Casey’s General Stores, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended July 31, 2018; compared with the three months ended July 31, 2017. Unless stated otherwise, financial amounts are in U.S. dollars. The company operated 2,085 stores in 16 states at quarter-end and reports one operating segment.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $2.588 billion | $2.094 billion | +23.6% |
| Income before income taxes | $89.1 million | $91.7 million | -2.8% |
| Net income | $70.2 million | $56.8 million | +23.7% |
| Diluted EPS | $1.90 | $1.46 | +30.1% |
| Operating cash flow | $150.1 million | $117.1 million | +28.1% |
| Capital expenditures for property and equipment | $97.5 million | $91.5 million | +6.5% |
Net income growth reflected higher fuel margin and a lower effective tax rate, partly offset by higher operating expenses. The effective tax rate was 21.2%, versus 38.1%, primarily due to the federal corporate tax rate reduction under the Tax Cuts and Jobs Act. EBITDA, a non-GAAP measure, rose 4.5% to $162.4 million; adjusted EBITDA rose 4.6% to $162.7 million.
Revenue less cost of goods sold, excluding depreciation and amortization, was $521.8 million, or 20.2% of revenue, compared with $476.7 million, or 22.8%. Fuel contributed $123.5 million at a 7.5% margin on fuel revenue, versus $109.2 million and 8.9%. Fuel margin per gallon increased to 20.5 cents from 19.3 cents. Grocery and other merchandise margin improved to 32.4% from 31.9%; prepared food and fountain margin declined to 62.0% from 62.5%.
Business trends and changes
- Total revenue rose 23.6%; fuel revenue increased 34.9%, reflecting a 26.7% increase in average retail fuel price and a 6.5% increase in total gallons sold. Same-store fuel gallons increased 0.5%.
- Same-store grocery and other merchandise sales increased 3.2%; prepared food and fountain sales increased 1.7%. Growth in total category sales also reflected 105 more stores operating than a year earlier.
- Management said a more proactive fuel-price optimization approach contributed to higher fuel margin and slower gallon growth. Operating expenses increased 11.9%, including approximately $8 million in additional credit-card fees and fleet-fuel expense and $3.6 million in health-care costs. Same-store operating expenses excluding credit-card fees increased 1.6%.
- The quarter included a one-time $1 million incentive payment from a new vendor relationship.
- The company adopted the revenue-recognition standard on May 1, 2018. The modified-retrospective adoption reduced opening shareholders’ equity by $4.1 million, net of deferred taxes, reflecting changes for gift-card breakage and pizza-box coupon recognition.
Cash, debt and liquidity
Cash and cash equivalents were $44.8 million at July 31, 2018, down from $53.7 million at April 30, 2018. Operating cash flow was $150.1 million; purchases of property and equipment used $97.5 million. Financing activities used $62.5 million, including $37.5 million for share repurchases and $9.6 million for cash dividends. The prior-year quarter included $150 million of long-term debt proceeds.
Long-term debt, including current maturities, was approximately $1.307 billion; an additional $27.4 million was drawn on the $150 million bank line of credit. The current ratio was 0.77, compared with 0.78 at April 30, 2018. Management said cash, operating cash flows and the credit line should be sufficient for working-capital needs.
Outlook, risks and contingencies
- The company budgeted $466 million for FY2019 store construction, acquisitions and remodeling. It reported 14 acquisition stores under agreement and a land bank of 103 sites. No specific earnings or revenue guidance is provided in the filing.
- Management expects future capital needs to be met through operating cash flow, the bank line and potentially additional long-term debt or securities. This outlook is subject to risks, including competition, fuel-price and supply volatility, tobacco demand and regulation, weather and seasonality, and the sufficiency of cash flows.
- The company reported no material change in risk factors from its FY2018 Form 10-K. It said pending or threatened legal matters were not expected to have a material adverse effect. Environmental remediation accruals were approximately $295,000; management cautioned that actual future costs could exceed accrued amounts.
- Gross unrecognized tax benefits were $7.3 million at July 31, 2018. The IRS was examining tax year 2012; management estimated these benefits could decrease by $1.3 million over the next twelve months, principally from statute-of-limitations expirations.
- The company repurchased 352,592 shares for approximately $35.2 million during the quarter under its prior authorization. A separate $300 million repurchase authorization was in place, with no purchases under that authorization during the quarter.
Important facts for investors to verify
- Whether fuel margins and gallon growth remain consistent with management’s pricing strategy, given the quarter’s higher per-gallon margin but slower same-store volume growth.
- How operating expenses, particularly credit-card fees, fleet-fuel costs and health-care costs, develop as the store base expands.
- Whether the $466 million FY2019 capital budget and ongoing repurchases can be funded while maintaining the stated liquidity and debt profile.
- Potential changes in tax benefits, Tax Reform Act estimates and environmental remediation exposure.