Casey's General Stores, Inc. (CASY) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for standing by. Welcome to Casey General Stores Third Quarter Fiscal Year 2017 Earnings Conference. At this time all phone participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and the instructions will be given at that time. As a reminder, this conference is being recorded. Now I would like to welcome and turn the call over to the Chief Financial Officer Mr. Bill Walljasper.

Thanks, Karmen. 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; Terry Handley, President and Chief Executive Officer is also here. Before we begin, I'll remind you that certain statements made by us during the 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 our possible or assumed future results of operations, business strategies, growth opportunities and performance improvements 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 which are described in our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q as filed with the SEC and available on our Web site. Any forward-looking statements made during this call reflects our current views as of today with respect to future events and Casey disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. This morning Terry will first take a few minutes to summarize the results of the third quarter. I will then provide some additional details and then afterwards we will open it up for questions about our results.

Thank you, Bill. And good morning, everyone. As most of you have seen in the press release, diluted earnings per share for the third quarter were $0.58 compared to $0.97 a year ago. The primary reason was attributable to a combination of increases in operating expenses and depreciation offset by increase in gallons sold and inside sales. Year-to-date diluted earnings per share were $3.72 compared to $4.54 in the same period last year. Like many others in the convenience and grocery stores sector, as well as the broader food service industries, we experience downward pressure on customer traffic which adversely impacted same-store sales across all of our categories. We believe this pressure is related to the agricultural economy and our marketing area, the growing spread in pricing between food away and food at home, as well as big box retailers continuing to increase promotional activities. The quarter started very strong in November with same-store sales either inline or above our annual goals across all areas with customer count at its highest point in nearly a year, then tapering off during the back half of the quarter. Same-store sales were further impacted during January by calendar shift as well as inclement weather. The calendar shift in the month represented approximately 50 basis points to 180 basis points to same-store sales depending on the category. As a result same-store customer count in quarter was flat to slightly positive, although we were encouraged to see an increase in our basket ring inside the store excluding fuel for the first time since the third quarter of fiscal 2016. Despite the more challenging environment we continue to be an industry leader in same-store sales growth in both fuel gallons and inside our stores. In addition, we are excited about the new share repurchase program authorizing repurchases of upto $300 million of common stock over the course of the next two years. The company has always focused on providing a strong total shareholder return and this will augment our growing new store pipeline and dividend payments. I will now turn the call back to Bill to go over our results and some of the details in each of our categories.

Thanks, Terry. In the fuel category, same-store gallons continue to benefit from low retail prices and our fuel saver program during the third quarter. This resulted in an increase in same-store gallon sold of 2.6% in the quarter while total gallon sold for the quarter rose 5.5% to $498.1 million. The average retail price of fuel during this period was $2.12 a gallon compared to $1.88 a gallon last year. The average fuel margin in the quarter was $0.179 per gallon, slightly below our annual goal of $0.184 per gallon. This was down primarily due to the rising wholesale costs throughout the quarter. Year-to-date the fuel margin was $0.187 per gallon just ahead of our annual goal. Third quarter margin benefited from the sale of renewable fuel credits commonly known as RINs; during the quarter we sold $16.3 million RINs for a total of $14.5 million. This represents nearly $0.03 per gallon improvement to the fuel margin. RINs are currently trading around $0.35. For comparison purposes, going forward, last year in the fourth quarter, the average RIN sold was approximately $0.71. Same-store gallons sold for the year-to-date were up 3% with total gallon sold for the year up 6.5% to $1.6 billion. Gross profit dollars in the fuel category for the quarter were $89.3 million, up 4.5%. Total sales in the grocery and other merchandise category were up 5.1% to $476.3 million in the third quarter. Excluding cigarettes, total sales would have been up nearly 6%. Same-store sales were up 3%, which fell short of our annual goal primarily due to a deceleration in customer traffic for reasons outlined by Terry earlier. Total sales across all major areas of the category showed mid-to-high single digit increases. The average margin of the quarter was 31.1%, consistent with the same period a year ago. As a result, gross profit for the quarter and the category was up over 4.7% to $148.1 million. For the year, same-store sales were up 3.5% with total sales up [ph] 6.1% to $1.6 billion. The average margin year-to-date was 31.6%. We are encouraged about our growth opportunities in this category as we benefit from the continued roll out of major remodels, replacement stores and new store openings. In the prepared food and fountain category, total sales were up nearly 9% to $228.3 million for the quarter. Despite the economic environment in our market area, same-store sales in the quarter were up 5.8%, which was an acceleration from the mid-year results. Our various growth programs continue to perform as expected. Sales in our unchanged store base were below our expectations which we attribute generally to the challenges in the broader convenient and food service industries. The average margin for the third quarter was 61.7%, down 30 basis points from a year ago, primarily due to a combination of an increase in supply cost and slightly higher cheese cost as we cycle out of the cheese contract that expired in December 2016. In the quarter, prepared food gross profit dollars rose 8.3% to $140.9 million. Year-to-date, same-store sales in the prepared food category were up 5.4% with an average margin in-line with our annual goal at 62.5%. We are optimistic about the growth in this category, as we benefit from the continued implementation of pizza delivery stores, the major remodel program, as well as new store openings. For the quarter operating expenses increased 12.6% to $292.3 million. At the nine month mark operating expenses were up 11.2%. Approximately two-thirds of this increase in the quarter was due to a rise in the wages and payroll taxes. Also the combination of credit card fees and fuel expense were up $3.5 million. Store level operating expenses for open stores not impacted by any of the growth programs were up approximately 9.6% in the third quarter. Again, this was up primarily due to wage rate increases including our decision in December to keep our commitment to salary increases for our store managers stemming from the proposed change by the Department of Labor to increase the minimum salaries for exempt employees. On the income statement, total revenue in the quarter was up 13% to $1.8 billion, due to a 13% increase in the retail price of fuel from the third quarter last year and sales gains due to an increase in number of stores in operation this quarter compared to the same period a year ago, as well as additional rollout of operational programs. Depreciation was up 16.7%, this was consistent with the increase in the first six months of the fiscal year and in-line with the comments we made during our last earnings call. We expect the percentage increase for depreciation to be up in the mid-teens with a fiscal year compared to a year ago. Year-to-date, total revenue was also up slightly due to sales gained mentioned previously, offset by lower retail fuel prices through the first nine months compared to the same period a year ago. The effective tax rate in the quarter was 35.9%, up from the third quarter last year due to a decrease in favorable permit differences. We expect our effective tax rate for the fourth quarter to be around 33.5% to 34.5%. Our balance sheet continues to be strong, at January 31, cash and cash equivalents were $115.7 million, up from $75.8 million at the end of the fiscal year, primarily due to the additional debt we secured for future growth and year-to-date results of the company. Long-term debt, net of current maturities was $915 million, while shareholder equity rose to $1.2 billion, up $132 million from fiscal year-end. At the nine month mark, we generated $316 million in cash flow from operations, the capital expenditures were $339 million compared to $317 million a year ago in the same period. We expect capital expenditures to increase as new store construction accelerates and we complete more major remodels during the fourth quarter of our fiscal year. I would now like to turn the call back over to Terry to talk about the growth programs and our unit growth and close out our opening remarks before taking questions.

Thank you, Bill. Let me begin by providing you an update with our growth programs. We are on-track to complete an additional 46 major remodels during the fourth quarter bringing our total at fiscal year-end to 102. Year-to-date, we have also converted 89 locations to a 24-hour format and 134 stores to the pizza delivery format. Currently we have approximately 997 stores that are 24-hours and 552 that deliver pizza and have completed 416 major remodels. In addition to these programs, we are encouraged by the gains in our online ordering program. Subsequent to the rollout in January 2016, total downloads of our mobile app have exceeded 700,000 and it continues to grow. The amount of pizza orders completed online has climbed to over 13% and our basket ring of an online order has increased and is over 20% higher compared to a telephonic order. We are optimistic that contribution will continue to grow as the number of downloads of our mobile app increases. We believe our mobile app was a great first step into ongoing digital engagement with our consumers. As we head into fiscal 2018 we'll be very focused on increasing these efforts. This quarter we opened 13 new store constructions, completed 7 replacement stores and acquired 8 stores. We also have 8 additional acquisition stores under contract to purchase. We also completed 32 major remodels in the quarter and in addition to all of this activity we currently have 33 new stores and 21 replacement stores under construction. Our second distribution center that was opened in February 2016 continues to perform well. One of the benefits of this facility is that it opens up new geography for us to efficiently expand our footprint; this along with increased resources in our store development department have positioned us well for accelerated unit growth going forward. With this in mind, the number of sites that we have under agreement for future new builds continues to grow. At the end of the third quarter we had 91 sites under agreement and as of today that number has risen to 100. As a reminder, we consider a site under agreement to be either a written contract or a verbal agreement to purchase, a vast majority of our written contracts. Please keep in mind that all of our agreements have contingencies that may trigger a site to fall-off our list before it gets released to construction. We are planning additional resources to the store development area this coming area to sustain our future new store construction pace at a higher level augmented with acquisition opportunities. Our store count at the end of this quarter was 1,954. We are accelerating our store development efforts and have a robust and growing new store pipeline which will benefit from leveraging our second distribution center in Terre Haute, Indiana. I'm encouraged by the progress we have made over the past several quarters in this area and believe we are positioned very well for future growth. As we have grown the company, we have always focused on total shareholder return. The guiding principal of our capital allocation strategy is to take a balanced and disciplined approach to the use of our cash and balanced sheet while maintaining flexibility to invest in areas with the greatest return to shareholders. This includes investment in the growth of our business, continued quarterly dividends, selective M&A, and share repurchases. I'm excited about the recent share repurchase authorized by our Board of Directors as it is another reflection of our commitment to delivering shareholder value. Despite some of the macro economic challenges that we currently face, we remain confident of the long-term direction going forward. That completes our review of the quarter. We will now take your questions.

[Operator Instructions] One moment for your our first question. And is coming from the line of Ben Bienvenu with Stephens.

Yes, thanks, good morning. Thanks for taking my questions. So I wanted to first ask about OpEx; that was the biggest surprise relative to my model and those that we talk to as well. Obviously the unchanged store base growing at a much more robust pace; it sounds like the composition of that growth had some permanence. I'm curious -- as you have seen comps slow, how do you think about your OpEx spend relative to mid-single digit comps and the resulting deleverage? And then do you have a paradigm that you think about in terms of EPS growth that you want to target? Does the OpEx growth that you've committed to suggest that you think comps continue to improve? Maybe just some commentary about how you think about flexing up and down the OpEx spend?

You bet, Ben. I'll try to keep all those answers. If I don't, keep me on this there but with respect to the operating expense, certainly this is going to be an area of focus as we move forward in the fiscal 2018 and we certainly recognize the slowing of our comp base in relationship to the OpEx. Now more specifically to the results that you mentioned in the third quarter, there are several things that are running through the third quarter that may not have been running through the prior quarters. First of all, as I mentioned in the narrative, we did keep our commitment to our store managers to increase their salaries with respect to the Department of Labor proposal. As we indicated in the last earning call, that would be approximately over the next 12 months, an impact of about $10 million. So roughly you're talking about $2.5 million on a per quarter basis. So that was running through this and so that will be something that will be there until we cycle over that, come next December actually next November but we started that process in November. Also running through, this would be more of a one-time issue roughly $2 million is running through that. We did in the third quarter, rollout new uniforms to our stores, that -- we don't anticipate that being an ongoing process; we obviously are currently -- we're very conscious of obviously customer service and that just happens to be an extension of that. And so we did have $2 million running through that as well. With respect to the total OpEx, getting away from the unchanged store base a little bit, one of the things that we have talked about is, we do have a new HRIS system, it's a payroll human resource system and ongoing expenses for that will be about $1.5 million per quarter. That started too, we didn't see it necessarily in the third quarter -- excuse me, the second quarter; as it started rolling out towards the tail-end of the second quarter. So that's in the total, I wouldn't run through the unchanged store base but that would in a total. A couple of other just a little bit nuggets to think about with respect to OpEx in the unchanged store base, credit card fees do role through that unchanged store base. We have seen an increase in credit card fees; we kind of called that out in the commentary. And so to the extent that retail prices continue to rise to any degree, we should probably see an increase in credit card utilization along with that. So there are few things going on there in that regard. Hopefully, that gets most of your questions answered, Ben.

That's great, I appreciate the color. And then thinking about the cadence of comps; helpful commentary there around the starts of the quarter in November, am I right to think the balance of the two remaining months in the quarter were equal in nature in terms of the same-store sales contribution or was one month weaker than the other? And then as you cycled out of that, do you have renewed confidence that did that slowdown in same-store sales was transitory in nature? Can we get some commentary there?

Yes, just kind of give you some cadence of same-store sales throughout the quarter and I think what you're asking also as we came out of January, kind of what we might be seeing in that regard but as Terry indicated on the call, we saw -- I would say -- I'd use the word very strong comps in November. We really -- as he mentioned we're either at goal or above goal in most of all the categories, even the sub categories. We took a step down in December, roughly probably started roughly the second week of December and then took a further step down in January. So that's kind of -- when you look at the impact with respect to each month that kind of how it rolled out. Now January, we had said we had some things going through January specific. We did have a calendar shift in January where we saw -- we're comparing against less riders [indiscernible] and that is quite impactful in a month and Terry talked about that impact by the month. Now in the quarter we did not necessarily have a calendar shift but also we did have two -- I would say significant weather patterns that hit our market, we had a nice storm that hit part of our market there as well as the snow-storm starting roughly in the mid part of January, definitely saw an impact from that as well. And then so to answer your question, we definitely saw an acceleration into February from what we were experiencing in January.

Okay, thanks. And then one last one for me. On the other revenue line item, that was down materially year-over-year. You called out an immaterial reclassification of sales in your 10-Q. I'm curious, is that $11.4 million sales level, is that a reset that we now sequentially grow off of or that's sort of a one-time step down in nature?

No, that the downward movement in the other category -- you keep in mind, last year this time we had about $0.5 billion lottery and you saw a significant influx in the other category with kind of the theme trending when the jackpot gets to that level. And so that's where we're comparing to, so that's really the dynamic of differential there.

Fair enough. Thanks.

Thank you. And our next question is from the line of Ryan Gilligan with Barclays.

Hi, good morning. Thanks for taking the question. Can you talk about the consumer response to the price increases and stepped up promotions you guys took in the third quarter?

Yes, absolutely. We had several price increases; the major one was in the prepared food category, roughly about 1% to 1.5% price increase. And we did see an acceleration of 70 basis points core sequentially speaking Q2 to Q3 in that regard. If it wasn't for that weather pattern that we had in January, that would have been north of 6%. So it would have been in line with what you I think probably would have expected with all things being equal. And so from a unit's perspective, we do not believe we saw any price elasticity, we were calculated in what we were taking up, we took up specifically coffee and pizza slices were the two major components and did not see necessarily any type of discernible change in traffic pattern for those two products with respect to the grocery and general -- go ahead, Ryan.

No, go ahead, please.

I was going to talk about the grocery and merchandize but we did take some price increases in the grocery and general merchandise and the same commentary would hold true. You know, we had a 3% -- roughly a flat sequential movement of Q2 to Q3. Again, if it wasn't for some of that traffic patterns, the weather patterns that we had in January. We would have saw a sequential movement upward. So definitely saw as I mentioned, advanced commentary and acceleration out of January into February.

That's really helpful, thanks. And then is there an update on developing your fuel saver card or partnering with other retailers in markets where there aren't Hy-Vee locations?

We continue to move forward on that. This is really a much larger perspective than just a fuel saver card. We do have a fuel saver card partnered with several grocery stores down in the southern parts of our area where we do not have presence with respect to Hy-Vee. We continue to look at the whole digital engagement with our customer and this is really -- something that we'll be really focused on as Terry mentioned as we move into fiscal 2018 and it goes way beyond just having a fuel saver card or rewards program as we really try and integrate every aspect of how we interact with the customer and make it kind of a seamless transaction for the customer whether it's coming into our store, whether it's telephonic order, whether it's somebody using their phone to interact with us. So this will be definitely a focus for us. And so kind of wait -- more to come on that one, I guess Ryan.

Okay, fair enough. And then lastly, can you just talk about how the pizza delivery rollout fit in the smaller markets?

Yes, I will say we were encouraged by that. Now when we rolled the pizza delivery in the smaller markets, this is -- but I would still be in the test mode at this point and it was a limited -- it was like Thursday through Sunday. So it was a limited number of days of the week because of that smaller community. I can tell you roughly, we anticipate roughly about 40 basis points of that comp and the prepared food came from that rollout which we were very encouraged by and so to the extent that this continues to perform well, I think it does open up more opportunities in pizza delivery in some of these smaller communities. So we'll continue to test that and keep pushing it forward.

Great, thank you.

Thank you. And our next question is from the line of Shane Hagan - Deutsche Bank.

Thanks for taking the questions. Bill, could you just give a color around the competitive environment. You called out some more promotional activity; is that -- are you seeing any particular regions that are -- that have become increasingly promotional or is it really broad based? Any color there would be great.

Shane, this is Terry. I would tell you that from a regional perspective, I think this is more of an industry consideration. When we think about the food service category, there is a lot more promotional activity with regards to some of the major pizza retailers. We have to be aware of those promotions in markets where we face them one on one. And also with regards to the QSRs because those folks are also our competitors, we need to make sure that we are staying vigilant with regards to combo type promotions and so these are areas of focus that we have going forward, that's certainly a shift if you will in terms of what some of the competition is doing. And on a case-by-case, market-by-market basis we're certainly going to be aware and be more proactive in that regard.

So do you guys see a step-up -- any significant step up say today versus maybe three or four months ago?

I would say in terms of the promotional activity in the last year we are starting to see some of that in our major markets with the combo programs from the QSRs. With regards to the pizza promotions, those are more likely to have come here just in the last 90 to 120 days. We're seeing much more of that and as a result we're going to have to be more proactive in those markets. When I talk about those markets, that would be metro locations when you're going to face the Dominos, the Pizza Huts, The Little Caesars Of The World; that's something we're going to have to make sure we're aware.

Also Shane just to add to that, we also have seen -- anytime we see increased promotional activity from big box retailers that usually kind of permeates down to the grocery stores as well. And so we don't price right now with most of our products with grocery stores and anytime they become more promotional, whatever products that might be, that just increases that spread between our price and their pricing. So like we called out last quarter and it's still true is, increased promotional activity in the beer category, for instance. And so these things do affect us in an indirect manner. So I do believe you're seeing increased activity in that regard.

Okay, thanks for that. And just a question on the share repurchase program; just curious about the timing. Why does the board announce the authorization today? And does it signal anything about your future CapEx plans or maybe about your approach to M&A today?

Well, we've done numerous share repurchase programs in the past. So in terms of the timing, there is nothing significant with regard to timing. We're looking at an opportunity to leverage that balance sheet and we want to make sure that we're balanced in that approach to provide that total shareholder return. And along with our continued growth and the dividend allocation, we just felt that the share repurchase opportunity was another way for us to bring total shareholder return. And that's nothing in specific to timing, just the Board thought this was the -- an opportunity for us to bring that return.

And how should we think about your leverage to ratio target?

Well, assuming -- kind of give you an idea, just -- this will be -- the share repurchase will be funded out of cash-on-hand, cash from operations as well as additional debt. If we took the entire $300 million debt, our debt-to-EBITDA will go to 2.1 times. At the high watermark we've been at 2.6 times, that was shortly after the major recap that we did back in 2010 on the share repurchase. So we necessarily have a target at this point but [indiscernible] we are very conscience of our leverage. We get more and more questions and have been getting more and more questions over the last, probably 12 months, about capital allocation. And so -- we are very cognizant of shareholders comments, I bring them up on a regular basis to the board and so they have an understanding of what our shareholders are saying. And so constantly, we've been having a lot more conversations about share repurchase in the past 12 months. You look at our debt-to-EBITDA, presently at 1.5 times; it will continue to go down as we grow EBITDA. Even if we -- even with the share repurchase that was just announced, we will quickly move downward from that 2.1 in the next several years. And so this will be something we'll continue to evaluate each and every year or each time an authorization expires.

Got it. Alright, thanks so much.

Thank you. And our next question is from the line of Bonnie [ph] with Wells Fargo.

This is Adam Scott on behalf of Bonnie. Just a couple of questions; first on RINs which I think is certainly a topic that is an investor focus right now. In a world where the point of obligation for ethanol blinding does change; I wanted to get some clarification on how that impact to you? We're obviously assuming that the terminals are blending ethanol, RINs would effectively fall to zero and splash vendors like yourself would lose the ability to sell RINs but -- just wanted to get your thoughts on -- if you think you'd be able to still capture any of the economic profit from splash funding in that scenario or if you think you would basically have zero benefit from any further ethanol blending?

Well, Adam you're right on the point, this has been a pretty hot topic. We get a lot of questions on RINs and obviously you probably saw some of that announcement, and so forth the last week or so with the executive order that didn't happen, but -- but having said that just a couple of things to think about with RINs; I want to make sure what everybody understands is, first of all, we're not the only [indiscernible] traded company but we're not the only people in the Midwest that secured RINs. The private operators will also have the opportunity to secure RINs as well. The reason I bring that up is this is -- yes, we are benefiting in the gross profit dollars from RINs currently but so are those operators. To the extent that anything happens in that through a dramatic fashion, there is a theory that they would be more rational or retail pricing offset, that loss goes to profit dollars. No different than any other pressure that comes into their business whether it's a minimum wage or increased legislation on another products; so that's one thing I want to make sure people understand. Secondly, there could be already -- this could already being competed away right now. So there may not be as much of an impact as people might think there is. Last thing what kind of maybe -- have people think about here is -- you know, it would be challenging I think for the point of obligation to change at this point. You're talking about the number of obligated parties less than 200 currently changing that focus to include retailers or people at the rack [ph], you're talking about thousands and thousands of obligated parties now. So I think that would become a very challenging dynamic to manage and enforce -- I'm not sure how you would enforce that. Even with us, we don't secure RINs really East of the Mississippi; we're not in a position there to purchase the two products separately. And so if you're a small operator, I'm not sure how that's going to look going forward. So I can tell you this, this is something that does not keep us up at night; RINs are not a strategy in our long-term forecast. It's just something that we secure based on how we operate our stores and where we operate our stores. Hopefully that gives you a summary there.

That's very helpful. Thank you very much. And then just one other question on an entirely different topic; tobacco. It sounds like from your press release that cancer [ph] cells -- grocery accelerated X cigarettes which implies obviously tobacco decelerated. Some of that I think in the past has been around the depremiumization trend to switch back to -- excuse me, tobacco versus cartons but if you look at your margin, that implies that maybe that's not happening. So I wanted to get a little bit of color on some of the specific mechanics of what's the underlying trends within tobacco? And is it mixed shifts? Is it different formats? Obviously, our customers downtrading in a way that they haven't been; so just some specific color would be very helpful. Thank you very much.

Absolutely. Cigarettes -- and I think we might have made a few comments like this in the last conference calls. But cigarettes probably over the last 9-12 months, we have seen a gradual move away from cart purchasing to pack purchasing. We also have seen a gradual moving from full value to more of a generic brand. And so when that happens, that obviously is a lower ring and it will affect the comps, and those typically are higher margin IMs but you need to really make a significant move to drive the margin. And keep in mind, the grocery general merchandise margin is comprised of a number of things. And so one of the things that we mentioned in the last call -- maybe the last two calls, is we did change our ice program and so we're not -- we have not fully comp through that. Now we go through a -- we used to bag our own ice and now we go through a third-party to do that. As you might recall that was a 50 basis point impact; and so we're still cycling over that. So that's what's really kind of playing at this point. But cigarettes -- as you know, it's a declining category, it has been for some time. I will say that we're probably bucking the trend nationwide with respect to cigarettes and cart movement.

Great. Thank you very much.

Thank you. And our next question is from the line of Kelly Bania with BMO Capital Markets.

Good morning. Thank you for taking my questions. Wanted to just clarify a comment; I think you said -- Bill, maybe that you saw an acceleration of what you saw of January into February. So I just wanted to clarify does that mean the trends continue to weaken? And just is that weather or is there anything else you're seeing promotional activity still kind of upticking?

Yes, so exclude the leap year -- normalized lead year for a minute because that will skew the results this last year and it will this year. The intent of the comment was more so -- definitely acceleration from January. But the environment that we're in is relatively similar to the environment that we experienced in the third quarter. So some areas we're seeing acceleration above and beyond where we're at at the night 9 month more and some we're seen flattish, some slightly down. So the consumer is still very anxious out there. Just one of those things; I still think there is bit of an unknown out there, especially what healthcare cost is kind of open [ph]. So things still assuming settle down before we get some confidence.

Okay. And another question, when you mentioned the competition from big box retailers and some of the other large pizza chains like Dominos and Pizza Hut, I feel like -- in years past we've kind of always been a little bit more inflated from that. So I'm just curious if you think what's going on; it's just so extreme that it's reaching your trade area or are some of those retailers expanding more in your regions?

No, it's not so much for the expanding Kelly, I mean there are several components here. I would say definitely there has been an increased promotional activity in certain products within the big box retailers and grocery stores and that creates a further pricing dynamic from their locations to ours, that's one component. Terry mentioned the other component about these -- I'm going to call them promotional deals that lot of the Pizza chains are doing. I don't think the competitive landscape has changed that, they've been encroached more into our areas but I think maybe the media has spread out. And so as you're in a small community, even though there may not be a Dominos, Pizza Hut or whatever chain there they may be seen in the advertising for the specials and that becomes engrained in their mind and that's an expectation all of a sudden is, there -- maybe at the forefront. And so I think what Terry is alluding to is that we need to be cognizant of those changes. They've increased -- Terry mentioned the last 90 to 120 days, and so we are circling back to see whether we have opportunities to be a little bit more laser focused in our pricing by region to combat some of those things, basic kind of price optimization by region if you will.

Got it. And if you -- I don't know if you look at your stores or sales trends in this way, but are you seeing any really difference in kind of your metro areas versus kind of the smaller rural towns?

Well, it depends on what category [ph], I mean typically in a larger community you're going to see gallon movement in grocery and general merchandize, higher than what you would in a smaller community and I think that's more of a foot-traffic perspective. Now from a prepared food perspective, the small communities are either in-line or actually above some of the larger communities because of the lack of a competitive environment.

Got it. And then just another one, I wanted to just ask about the new store development; I think several comments about accelerating that. So just trying to understand what should we really be thinking about in terms of unit growth expectations over the next several years?

Well, Kelly this is Terry. I would tell you that our intent here is to increase the number of new stores on an annualized basis, we have certainly scaled up our staff in the real estate department. We have brought on new associates, not necessarily based out here out of Ankeny [ph] but based in some of these growth markets looking to increase opportunities around the Terre Haute distribution center. We have our first new store opening up in Ohio here on March 17 and we're looking towards Oklahoma and Arkansas, and as well, Tennessee and Kentucky. So we certainly believe there is great opportunity throughout our -- what assumably 15 state market area to continue to grow. So we want to ramp that number up from what has been historical, so you'll see that number continue to grow. We're looking for a baseline of 4% from our new store growth, so that's a priority for us. And we'll not only do that in our new markets but also in our existing markets because we understand that there are still great opportunities even in in our existing markets. And a state that we want to focus on as well going forward is the State of Wisconsin. It's in our backyard and we see that -- great number of towns that are Casey's towns in the State of Wisconsin. And we have some stores -- states here where we have solid ROI, State of Nebraska, States of South Dakota, Minnesota; we want to continue to look there as well. So we're going to increase the number of new stores going forward.

Got it. And then could I just ask another one on RINs, it seems -- I think Billy mentioned prices are now $0.35, down from I think $0.89 or so for the quarter. But I think your comment that some of that could possibly be offset in just gas margins because everybody in your trade area, other dependents, many are -- also have been benefiting from that. Have you seen that dynamic play out in the past couple of months as that RIN prices has moved down sharply?

The fuel margin -- when we talk about the fuel margin, even though it's a very high, we believe a very solid $0.79. If you break out the RINs and look at the quarter, I mean wholesale cost did rise in the quarter but the other thing that we didn't really mention is basically a flat volatility in the third quarter. And so volatility -- when you have volatility, no matter what direction the wholesale cost going whether they are up directionally or down directionally; you have an increased opportunity to spread your margin and we haven't seen that yet. So the environment with respect to the fuel margin and what you just mentioned Kelly, we're not the only ones that's facing that. So here if you're a smaller operator, operating at maybe a lower major environment than what you normally had been in the 9 to 12 months; something at some point will have to give. And so we think the either the margins will rise at some point in time in the future or else we might see some opportunities for acquisitions as the pressure continue because the macro environment that Terry alluded to as you probably know is not specific to our company.

Right.

So, I think we're positioned very well to take advantage of whatever direction this goes here. And as Terry mentioned, the unit growth -- just maintaining a minimum 4% unit growth from organic perspective and then augment it with acquisition opportunities, we're certainly gearing ourselves up for a future accelerated gross pace.

Great, thank you.

Thank you. And our next question is from the line of Chris Mandeville from Jefferies.

This is actually Aaron [ph] on for Chris. Thanks for taking the questions. So just curious, in our market cheese prices are today and if you guys decided to lock in costs on that? And if so, at what price?

Well, currently right now the market price is a $1.75 a pound. And so we're looking for any opportunity for a forward buy but as far as an immediate lock-in, we don't have any plans, we're just keeping our eyes open to see if future prices become more in-line with that current price and when that opportunity presents itself we certainly will make that forward buy.

Okay, understood. And then on grocery you guys talked about grocery X tobacco having accelerated; is there any chance you can provide us just with some numbers around that to kind of better understand what that was Q2 versus Q3?

We're not going to -- we're probably going to take a stop there to get that type of granularity out but the point that we want to make there Aaron was the fact that this is the first time in probably three quarters that we have seen that movement go upward. And so I'm not saying that necessarily we're referring that as a bottom of the economic conditions we're in but it's certainly a signal. The other side of that Terry did mention too -- this is for the first time in almost a year we've seen the basket ring inside the store go up. Now that coming inside of the store book excluding fuel, that was up somewhere at 7% to 8% range from the second quarter.

Understood. And I guess one last one for me -- kind of on the digital data front; at what point do you guys think you can become a little bit more sophisticated and very much to that as where you can target the customer with a specific promotion based on their prior purchases, not just online but in the store as well?

Certainly during fiscal '18, that's a priority project for us. So between our store operations and our IT teams along with marketing and food service, that is a project that we want to move forward very quickly. We understand that our customer relations management is an opportunity for going forward. We need to understand what is it that we're not providing to the consumer they are looking for and we also want to understand an opportunity through our social media is to communicate with our consumer and make sure that when they are on-premise, we're providing them the promotional opportunities that they are looking for; we want to get a sense of what it is that they are purchasing, and -- so we can provide those promotions to them. So we understand that we want to be more sophisticated with that, we want to make sure that we're best-in-class and that we're going to certainly move in that direction.

Understood. Thanks, guys. Best of luck going forward.

Thank you. And our next question is from the line of Irene Mattel [ph] with RBC Capital Markets.

Thanks and good morning everyone. Just continuing on the subject of digital; when you talk about F-18, are you talking -- should we be expecting an actual launch of something more sophisticated in F-18 or just more discussion around what your intention is to do?

Irene this is Terry. As far as the potential launch, I'm not going to guarantee that there will be something in the front half of fiscal '18. Our goal here is to truly understand what it is that we can do to establish a "loyalty/rewards" program. But we wanted to make sure that's a sophisticated program, we don't want to just do something simple; we understand that once we're in that program it's something that needs to be dynamic and something that is also scalable going forward. So we're going to be thoughtful in our approach but we want to make sure by the back half of fiscal '18 we have our next steps in place. Obviously, this is an opportunity that we'll continue to grow and develop and mature. The first step for that launch, if you will, of a customer relations model is when we put out our mobile app on the pizza program and we're doing very well. But we understand that it needs to be more dynamic, it needs to be better, more engaging and that's our goal, is to move that direction.

That's really helpful, thank you very much. And certainly we look forward to getting a lot more detail on that. Just a couple other questions, if I might. If we can come back to the whole food service piece and the prepared foods; it sounds as though there is more opportunities perhaps for you guys to get a little bit more sophisticated or do more around bundling. I mean I know you do a lot of that already, but can you just talk about sort of the tools that you're looking at to drive continued -- let's call it higher basket size on food.

Well, I would tell you that I think in terms of our basket opportunity, we do those basket rings or those basket opportunities where we bundle products together, whether it be food service and fountain, maybe it's a bag of chips or another snack item. I don't know that we have always done a great job in promoting that across the board. So you will see those maybe more happening along the line of an in-store promotion and in terms of it may be more regionalized. So we want to make sure that when we think about our sub-sandwich program as well as our hot sandwiches and our pizza slide, that we're conscience of what the competition is doing; we're making sure that we're providing a great value to the consumer but we're also doing a better job of marketing that to our consumer. So it's not -- I would say it's been more of a hit and miss if you will, it's been a seasonal type situation, maybe more along the line of the summer months. We see that this is something that we need to do more on a year round basis and provide that opportunity. So we're going to be more dynamic, if you will, in terms of its scope and also in the depth of the promotion.

And that digital process will help enormously presumably?

Well, absolutely. The digital is a great way for us to get those promotions to the consumer. We have -- with our social media capability and sending out promotions to our mobile app users, we're having great levels of engagement, but we know it needs to be more. And again, that's where an increase in development of that program is going to be vital. It's one thing to have an in-store promotion and you see it when you come inside the store but we want to capture you when you're away from store and make you come in the store for a reason. So that's our opportunity is to be more engaging with our consumers at store level or someone who has never been to Casey's before.

That's very helpful. Just I have couple more housekeeping questions if I may. Your discussion around the I guess the trends in February suggest that step up from January but maybe not quite in line with the annual goals is that a fair comment.

Yes, it would be. It would be more in line with what we've been experiencing in the last several quarters.

Okay, that's very helpful. And then finally just on the share repurchase. Can you give us a little bit of color on how you plan to execute. Will it be opportunistic, will it be more of a consistent share repurchase. Anything you can help out on that one.

It will be a combination of the two, Irene. Certainly we will have -- we'll be -- our plans to purchase here is not an open window environment but also closed window environment. Certainly we'll be doing that throughout the quarter.

That's right.

Each quarter may be different, obviously.

When do you plan on starting?

You know, we plan on starting this quarter.

Okay. That's very helpful. Thank you.

You bet.

Thank you. Our next question comes from the line of Chuck Cerankosky with Northcoast Research.

Good morning every one.

Hi, chuck.

When you're looking at those eight stores you have under your contract in the 33 under construction are those going to open in the fourth quart -- be acquired and opened in the fourth quarter? How would you put a timeline on that group of 41 units.

Yes, sir. Those will all close in the fourth quarter. That is correct.

All right. So then -- sounds like you'll be pretty darn close to the goal this year then.

We'll be below goal on the number, but certainly we have some opportunities in fiscal 2018 as we eluded to in the narrative. We have a lot of sites that are under contract or verbal agreements and we feel very strong about that and certainly the -- with the increase in the number of staff that we have with regards to our real estate team, they're young and they're hungry and getting after it, so we look forward to their continued aggressive activity in bringing more sites to us for the rest of fiscal 2018.

When you're looking at these operating expense increases, Bill, you went over in detail some of it, are there any line items you could push back on or does it have to be the recovery in sales growth to lever some of these operating expenses? In other words, can we see the rate of increase decrease in dollar terms perhaps?

Yes. I guess to answer your question, when you look for an operating expenses, knowing kind of what Terry is eluding to with respect to what we are rolling out in the fourth by the way of new store constructions and remodels and replacement and you head into a more aggressive activity in fiscal 2018, certainly that promotes a higher degree of operating expenses. To your question specifically when you look at the operating expense line, wages definitely commands the majority of that. You put in perspective the Q3 OpEx increase about two thirds of that, imagines how to do with wages and payroll taxes. We are taking a much stronger focus and look at opportunities that we might be able to have and make adjustments in with respect to that. Most of it has to do with rate. Even if you pull out the manager salary increase that I mentioned, it's a competitive landscape out there. We've had to take some rate increases like on shift differentials for the non-core hours and out 24-hour operations, pizza delivery drivers. [Indiscernible] choice but that's the area that I think we'll be able to make the biggest impact. I'm not sure it's going to happen overnight necessarily, but that's something that we'll be focused on and probably talk more about in the next conference call in the efforts in that regard.

Okay. And then, finally, you talked about the quarter to date trends in comps. Is that both prepared foods and grocery category?

That would be -- that would be across all of it including fuel gallons as well.

Okay. All right. And then on -- how about the fuel gallon margin, Bill. Would you be willing to talk about that quarter-to-date?

Well, I mean, yes, the comment I would make there would be is this. I mention the previously we had a pretty flat from a volatility perspective in Q3. That flatness kind of continues.

All right. Thank you.

Yes, you bet.

Thank you. And our next question comes from the line of Mark Smith with Filter and Company.

Hi guys, first of just a housekeeping. Can you walk through again your tax rate assumption here going forward?

Yes, tax rate assumption was specific to the fourth quarter. And that was 33.5 to 34.5 in the fourth quarter. For the year-to-date, we'll be more along the 34.5 to 35.5.

Have you guys spoken to increased volatility in tax rate with the new accounting for the tax impact on stock options.

Are you talking about the tax reform or are you talking about tax [indiscernible] the one that we implemented three quarters ago. I'm trying to clarify your question, Mark.

Yes, I think that's it. The one that you put in.

The one that we put -- most of that is going to be in Q1. Because that's when restricted stock units become fully vested. That’s when we the opportunity to get that benefit, we did have an influx last year in Q1 because we did have some people exercise some stock options that would go to that, there will be non-going benefit but it tends to be little less than few quarters, two, three and four, so come Q1 we expect to see a benefit in that regard.

Okay, and then lastly for me, looking at the major pizza chains doing over 50% of the orders digitally today. Is there anything that keeps you from over time being able to grow to similar metrics?

You know, I think it might be a little more challenging for us to get to those levels. Certainly, we're striving to get higher penetration to the extent that we can. The reason I say that it might be challenging is the larger players that you are referring to are more metropolitan areas. What we see the mobile app usage certainly more dominant in our more metropolitan areas in their role areas. So just because of the demographic maybe just a little bit more challenging to get to the levels. But having that said, Mark, I think we have opportunities to grow from where we're at definitely. As Terry, mentioned this will be an area of focus for us. We want to make sure we're fully engaged with our consumer.

Maybe I'll squeeze in one more. Have you quantified the difference in average check between a mobile order or digital order versus somebody in the store?

We haven't done this dollar amount, just the percentage increase. But you can kind of -- we've given out the average [indiscernible] will be around 7--70 excluding fuel. But then it won't get you to what you're getting at. We haven't necessarily broken up the dollar amount yet. But it's slightly less than $2 differential in the ring telephonic versus the online.

That's helpful. Thank you.

Thank you. Our next question comes from the line of Ronald Bookbinder with Coker Palmer.

Good morning.

Hi, Ron.

The peach delivery in food [ph], it seems like you have a lot of nice positive drivers. You accelerated the pizza delivery, the increased -- you had some strategic price increases. The pizza app the average orders is 20% higher. What was traffic down in the category and how is that going to change going forward? Is it promotions or just flatly the economy.

We think it's the impact of traffic has to do more with the dynamics that Terry eluded in the opening remarks in the call. It's a combination of the agricultural economy being very challenging right now and the income looks to be similar at least with the first part calendar 2017, also that pricing spread between food away and food at home is another dynamic that’s playing upon that. And then time to time especially this time of year, Ron, we are going to see some weather paths and just quite frankly in the short term effect traffic, that’s what happened we saw in January, the costumer count January for instance we had to do with calendar shift but also part of it had to do with the weather pattern actually was the negative customer count. As first time we had a negative costumer in a month's time for about a year and a half. Prior to that, November was extremely strong, in contrast November was at one of the highest points that we had in the last two years. For us it's looking to be diligent in our promotional activity to drive customers. Terry made a great point earlier about the digital engagement of our customers to drive into our stores. We want to know what they're buying but also what are they not buying, why aren’t they buying this when they come to our stores. So we can do a better job of engaging them to actually buy other products. So it is going to be a focus for us going forward.

On rising input costs, when do other contracts roll off and how do the meat and coffee prices look compared to your contracts.

The other for buy that we have is in coffee and that's locked in through the summer -- July of 2018, 2018 and as Terry mentioned, we are looking diligently at opportunities to maybe engage in other buy of cheese, we haven’t engaged that yet. As far as meat and some of the other, we don’t specifically have for buys in those categories, a slight benefit there but not meaningful this point.

Lastly, as you look at these new markets and building new stores, are you looking at adding alternative energy a place to plug in a car and how are you looking at this sugar tax on the soft drinks that we are seeing out of Philadelphia. People are wondering how that could impact convenience stores if it spreads nationwide.

With regards to the alternative fuels, certainly we are aware as there seems to be some newsworthy trends towards use of electric vehicles, driverless vehicles and so forth. We certainly want to be mindful of that and we want to look towards our metropolitans in markets maybe where that might be greater opportunity than maybe some of our royal markets .As we move into new states, we will certainly be mindful of what those opportunities may be. With regards to the sugar tax I am not sure anywhere necessarily in our market area we facing that sugar tax issue, but when it comes it will affect us like it does everyone else, so we will be on equal footing.

Okay, thank you, and good luck in the new quarter.

Thanks, Ron.

Thank you. Our next question comes from the line of Anthony Lebiedzinski with Sidoti and Company.

Good morning and thank you for taking the question. Just wanted to actually follow-up as far as your commentary Bill, about November being extremely strong. Any particular reasons why you think that was the case.

Probably a number of reasons, one we did kick off a price increase in November, and obviously that was helpful in November as it was in December and January. The weather in November was also very strong, so the comparable weather patterns I think they were very favorable. Quite frankly, we can't put a specific number on it, you had a lot of political unrest leading up to the election, and I think the election results came in and I think there was kind of a sigh of relief that that part's over. I think that kind of reengaged itself as the new administration kind of set their foot forward there. But I think those are the reasons that we are seeing right now.

Thanks for that color.

Anthony, before I leave that question. The other thing I do want to point out in month of November we did have a different promotional activity in prepared foods. We offered free bread sticks with a large pizza and traditionally we don't do that very often, but that was certainly a strong player for us in the month of November.

Got it. Thanks for that color. And also, as far as looking at what you deliver, I mean right now primarily it's pizza and bread sticks and some other miscellaneous items. Is there a thought to expand perhaps what you can deliver and perhaps down the road to deliver some grocery items or some other merchandise. How do you guys think about that.

Anthony, this is Terry. We certainly will keep an open mind with regards to those opportunities. With our drives going to the stores or going from stores to home, there may be the opportunity to add some grocery items there. So we'll take a look at it, we may test that here during fiscal '18 and see what products make the more sense.

Got it, okay. And lastly, as far as the potential price optimization by region Bill, I mean any thoughts as far as the timing of when that could happen?

No, I don't have any timing at this point right now. It's something that we do have price optimization on some key products currently, obviously it feels one of them cigarettes rather -- and we're talking -- and Terry was talking more about being more diligent about and cognizant of some of the promotional activity in certain markets and trying to combat those with some different price optimization. So fiscal '18 is definitely going to be an area that's going to be moving forward in.

Okay, terrific. Thank you very much.

Thanks, Anthony.

Thank you. And our next question comes from the line of Bob Summers with Mcquarie.

Good morning, guys. So I just wanted to compare and contrast the stores where your leveraging initiatives versus the unchanged phase, you know maybe along the lines of comp trends, gross profit dollars, EBIT margin. And as you think about where you're falling short of your goals -- which store bucket if at all is driving it? And then separate but maybe related, when I think about the leverage point, I mean it's obvious that you're incurring costs for this year; where do you think about the leverage point in terms of in-store comps now and then where it might be in four quarters? Thanks.

Alright, Bob. I'll try to get to all those answer there. With respect to comps -- when we look at the growth programs, I mean they are comping significantly above the unchanged store base. Now as we get further [indiscernible] -- say later in the innings of the rollout of some of those initiatives, that benefit will probably start to taper off as the base grows, even currently right now the 24-hour roll out that we've done; those roll outs are stores that we've already have modified ours on and so their impact is build less than what we've done in prior years. We'd also like to think in the other initiatives, we've taken some of the better ones, so initiatively you think that some of those will also start to take -- but still they are performing significantly higher than unchanged store base. And so when we look at comps, unchanged store base represents probably 1,300 to 1,350 stores, Bob. And so there is really no discerning differential across our market there with respect to population or state in that regard. So consequently we come back to those macro environments that we discussed on and so both of those would need to change for us to move that particular one forward. Maybe -- I'm not sure of the other question, if I've got your questions answered in that regard.

No. And then Just back to the point of leverage. I think that while the economy -- the farm economy has is bit of headwind; you know, as you think about sort of modeling out your business and sort of the incremental cost that have been absorbed; where is the leverage point now? And then can it be lower at some point in three to four quarters when once you anniversary some of these labor expenses, HR systems, what are there.

Yes, definitely – you're talking specifically operating profits expenses and not debt leverage. But from an operating expense perspective, there are some things that we have incurred that we will cycle over and create a new base come December first fall what that minimum salary that we talked about. Also come later, second quarter of fiscal 2018 will lapse over here is the health claims. Health claims have risen and we have a higher number of high dollar claims, total number of claims are up as we grow the company. And the dollar amounts continue to grow, that was a little bit different in Q3 with respect to Q2 and Q3 a year ago. And then that uniform is kind of a one-off thing. So our anticipation as we head into next fiscal year is to provide a little different direction than we have in the past. I'm not sure how that's going to shore up, but what I mean by that is guidance as opposed to goals. I'm not sure how that's going to shore but one of the things that became clear is that we need to do a better job of guiding the expectations of the analysts; and there is something we're going to be working on, part of that Bob is going to be the operating expense line of that. And so you will see a different approach going forward, and I think we'll be much more clear on an ongoing basis throughout the year.

Okay, great. Thank you.

Thank you. And our last question comes from the line of Dan O'Hare with Bank of America.

Good morning. Do you have any new product launches that customer is going to look forward to in Q4 or fiscal 2018?

We're always launching new types of products that intend to be different flavor profiles with some existing products like special pizzas for instance; different products within the bakery category. And so Terry might have some insight more than I as I can turn over Terry.

Well, one area that we're certainly looking at is the opportunity for taking baked pizza. We are going to test that during the fiscal '18. We understand that that's an area of opportunity that some of our consumers may be looking forward, especially where we may have a higher rate of snap and EBIT -- snap customers. So we'll take a look at that here very shortly with the test during Q1. And if that meets our expectations, that's an area we're excited about on a go-forward basis.

Got it. And then I was just wondering if you could provide any commentary on the impact or any impact that you've seen from the delay in tax refunds.

Yes, I'm not sure we can necessarily spell out that. I heard that comment from a number of our related peers coming out. I think intuitively it does play into it. It will be really hard for us to say what that means to us but anecdotally definitely, that's an issue out there.

Got it. And then my last question is, how much of the decline in the prepared food margin was attributable to the higher cheese costs? Thanks.

Are you talking about Q3 over Q3?

Yes.

We had about 30 basis points to 35 basis points drop in our margin Q3 over Q3; about half of that was cheese cost and the other half was supply cost.

Got it. And for the supply cost, was it higher fuel prices? That was the other component?

No. When I take supply cost in the prepared food category, I'm talking about some of the supplies like cups and things like that, it wouldn't be food cost.

Got it. Thanks so much.

Ladies and gentlemen, that is all the questions for today. I would like to turn the call back to Bill Walljasper for final remarks.

Thanks, Karmen, I appreciate that. I'd just like to thank everybody for joining us this morning. And we look forward to next call come June. Have a good week. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.