were partially offset by the reduction in same store hours.

Depreciation in the quarter was $89 million. That’s up $10.9 million versus the prior year, and that’s primarily due to operating more stores. Net interest expense was $14.1 million in the quarter. That’s up $2.4 million versus the prior year, primarily due to less interest income as we funded several acquisitions in the quarter out of cash-on-hand. The effective tax rate for the quarter was 24.1% consistent with the prior year. Net income was down versus the prior year at $86.9 million, a decrease of 13.2%. EBITDA for the quarter was $217.6 million compared to $221.7 million a year ago, that’s a decrease of 1.9%. Our balance sheet remains in excellent condition, and we have significant financial flexibility. On January 31, we had total available liquidity of $1.1 billion.

Furthermore, we have no significant maturities coming due until our fiscal 2026. Our leverage ratio, calculated in accordance with our senior notes, is 1.6 times. The third quarter tends to be our seasonal trough for cash flow generation. For that quarter, net cash generated by operating activities of $123 million, less purchases of property, plant and equipment of $150 million, resulted in the company using $27 million in free cash flows, and that compares to a generation of $27 million in the prior year. At the March meeting, the Board of Directors voted to maintain the quarterly dividend of $0.43 per share. During the quarter, we repurchased approximately $30 million of stock, and we have $310 million remaining on our existing share repurchase authorization.

Investing in EBITDA and ROIC accretive growth investments remains our primary capital allocation priority, but currently given our low leverage levels and strong cash flow, we are repurchasing more shares than in the past. We have had an excellent unit growth year so far, especially with M&A. During the third quarter we closed on a transaction to enter our 17th state in Texas, and through the end of the quarter, we have built or acquired over 125 stores. As we prepare to finish fiscal year ‘24, we are reaffirming all of our fiscal year guidance as outlined in the third quarter press release. And before we get into our fourth quarter experience to-date, just a reminder that February had an extra day due to the leap year, and that will equate to an approximate 100 basis point increase to both same store results and total OpEx for the fourth quarter.

Our results for February, excluding the impact of the leap day, were as follows: Inside same store sales are near the top end of our annual outlook range. Fuel gallons were near the low end of the annual outlook range. CPG was a touch below the mid 30s. Please note that February tends to be seasonally low in terms of fuel profitability, and that this February’s result is a couple of cents per gallon higher than the same period last year. Current cheese costs are modestly favorable versus the prior year. And one last comment on total operating expenses. We expect to finish the year at the high end of our annual outlook range, and that will be driven by some discretionary fourth quarter year-end charitable contributions, as well as incremental incentive compensation expense due to the company’s strong performance.

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 strong quarter. You may have seen we recently added a new team member, our new Chief Pizza and Beer Officer, Nebraska native Joe Cruz. Joe was selected from over 500 applicants, and we’re thrilled to have him. Now the hard work begins as he’s busy tasting our handmade delicious pizza and our refreshing ice cold beer pairings, which you can follow along with on our social media channels. Our team members across the organization continue to execute our strategic plan extremely well, and the results are proving that the hard work is paying off. We continue to roll out programs to make the stores run more efficiently, including the launch of our digital production planner.

This tool allows us to use our robust data and analytics capabilities to give team members the technology to manage food production more effectively in order to reduce waste and save team members time. The Casey’s brand, both with private label and our prepared food offering, continues to prove to be our strength in the industry, as evidenced by our robust inside same-store sales, both in the quarter and on a two-year stack basis. This allows for strong guest support for food innovation, and in January we rolled out a refreshed chicken sandwich and cheeseburger that guests are already gravitating towards. Just another example of guests trusting that Casey’s will deliver. Our prepared food program continues to drive strong results and gives us a unique competitive advantage in the industry.

The commitment of our team members in stores to serve guests with high quality products at a great value has translated to results. Our private label program continues to shine as we saw positive growth in units and gross profit versus the year. More and more guests continue to join Casey’s rewards as we have over 7.7 million members today, as growth in the third quarter was accelerated by our 24 days of Casey’s campaign. With help from the continuous improvement team, our store operations team continues to operate the stores more effectively and efficiently. With their efforts, we had another quarter reducing same-store labor hours, marking the 7th consecutive quarter of same-store labor hour reduction, while increasing both guest satisfaction and team member engagement scores.

There’s more to come as we’re excited about what’s in the pipeline for the next 12 to 18 months regarding store simplification. We look forward to giving our team members even more tools to make a great guest experience. On the fuel side of the business, we performed well despite lapping a highly profitable quarter last year. Wholesale price move in was less favorable, but we still posted a 37.3 cents per gallon margin, while outpacing our geography on fuel gallons sold. We’re positioned to thrive in this environment with our team and the capabilities that we’ve stood up. Regarding store growth, we’re off to a great start on our commitment to add 350 stores by the end of fiscal 2026. Our two-pronged approach of new store construction as well as M&A allows the company to ratably grow without reaching for acquisitions.

As we approach the end of fiscal 2024, I’m proud of how we started our three-year strategic plan. I’m extremely excited about the outlook of the business. Now that the world and our industry has evolved to a more normalized post-pandemic environment, our unique business model is proving to be both highly differentiated and resilient. We have abundant growth opportunities on the horizon and the team and balance sheet to capitalize on. This gives me great confidence in our team and our ability to execute the strategic plan. We’ll now take your questions.

See also 27 Most Charitable Countries in the World and 13 States That Don’t Tax Retirement Income.

Q&A Session

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

Ben Bienvenu : Hey, good morning, everybody.

Darren Rebelez: Good morning, Ben.

Darren Rebelez: Good morning, Ben.

Ben Bienvenu : I wanted to ask first about the results in the prepared food business. Very strong same-store sales results, very strong margins. I’d love to hear a little bit about the composition of the same-store sales growth that you saw during the quarter. How much is ticket versus traffic? And as you look forward to some of the new product innovations that you have in-store and the store simplification, what impact you think that might have on the prepared food business versus the rest of the business more broadly?

Darren Rebelez: Yeah Ben, this is Darren. Sales bills were driven by a few things. We had real strength in whole pies. Whole pies are up about 11% in the quarter. Our bakery products as well were up about 11%, and then we saw apps and side items up around 9%. So that was pretty good. Overall, when you look at the inside sales mix, I was really happy with how inside worked out this quarter. It struck a really nice balance. We’re up about 2.2% in transactions and about 1.9% in check. So, really you see a little bit of modest inflation, but you also see the strength coming from driving traffic to the stores, and that’s really a good spot to be in from that perspective. With respect to innovation, I tell you, I think we’re really starting to hit our stride, and this quarter had some impact of that with our chicken sandwich and our burger platforms.

The culinary team did a fantastic job of basically rebuilding those products and up-leveling the quality of all the ingredients, changing the builds, making those more compelling and adding a new crispy spicy chicken sandwich which really resonated well. And in doing that, up-leveling that quality and also negotiating better cost of goods, we were able to raise price by about $0.50 a unit and the velocity has accelerated almost triple digits, and so we’re really seeing some nice results there. And so that innovation can really not only have an impact on the velocity, but also have an impact on the margin at the same time.

Ben Bienvenu : That’s great. My second question is also in the prepared food segment, but more as it relates to the margins and in particular the cost of cheese. Steve, I think the last update that we got is that you are 80% lost for the balance of the year, so that would be the fourth quarter. Spot cheese costs are down considerably. Is there anything that you can share with respect to how you are thinking about forward buying your cheese needs for fiscal ‘25 and what potential benefit that might afford for Casey’s?

Steve Bramlage: Sure. Ben, good morning. So, as it relates to the fourth quarter first, we’re now about 90% locked for our fourth quarter buy and so I think we got a lot of visibility into that. I would expect us to be something like 5% or 6% to the good on a year-over-year basis for the all-in cost of cheese. That would compare to about a 10% or so benefit that we had in the third quarter, so favorable, but modestly less favorable. As we enter into FY’25, we will continue to be opportunistic as we think about how we can forward buy cheese on a favorable basis. If we get an opportunity to forward buy it, so that we can lock in deflation on a year-over-year basis, we take advantage of that, and that’s what our sourcing team is focused on.

And so we certainly are not locked into the level that we are for FY’24, but we will continue to take advantage of that opportunity going forward. When we get to the end of the fiscal year this year, we’ll give some more forward visibility as to exactly what those positions are entering FY’25.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Anthony Bonadio with Wells Fargo. Your line is now open.

Anthony Bonadio : Hey, good morning, guys. So it looks like OpEx growth in Q3 came in quite a bit below what you guys had guided to last quarter. Can you just talk a little bit more about what drove that upside versus what you guys were planning? And then maybe more broadly, what you are doing on the cost side that’s working so well right now?

Darren Rebelez: Yeah, Anthony. I’d say we had another really strong quarter on OpEx, and that was — the favorability was really driven in the stores with labor management and the stores continue to perform exceptionally well in taking unproductive labor hours out. And it’s somewhat of a virtuous cycle as we make the job in the stores more simple for people to execute. It takes less hours to do the jobs, but it also reduces turnover. When you reduce turnovers, you reduce overtime, you reduce training hours, and people get more productive in their jobs because they stay in them longer, and so we’re seeing all of those things happen. And then the great side benefit of all that is team member engagement scores go up, overall satisfaction scores go up, both of which are the highest we’ve ever seen in our company. So everything’s working pretty well on that, but the primary driver was labor hour reduction.

Anthony Bonadio : Got it. That’s helpful. And then I just wanted to dig in on fuel margins a little bit. I realize there’s sort of a price element to the softness we are seeing of late, but I also know you guys have a uniquely good read on the health of the marginal operator, given you are looking at a lot of these chains as potential tuck-in deals. Can you just maybe talk a little bit more about what you are seeing there, as we sort of look to assess the impact on fuel margin breakeven for those players?

Darren Rebelez: Yeah, with respect to fuel margin and other operators, I mean we are seeing other operators as we look at stores that we are acquiring. We’ll see operators that are taking more fuel margin. Their fuel margin will be higher than it was prior year, but in many cases, their EBITDA is lower than it was in the prior year. And so what they are having to do is raise price on fuel, take more margin. They are chasing off gallons in the short term, and that math works in the short term. It doesn’t work over a sustained period of time, and that’s still not enough to cover the losses that they’re experiencing in the cigarette category or the inflation that they are experiencing in OpEx, because typically these smaller operators are over-indexed to tobacco, and they don’t have any scale to negotiate better services agreements with service providers that ultimately impacts their OpEx. So that’s kind of what we’re seeing on that front.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is now open.

Bonnie Herzog : Alright, thank you. Good morning.

Darren Rebelez: Good morning, Bonnie.

Bonnie Herzog : I had a question about, your inside sales were really quite strong, which is great, and you are executing very well, but I guess I was wondering if you are changing your strategy a bit in terms of what you earn at the pump versus maybe driving traffic in the store. I guess I’m asking because your fuel margins were strong, but they have decelerated sequentially this year. So, is this more a function of a shift in strategy on your end or maybe just some industry pressures? And then if it’s the latter, can you give us a sense maybe of why industry margins have been declining over the last few months?

Darren Rebelez: Yeah, Bonnie. I would say first, there is no change in strategy for us on fuel, and we’ve been very consistent in that we always strive to maintain a balance between volume and margin and try to optimize gross profit dollars in that equation. And if you look over this past fiscal year, every quarter has been either favorable or positive by 30, 40 basis points or negative by 30, 40 basis points. It really toggles within a pretty tight range around flat, and we’ve had good margin. This quarter obviously, the margin was lower than prior year. Prior year margin was over $0.40 a gallon. We’ve never really had a goal to achieve any sort of margin, frankly. It’s really to maximize those gross profit dollars, so no change in strategy.

We were actually really pleased with the fact that when you look at the mid-continent data from OPIS that we’re about 500 basis points better than the industry. From a volume standpoint, we’re still north of $0.35 a gallon on fuel margins. So we like that math, especially when it maintains traffic in the store. We have positive traffic in the store, which is where all the real margin is, and that’s our true strength and differentiator. So the model is working exactly as we would describe it to work.

Bonnie Herzog : Okay. It definitely makes sense. And then just maybe a quick follow-up on that, because Darren, I think you mentioned that you’ve made some modest retail price adjustments. So would love to just hear a little bit more color around this. And what I’m talking about is at the pump and then your ability to maybe take even more pricing in the future, in the context of sort of what you just said. Thank you.

Darren Rebelez: Yeah. We took some modest pricing in grocery and general merchandise. The tobacco pricing I’d set aside, and you know how that works Bonnie. It’s a quarterly cadence. We pass on those cost increases to the guest. Outside of that, as we turn the page on the calendar year, we had some cost of goods, increases primarily in some of the non-alcohol beverage categories. We were able to pass those on. But by and large, this was not a real inflationary year compared to the last several that we’ve experienced. And like I mentioned before, we had a really good balance in the quarter of driving traffic to the stores and throwing that check just a little bit vis-a-vis inflation or mix to get to a pretty good outcome at a little over 4%.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Bobby Griffin with Raymond James. Your line is now open.

Bobby Griffin: Good morning, everybody. Thanks for taking my questions and congrats on a good quarter in a tough wholesale environment. I guess first up for me, I want to maybe switch gears and talk a little bit about the recent M&A. I think you guys have acquired about 145 stores over the last 12 months, more of the tuck-in side versus the bigger, larger acquisitions like you did with Bucky’s a couple years ago. Can you maybe just talk a little bit about how the integration is going on some of those? Any interesting learnings from these recent ones versus kind of times in the past? And then maybe, I know it’s early, but just touch on how the expansion in Texas is going.

Darren Rebelez: Yeah, Bobby. Yeah, it’s been a real active M&A environment recently, and our M&A team’s doing a fantastic job with a lot of these tuck-in acquisitions. That being said, we’re also having discussions on larger potential deals, but we just haven’t gotten anything over the finish line yet. So, more to come on that. But yeah, I’d say we’ve done so many of these now, these I’ll call them under 100 store size acquisitions. Our integration team has really got a good process down, and they are really efficient and effective at doing that. I think we’ve learned how to get our prepared foods into these acquisitions more quickly. Historically, this has taken us a long time to do, and to the extent that some of these stores that we acquire have some level of kitchen space available, our team’s gotten really effective at getting equipment in early and getting the food into the stores quicker, which obviously accelerates the same-store sales capture and the synergy capture in those acquisitions.

So, yeah, I think we get a little bit smarter and a little bit better on every one that we do.

Bobby Griffin : And then, Darren, just on the whole pie growth, I mean 11%. Just curious, can you unpack a little, or do you have any details on what is driving that? Is that the carryover from just obviously adding thin crust as part of like, we haven’t fully lapped that yet, I believe? Or is Casey’s pricing versus peers in the core markets just becoming more compelling on a whole pie basis, given your size is getting bigger or anything else there to maybe talk about what’s driving that growth?

Darren Rebelez: Yeah Bobby, I think it’s a combination of things. Certainly, the thin crust has helped. It’s about hanging in there, it’s about hanging in there at about 12% of the mix now and a good portion of that was incremental and we won’t lap that until June. So we definitely have some favorability there. We’ve also seen really strong growth in single topping pizzas and that tends to be more of a value play. And one of the interesting things we’re seeing as we dig into our guest insights, we’re finding that although we are not really overly exposed to the lower income consumer, about three quarters of our guests make over $50,000 a year. That other cohort that makes less than $50,000, they are spending more money on prepared foods and they are finding that value proposition really compelling, and so it’s been an interesting dynamic.

I mean the other income cohorts are also going to prepared foods, but the fastest growth is coming from the lower income demographic, as I think they try to find that right value and quality equation. And frankly, when you look at a lot of the other pizza players, a lot of them are franchised and a lot of those franchisees have taken a lot of price. And when we compare our numbers to any of the other publicly traded pizza competitors, we stack up really well in relation to them. I think that’s because of our ability to maintain that right value equation in that space and we’re seeing the growth as a result of it.

Operator: Thank you. And our next question comes from the line of Michael Montani with Evercore ISI. Your line is now open.

Michael Montani : Hey guys, good morning and thanks for taking the question.

Darren Rebelez: Good morning.

Steve Bramlage: Good morning Mike.

Michael Montani : Just wanted to ask if I could to discuss a little bit the inside margin outlook into the fourth quarter. So, if we went to the midpoint of the full year guide, it suggests that there could be some pressure coming up there in terms of less expansion for sure. So just wanted to kind of get a sense, how to think about that. And then secondly, I guess, to the extent you have visibility on input costs and pricing, do you think we’re seeing kind of a bottoming of disinflation at this point and potentially there could be some uptick there? How should we think about that?

Steve Bramlage: Yeah. Hey, good morning Mike. This is Steve. I’ll try to start with that. I think as we sit here today, halfway through the fourth quarter, I don’t think there’s a radical change in the experience we’ve had around input costs broadly vis-a-vis what’s happened here in the last couple of quarters. As we mentioned on an earlier question, cheese may be a touch less favorable for us in the fourth quarter on the prepared food side of the business than it was, but it’ll still be favorable year-over-year. Broadly speaking, in prepared food, we continue to have year-over-year deflation, usually disinflation at worst on most of the commodity categories with the exception of beef. And so I do think we continue to have a tailwind that’s likely to stick with us here for a little while on those categories.

And then on the grocery side, that’s a contractual business for us. And so as Darren had mentioned earlier, most of those prices reset for – most of those input costs reset for us at the beginning of the calendar year, and we were able to make retail price adjustments accordingly. And so I would expect us to be in a position to preserve the grocery category margins pretty consistently with what we’ve seen here for most of the year as we finish out this year.

Michael Montani : Got it. And then if I could sneak one more, and just on the LIFO front, how should we think about that into the fourth quarter?

Steve Bramlage: You know, LIFO is just reflective of what our input costs ultimately are and the way the accounting rules have us make adjustments to inventory balances. And so generally, the direction of LIFO charges will follow what’s happening with input costs. And so with the exception of tobacco, where we consistently are going to be taking LIFO charges, because we’re consistently getting price increases, generally speaking, LIFO will be less of a headwind on a year-over-year basis for us as we continue to see deflation on the prepared food side. And so I would expect LIFO, as we sit here today, probably to consistently be modestly favorable on a year-over-year basis for us as we finish out the fourth quarter.

Operator: Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is now open.

Kelly Bania: Good morning. I was wondering if we could just talk about gallons. You are tracking flattish, which sounds like some pretty significant market share gains in your region. Just wondering if you could talk about maybe what’s driving the broader decline in gallons. It seems several quarters in a row now. And do you anticipate that that’s kind of the new normal where gallons are kind of weaker across the industry? And is your strategy to maintain flattish gallons there going forward?

Darren Rebelez: Yeah Kelly, I think this goes back to what I was saying before. If you look at some of the smaller operators, you got to look at the composition of their business. So, if you set gasoline aside for a second, in the inside of the business, they are heavily leveraged to tobacco. Typically 30% or more of their inside mix is tobacco, ours is about 18%. And that category is declining, call it 8% to 10% a year. They don’t typically have prepared foods. They don’t have rewards. They don’t have a lot of scale to leverage. So, they don’t have a lot of levers to pull to try to offset the inflationary pressures and the decline in the tobacco category and inside overall. So they are raising price on fuel to try to offset that, but the consequence of raising that price on fuel is chasing away some of those gallons, and we’re able to have a more balanced approach to that because we have such a strong inside offering.

And we do have scale, and we do have rewards, and we do have prepared foods and we have a lot of those other things that they simply don’t. So we make money another way. And remember for us, about 70% of our transactions are non-fuel anyway. So we’ve got a lot of business coming to the stores that helps us offset some of those other areas of softness in some of the other categories. So we’re able to afford to have a better balance of fuel volume and margin. At the same time, there are some structural things that are going on with fuel that would put some pressure on gallons overall if you just think about fuel efficiency in vehicles overall. With an average car age of about 12 years, every year you drop off the oldest, least efficient vehicles in the fleet and replace them with the newest and most efficient vehicles that have been made.

And so there’s always going to be some pressure on gallons consumed in the industry. And so we kind of feel that in that type of environment, if we’re flat to slightly up on gallons and we have strong margin, that’s a really good balance for us. And we convert that fuel traffic into store traffic, which is where we have the strongest margins and the most profitability.

Kelly Bania : Thank you. Also just wanted to ask with store simplification, I think you mentioned seven quarters in a year, so in same store hours declining. Just curious if you could talk about how much more opportunity is there? It sounds like there’s more to come, but maybe you can just give us some color where the opportunity is.

Darren Rebelez: Yeah, we do think there is some more to come. Frankly, whenever you start off on an initiative like this, you go off to the low hanging fruit first. So, I think some of the big chunks that were available to us, we’ve taken. So, it gets a little more challenging and we have to get a little more sophisticated. But we’ve got some good initiatives in the pipeline from workforce management tools to some process changes that really we think will make a difference. But, I think overall where we’ll see the real benefit is just simplifying the work in the store, giving the store back some slack hours is what we call it, where we don’t necessarily take hours out, but we’ve eliminated work, which makes the job of the team members in the stores easier.

That has a positive impact on turnover. With less turnover, you spend less in training, you spend less in overtime, you get more productive in your job. All of that helps to reduce labor. So, we haven’t given any guidance on what that’s going to look like over the next couple of years. We’ll probably get a little sharper on that in our next quarter when we give guidance for fiscal ‘25. But suffice it to say, we still think we have more opportunity there and we’ll continue to go after that.

Operator: Thank you. And our next question will come from the line of Irene Nattel with RBC Capital Markets. Your line is now open.

Irene Nattel : Thanks, and good morning, everyone. Just coming back to the recent fuel margins, I think that investors are just struggling a little bit to understand why we’ve seen this more recent compression in recent weeks relative to prior weeks. So I guess my question for you is, are you seeing anything fundamentally different in the competitive set and in the way they are acting that would play into that sort of slightly lower trend on fuel margins? Or do you think it’s just more a seasonal issue?

Darren Rebelez: Yeah Irene, we’re not seeing anything dramatic. I mean, competitors ebb and flow in their behavior and then we always react to that and they do the same with us, but I’m not seeing any wholesale changes in anybody of any scale that would make a difference. And I would just remind everybody that, yeah, our margins were a little bit thinner than they have, and we’re talking off of $0.40 a gallon though. Nobody, at least I know of, is really banking on $0.40 fuel margins being the new normal. And so the fact that we ended up at $0.37, I think is a pretty good outcome. No, it’s not $0. 40, but it’s definitely a pretty good outcome. And I think this time of year in general, as we start to go into refinery turnaround, that supply starts to get a little bit tighter, the cost curve goes up.

I mean, since the beginning of the calendar year, wholesale costs have risen $0.50 a gallon. Now, what we do know is that at some point, that curve is going to inflect and the cost curve will come down as the refineries come back online. And as that cost curve comes down, margins tend to widen out. What we don’t know is when that curve is going to inflect. It could inflect next week and we’ll have a nice six-week run before the end of the quarter of widening fuel margins. It can inflect in four weeks from now and we’ll only have two weeks in the quarter. At the end of the day, it’s not going to matter, because the curve will run its course and we’ll make the margin that we are supposed to make. The timing of it and when it lands neatly into a quarter or not is really anybody’s guess at this point.

But to get back to your original point, we’re not seeing anything structurally different with fuel margins at this point.

Irene Nattel : That’s really helpful. Thank you very much for that. And then just coming back to sort of the consumer behavior, you called out that sort of your lowest 25% is sort of you are seeing better results on prepared food. But just wondering sort of more broadly speaking, what you are seeing around consumer behavior and any sort of heightened sensitivity around promotional or spending or anything like that. Thank you.