Casey's General Stores, Inc. (CASY) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Casey's General Stores Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Bill Walljasper, Chief Financial Officer.

Thanks, Keith. Good morning, and thank you for joining us to discuss Casey's results for the quarter ended January 31. I'm Bill Walljasper, Chief Financial Officer. Bob Myers, President and Chief Executive Officer, is also here. Before we begin, I'll remind you that certain statements may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As discussed in the press release and the 2011 annual report, such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from future results expressed or implied by those statements. 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. Let's take a few minutes to summarize the quarter and then open for questions. As most of you have seen, basic earnings per share in the third quarter were $0.44 compared to $0.34 a year ago. Year-to-date basic earnings per share were $2.46 compared to $1.64. The results last year include approximately $27.4 million in costs related to the company's recapitalization plan, as well as fees associated with the hostile takeover attempt by Alimentation Couche-Tard. Adjusting for these costs, basic earnings would have been $0.37 per share in the third quarter last year and $1.87 year-to-date. The solid earnings performance this quarter was anchored by strong inside sales due to operating more stores this quarter compared to last year, as well as other initiatives such as major remodels and expanded store hours. The average gas margin in the third quarter was $13.6 per gallon compared to $13.9 last year. Year-to-date, our margin is $15.9 per gallon, up from $15.1 during the same time period a year ago. Casey's trailing 4-year average gas margin is $14.2 per gallon. Total gallons sold for the quarter were up 4% to $360.8 million compared to $347 million a year ago. Year-to-date, total gallons sold were up 5.4% to $1.1 billion, while same-store sales at the 9-month mark were down 2.6%. Same-store sales for the quarter decreased 2.4%. These decreases are primarily due to increases in fuel prices from the previous year. For the quarter, Gasoline gross profit was up 2.2% to $49.2 million. Same-store gallons in February improved relative to previous months as we begin the cycle against more favorable same-store gallon comparisons from a year ago. The Grocery & General Merchandise category is performing well. Total sales in the third quarter are up 12.7% to $311.2 million with an average margin of 31.8%, up approximately 90 basis points. Same-store sales in the quarter are up 6.3% while gross profit rose 16.1% to $99.1 million. Year-to-date same-store sales were up 6.1% with an average margin of 32.3%. The margin improvement in the third quarter is primarily due to an increase in the contributions of higher margin items such as energy drinks, sports drinks, snacks and ice. Same-store sales continued to be solid in February. Prepared Food & Fountain category continued its strong performance. Total sales were up 18.5% to $118.7 million for the same -- for the quarter. Same-store sales in the quarter were up 12.6% with an average margin of 61.2%, down primarily due to the higher cost of cheese. Average cost of cheese this quarter was $1.95 per pound compared to $1.76 a year ago. The cost of cheese currently is about $1.70 per pound. Coffee is also moderated, allowing us the opportunity to complete a forward buy of coffee for the months of April and May. Effective February 1, we also implemented a price increase in cappuccino, representing approximately 1% of the total Prepared Food category. Year-to-date, same-store sales were up 14% with an average margin of 60.6%. Despite the effect of commodity pressures and strong comparisons from a year ago, we were able to achieve a gross profit dollar increase of 16.8% in the third quarter. Same-store sales continued to be strong in February. At the 9-month mark, operating expenses were up 12.1%. After adjusting for the previously mentioned costs from last year, expenses would have been up to 16.2%. For the quarter, operating expenses increased 11.7% to $169.2 million. Excluding fees associated with the hostile takeover attempt by Couche-Tard in last year's results, expenses would have been up 13% or about $19.5 million. About 75% of this increase was due to a rise in wages primarily related to operating more stores this quarter compared to the same period a year ago, as well as the stores remodeled and the expansion of 24-hour locations. About 15.5% or $13.1 million came from the combined increase in credit card fees and fuel expense up due to higher retail prices and increased credit card utilization. Credit card transactions were up 19%, accounting for approximately 58% of all sales this quarter compared to 56% a year ago. Without the increases in credit card fees and fuel expense, expenses would have been up about 11% on adjusted basis. On the income statement, total revenue in the quarter was up 14.9% to $1.6 billion. Year-to-date total revenue was up 28.1%, primarily due to a 26.5% increase in the retail price of Gasoline and sales increases in the categories mentioned previously. The effective tax rate was lower in the third quarter of this year compared to last year due to higher federal tax credits. On the balance sheet, it continues to be very strong. At January 31, cash and cash equivalents were $46.3 million. Long-term debt, net of current maturities decreased to $673.1 million while shareholder equity rose to $485.6 million, up $81.7 million from the fiscal year end. We generated $224.2 million in cash flow from operations. The 9-month mark capital expenditures were $222.3 million compared to $256.4 million a year ago in the same period. It was down due to fewer acquisitions in the first 9 months of this year compared to last year. We expect capital expenditures to increase during the fourth quarter as we open new stores and begin construction on additional major remodels. Given the early result and increasing performance of the stores remodeled to date, we have selected another group of 25 stores to remodel. Initial study of the remodel program indicates that the higher-performing remodels are stores located in slightly larger populations in our average store base. The community provides the opportunity to gain more market share. We anticipate that these will be completed by the end of the first quarter of the next fiscal year. We are encouraged about the future of this program and anticipate additional remodels to be completed later next fiscal year. In January, we completed a conversion of an additional 150 stores to a 24-hour format, and we are in the process of identifying additional stores to be converted next fiscal year. Over the trailing 12 months, we have converted approximately 220 stores to this format. We now have approximately 18% of our store base operating 24 hours. We're also encouraged by the preliminary results of our pizza delivery program. The 26 stores we had delivering pizza this quarter, accounted for almost 1% of the Prepared Food same-store sales in the period. With this in mind, effective February 1, we rolled out an additional 50 stores to this program. We're in the process of identifying more locations to be converted next fiscal year. This quarter, we opened 10 new store constructions. For the year, we acquired 33 stores and completed 18 new store constructions. Through the combination of new store construction and acquisitions, we anticipate adding approximately 65 stores by the end of this fiscal year and replace 11 stores. Year-to-date, we have replaced 8 stores. Our store count at the end of this quarter was 1,686 corporate stores. We remain optimistic about the pipeline for new store construction and acquisition opportunities going forward. That completes our review of the quarter. We'll now take your questions.

[Operator Instructions] And your first question is from the line of Chuck Cerankosky with Northcoast Research.

This is Jamie Dunford on for Chuck. Quick question for you, can you provide an update on the acquisition pipeline for after fiscal '12 and then the first half of fiscal '13?

Yes, for fiscal 2012, I mean, as I mentioned in the call, we're going to add about 65 stores in total, roughly about 35 of those will be through acquisitions and 30 will be for new store constructions. Now as we head forward, the pipeline that we're seeing with acquisitions, really, is as strong as it's ever been, the stores that we consider to be in the funnel whether we're negotiating those, reviewing those or modeling those, it is roughly the same as it was in prior years. As we all know, sometimes, acquisitions tend to be lumpy and certainly, we're going to remain to be disciplined in our approach with acquisitions. I will tell you as a sidebar to that, we do anticipate accelerating our new store constructions next year and the following year. That program has been very well-received by our customer base, and we think there's opportunities in that regard as well.

Your next question is from line of Anthony Lebiedzinski with Sidoti & Company.

Couple questions here. Just first, I just wanted to clarify the gas gallon comment for February. I think, Bill, you said that it improved relative to previous months. Does that mean you're less negative than the previous months? Or have you actually been able to post a positive comp gallon?

We anticipate a positive comp gallon in February.

Okay. Thank you for that. And as far as the margins, I think I missed that. Did you have a comment on the gas margin?

No, we didn't have a gas margin, but the gas margin has narrowed relative to what we have been experiencing the year-to-date. That year-to-date was north of 15%. So the margin has started to narrow just a little bit.

Okay. And as far as you know, this quarter over here. You highlighted the weather. I'm just wondering how important that was for -- in the overall scheme of things? How much of the earnings growth here would you have attributed to the favorable weather?

It's always hard to make an accurate determination of weather and the impact. Certainly, we'll look at the weather conditions in the third quarter last year. Remember this year was considerably different. We had quite a bit of inclement weather last year relative to this year. Now I can tell you that certain items due to the weather has accelerated tremendously, ranging anywhere from 20% to 35% increases in energy drinks and sports drinks. Also ice was another item that I called out in the narrative that increased significantly during that period. Those are all factors that in part, at least, are driven by weather. So certainly, I think weather does have a plight. It's really, it's a little bit harder to bifurcate that.

Okay. And I think you guys have also extended some of your operating hours at the stores without actually going to a full 24-hour basis. Can you just comment on that initiative?

We've been doing that for some time, kind of tinkering with the hours. Our core hours, as you know, Anthony, are 6 to 11. So we've been tinkering with that for quite some time, expanding those to maybe 5:30 to 11:30, maybe it's 5 to midnight. I don't have a number in front of me as to how many stores we have on extended hours, but it's significantly more than the 220 stores that we converted over the last 12 months. But certainly, this is a program for us that expanded hours seems to be a very strong initiative. As I alluded to, we're in the process of identifying more stores to convert to 24 hours. We'll look to do that next fiscal year, and continue to roll that program out. It's probably not applicable to all of our stores, but certainly, we're going to find out where it is applicable to, and it's a pretty easy transition into that, and an easy transition back if it doesn't work.

Okay. And lastly, on the D&A expenses, looks like there was a big jump sequentially, certainly, on the year-over-year basis. So kind of the run rate that we should assume going forward, what would you say we should be looking at?

Well, the depreciation, is certainly going to be dependent upon the number of stores that we bring in, the construction activities that we bring into the mix going forward. So it's a little hard to give you any idea of what the run rate might be, not knowing exactly when that will come in next year. But we have been tracking in the low teens increases and the depreciation, so it really depends on the number of units that we bring into the mix and the construction activity.

[Operator Instructions] And your next question is from the line of Ben Brownlow with Morgan Keegan.

On the 24-hour format conversions, you touched on the criteria for the larger cities. Can you just give a little more detail with that? And then what are you seeing performance-wise with that conversion in the smaller cities?

While most of that, you hit right on point, Ben. Most of the conversions that we've done regarding the 24 hours have been in higher populated areas and stores that are centered around maybe a higher traffic pattern. Obviously, in my comment earlier about a not going to be a viable initiative in all of our stores. That's exactly why in a small community, it probably doesn't warrant to have a store would open for 24 hours. That doesn't mean necessarily going back to Anthony's question that we can't expand those hours to meet the demand in that region. But certainly, that's the key criteria that we're looking at is, the population, the traffic counts surrounding those stores. I can tell you that when you look at the EBITDA growth in the third quarter, and you look at the remodels that we did in the prior fiscal year in combination with the 70 or 80 stores that we converted to 24 hours back last February, those 2 initiatives are accounting for about 26%, 27% of the EBITDA growth in the third quarter. Certainly, it's a viable initiative that we're very encouraged by.

That's impressive. And as are most of those 24-hour formats in cities of larger than 10,000 people?

I don't have the breakdown in front of me. I wouldn't say necessarily that would be an accurate statement but certainly, larger than our store base.

Okay. And I missed your earlier comments on the delivery initiative. How many stores are on that? And how many went into effect in January? And if you could just give some color on sort of what you're seeing on the competitive response to that and any advertising initiatives you have planned?

Sure. The 24 hour stores, we had 26 stores -- excuse me, the pizza delivery stores, we had 26 pizza delivery stores that were in operation during the third quarter. Effective February 1, we put another 50 stores into that program. We're in the process of identifying more stores to bring into that program for next fiscal year. So when I circle back in the performance of those 26 stores, most of those were brought on November, November 1. Those 26 stores accounted for, of the 12.6% increase in same-store sales for Prepared Foods, about 1% was due to the pizza delivery. But just in a very short period of time, we're seeing a tremendous traction in that initiative, which is giving us some optimism to roll out that program. We'll still be disciplined with that and push that up to see where it's going to work because obviously, it's not going to work everywhere. So we are encouraged by that and we'll certainly keep you informed as we continue that program rollout.

And are you seeing any sort of competitive response via pricing or advertising? And then do you have any advertising programs planned for the additional rollouts?

I can't see that we've seen any increase in competition relative to that program, necessarily. Certainly, there's advertising and really, it's going to be centered around where we're rolling those stores out. It's going to be a combination of point-of-sale type advertising, radio. It's really going to be dependent upon where those stores are in, in the Metropolitan areas or not.

And we have no other questions at this time. So that will conclude our question-and-answer portion. And I would like to turn the call back over to Mr. Walljasper for closing remarks.

Yes, I'd like to thank everybody for joining us this morning. Just as a reminder, we will release February same-store sales on the 15th. So I appreciate it. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you, for joining us. And you may now disconnect. Have a great day.