Darren Rebelez: Yeah Irene, really overall, I think I’d have to say that the consumer’s proven to be pretty resilient. We’re not seeing a lot of real changes. We tend to see changes in fuel when times get tight. They’ll switch to more heavier ethanol blends. They’ll buy less premium. We’re not seeing any of that right now. We’ve seen good growth in our private brands. There’s a 5.5% same store in the quarter, but not a huge shift. Like I mentioned, the lower income cohorts are doing what you would expect lower income cohorts to do, which is gravitate a little more towards value. Our prepared foods and our private label satisfy that need. But with the other income cohorts, they are continuing to spend like they have been, and so we’re not really seeing anything different at this point.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Krisztina Katai with Deutsche Bank. Your line is now open.
Krisztina Katai : Hi, good morning and my congratulations on a good quarter. So, I had a follow-up question on prepared foods and some of the recent launches, thinking about thin crust, the four new sandwiches. So if you could just talk about the value that you see Casey providing relative to just your broader competition, looking also at QSR competition. You could make any comments about what they are doing from a pricing perspective that could give you an opportunity to gain further market share. And then if you could also contextualize for us where you see Casey’s market share today in the various day parts compared to maybe a year or two ago.
Darren Rebelez: Yeah, Krisztina, I think with some of the recent innovation, like I mentioned in the sandwich category in particular, we were able to take some price, but our price points are still significantly below what you would find in a QSR for a comparable quality sandwich. I mean, a couple of dollars cheaper. So we think it poses a unique value. And look, the guest is going to buy on quality first and then hopefully try to maximize on price. And I think our culinary team like I mentioned before, did a really nice job of taking some products we already had and tearing them down to the studs, improving the quality of every ingredient in those builds and making them a better product and then layer in some innovation along with that with a new build, and it’s a good recipe and very much a value.
I don’t have good market share data in those subcategories right here as we speak today, but I know historically when we do something like this, we tend to take some share from the largest players. So the last time when we did a similar exercise on breakfast, we saw the most share actually come from McDonald’s, believe it or not. And that’s primarily because they have the most presence and they are the biggest player. So I would imagine that once we get the data in on the sandwich platform, it may look something similar to that, but I just don’t have the data at my fingertips right now.
Krisztina Katai : Got it. That’s helpful. And then just a quick follow-up. On private label, I think Darren you said that volumes were positive, but did you provide where penetration ended in the quarter? And then just broadly, how are you thinking about new product launches or the number of SKU launches that you are planning over the next six to 12 months?
Darren Rebelez: Yeah, the penetration in the quarter was about where it had been. It was right around 10% in units and gross profit dollars. I’ll just remind you that third quarter is seasonally the softest quarter for private label, because it’s the softest quarter for beverages and we have a big beverage presence with our private label product. So it’s always going to be a little bit less penetrated this time of year than it would be here in the next few quarters. I’m sorry Krisztina, what was the other part of your question? Oh, new products. Yeah, we’ve got a pipeline of about 40 or 50 new products that we are planning to enter into the assortment. We are kind of phased in over the next several months, summer being the biggest part of it. Not prepared to really discuss the details of any of those, but we are pretty excited about what we’ve got coming this summer.
Operator: Thank you. And our next question comes from the line of Charles Cerankosky with Northcoast Research. Your line is now open.
Charles Cerankosky: Good morning, everyone. Great quarter. In looking at your prepared food margins, they’ve been trending upward. And would you care to comment, can you get back into the 60s? And I’m curious about what the role of redeeming private label rewards is on the prepared foods part of your business, and will that hold it back, the margin back?
Steve Bramlage: Sure. Good morning, Chuck. This is Steve. I’ll maybe start with that. I think, first of all, we’re pleased with the progress of kind of margin recovery broadly in prepared foods. As you know, we consciously have taken a position of trying to improve margins in that category by kind of pricing through the commodity cycle. And so unlike the grocery business, which is contractual, we’ve got a lot of commodities, and so when all the commodities went up at the same time a couple of years ago, we chose not to chase dollar for dollar with price increases at that point. So we raised prices, but not as much as the input costs went up. And we expect over time commodities will inflect. And ultimately on the downside, as we hold retail prices steady, we’ll recapture that margin over the course of the cycle, and that’s exactly what’s happening right now in our experience, and I think we’ve got further to go in that direction.
So the 60% number for prepared foods, we’re close to it now. The high water mark a couple of years ago was a little bit higher than 60%. I would remind you a couple things structurally have changed. And you kind of hinted at that, right. We did not have a rewards program at that particular point in time, and the cost of the rewards program in terms of points that are accrued is a reduction in margin. It’s about a 50 basis point reduction in margin on prepared foods as we sit here today. We also did not have third-party aggregator delivery of any significance at the time. So that previously was an operating expense where we delivered out of the stores, and now it’s a cost of product in the fees. And so those things structurally have changed, and so the high water mark probably has been reset accordingly.
But I think we feel good about a glide path to 60. We’re on it right now. Input cost remains favorable, and I think we feel good that the approach we’ve taken has allowed us to maximize gross profit dollars inside the store and maintain the value proposition. And I would expect we’ll continue to run the play in that regard.
Charles Cerankosky : Got it. Thank you.
Operator: Thank you. One moment for our next question, please. And our next question will come from the line of Corey Tarlowe with Jefferies. Your line is now open.
Corey Tarlowe : Great. Thanks. I wanted to ask about growing organically versus through acquisition. It sounds as if the environment has become more conducive to growth through M&A, given it sounds like marginal player EBITDA has been a little bit pressured, elicited by the cents per gallon and traffic headwinds that these peers are facing. I’m curious to get your view on that and how that informs what your outlook is going forward as you think about growing through those two levers, organic versus M&A.
Darren Rebelez: Yeah Corey, this is Darren. Yeah, I’d first say that we like to strike the balance between organic growth and M&A. We don’t ever want to put all our eggs in either one of those baskets, because situations can change. So what we are seeing right now is that the M&A environment is pretty attractive. The cost of construction has gone up and at the same time the challenges for the smaller operators have gone up as well. So what we’re finding is we’re able to buy some assets, pretty good quality assets, invest close to $1 million in putting in kitchens and remodeling and fixing deferred maintenance and all those other things, and essentially have a brand new store for less than replacement cost than it would cost us to build it brand new.
And so we like that math. We look at a lot of things when we’re assessing valuation on M&A, but one of those checks is replacement cost. Can we build it cheaper than we can buy it and fix it up, and so we stay pretty disciplined on that. So right now, it’s been very favorable. We’ve been able to buy a lot of stuff for below replacement cost, all in. That being said, we’re still going to build in the neighborhood of 50 new stores this year. We have a pipeline of organic growth that continues to build. If we have a lot of M&A, we always have the option to land bank our real estate and continue on M&A. And then if the M&A market turns a little bit soft, we can just pivot back over to our land bank and continue to grow organically and maintain that steady ratable growth that I think people are counting on from us.
Corey Tarlowe : And then just as a follow-up, how are you thinking about leveraging technology to not only improve those same-stores hours that you pointed out, but I wanted to ask about AI and your intentions there and how you think that could benefit the business as well going forward?
Darren Rebelez: Yeah. So a couple of things there. I think with technology, we are using some technology to help on the labor side. More recently, we just launched our digital production planner, which enables us to take what was a manual paper-based process and make that fully automated. So that saves people, store managers in particular, time on having to manually do calculations and manually write things down to get to a production planner for the kitchens to execute again. So it’s one example. We’re also rolling out here before the summertime a workforce management tool that will allow our store managers to get even more efficient in labor scheduling and deployment and give our team members flexibility from a scheduling standpoint.
So that’s on the labor side. With respect to AI, we’re looking at a couple of different things. Probably the best example we have is what we just rolled out, what we call our automated voice assistant, or AVA as we call her, which essentially answers the phones in the stores. And even though about 80% of our food orders that come into our kitchens are digital, that still leaves close to 10 million phone orders a year where people will call a store and talk to a person in the store to place an order. And as you can imagine, that becomes disruptive during peak periods when people are trying to get food out of the kitchen and they are having to stop and take orders and it’s noisy and disruptive. So AVA takes care of all that. It’s AI driven. We trained it with natural language processing and machine learning.
So when a call comes in, it can take the order, it can suggest a sell, it can help build that order, and it goes right into the order management system in the kitchen. So the phone calls are drastically reduced in the kitchen. It makes it more efficient to get the food out. And we are right now at about, 11% of the orders that come in are being handled by AVA at this point.
Operator: Thank you. And our next question comes from the line of John Royall with JPMorgan. Your line is now open.
John Royall : Hi, good morning. Thanks for taking my question. I know we’re short of time, so I’ll just ask one. Can you discuss any impact you had from weather in January? I know the Midwest got kind of pummeled with some winter weather. You saw fuel comps off a little, but very strong inside the store comps. So I guess I was a little surprised to not see much of a material impact there. Can you just talk through any weather impacts in the third quarter?
Darren Rebelez: Yeah. It was really a tale of two parts. The November, December were pretty favorable. And so we had good inside comps and we had positive fuel comps in November, December, and in January, that turned on us. I think we were on fuel. We were up 0.9% in November, 0.6% in December, and down 2.6% in January. And so we ended up down a little bit. On the inside, we never turned negative. We were positive 5%-ish and 6%-ish in November, December positive. A little bit over 1% in January. You know, netted out to the 4.1% overall. So again, I think weather certainly has an impact. And you know, in this part of the geography, we had about 10 days or so where temperatures didn’t get above zero and the news was telling everybody to stay home and don’t go outdoors. So it’s not great for business, but I think overall, it felt really good about how we came out of January considering how tough it was and ended up with a really strong quarter.
John Royall : Thank you.
Operator: Thank you. Our final question comes from the line of John Lawrence with The Benchmark Company. Your line is now open.
John Lawrence : Yeah, great. Thanks for squeezing me in. Darren, when you talk about, obviously you are looking at some larger chains for acquisitions. We’ve watched you and witnessed all the leverage points in years past. Can you talk a little bit about how this restructured gas margin in the 30s, how does that affect the math as you look at these larger chains? Does that give you another leverage point on scale as you look at making the chain a lot larger?
Darren Rebelez: Well, if I think I understand your question, I mean, when we’re looking at these chains, those dynamics that I described earlier are still consistent that most other operators are heavily relying on fuel margin because the inside business isn’t as resilient. For us, when we look at these things, we try to model those based on our experience, not necessarily the experience of the previous owner, because we are going to have an approach to how we price fuel and how we procure fuel. Typically, these assets are in our existing geographies or adjacent to us. We’re pretty familiar with the fuel supply and pricing dynamics in these markets, and we understand how our stores perform there. So we don’t really put too much stock in how they do it today. We take much more, put much more credence into how we’re going to operate them moving forward, and we model it accordingly.
