Casey’s General Stores, Inc. — Form 10-Q Summary
Business context and period: This report covers the three months ended July 31, 2013, the first quarter of fiscal 2014, compared with the three months ended July 31, 2012. Casey’s operated 1,749 convenience stores in 14 Midwestern states. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $2,114.7 | $1,868.3 | +13.2% |
| Gross profit | $345.5 | $287.0 | +$58.5 |
| Gross margin | 16.3% | 15.4% | +0.9 percentage points |
| Operating expenses | $216.0 | $189.4 | +14.0% |
| Depreciation and amortization | $30.5 | $26.5 | +14.9% |
| Interest expense, net | $9.5 | $8.9 | +$0.6 |
| Income before taxes | $89.6 | $62.1 | +$27.4 |
| Net income | $55.7 | $39.0 | +42.7% |
| Diluted EPS | $1.43 | $1.01 | +$0.42 |
- Category results: Gasoline revenue was $1,514.9 million and gross profit $94.3 million, with a 6.2% margin versus 4.4%. Gasoline volume rose 8.2% to 426.5 million gallons; same-store gallons increased 3.2%. The reported average gasoline margin was 22.1 cents per gallon, versus 14.9 cents a year earlier.
- Grocery and other merchandise revenue rose 9.7% to $423.6 million; its gross margin declined to 32.7% from 33.4%. Prepared food and fountain revenue rose 16.5% to $166.2 million; its margin declined to 61.8% from 63.5%.
- Cash flow: Operating cash flow was $138.2 million, up 29.8% from $106.5 million. Investing activities used $73.7 million, including $72.5 million for property and equipment and $1.7 million for store acquisitions. Financing provided $85.1 million, including $150.0 million of long-term debt proceeds and $59.1 million of short-term debt repayments. Cash increased $149.7 million to $190.9 million.
- Liquidity and debt: The current ratio was 1.10 at July 31, 2013, compared with 0.69 at April 30, 2013. Long-term debt, net of current maturities, was $804.0 million; current maturities were $15.9 million. The company had no balance on its $100 million bank line at quarter-end. Management said cash from operations and the line should meet working-capital needs.
Material changes and management commentary
- Net income growth was primarily attributed to higher gasoline gross profit, including $12.9 million of renewable fuel credits sold, compared with $0.2 million in the prior-year quarter. Management noted the quarter’s gasoline margin benefited from the fuel-saver program and those credits.
- Revenue growth also reflected higher gasoline prices and volume, 51 more stores in operation than a year earlier, and increased grocery and prepared-food sales. Same-store grocery and other merchandise sales rose 6.1%; prepared food and fountain sales rose 11.9%.
- Operating expenses increased 14%, mainly due to more stores, increased 24-hour operations and pizza delivery, and a $3.2 million increase in credit-card fees. Operating expenses were 10.2% of revenue versus 10.1%.
- Grocery margin faced cigarette price reductions and comparison with a $3.5 million one-time Illinois cigarette-tax benefit in the prior-year quarter. Prepared-food margin was pressured by higher commodity costs, especially cheese. The effective tax rate rose to 37.8% from 37.2%, partly because a prior-year tax benefit did not recur.
Outlook, risks, and contingencies
- Management’s stated fiscal 2014 plans were to build or acquire 70–105 stores and replace 20 locations. The company completed four new-store constructions, opened five replacement stores, and closed seven stores in the quarter. It had anticipated fiscal-year capital expenditures of $313–$374 million; first-quarter expenditures were $74.1 million.
- The company reported $803.0 million of long-term debt excluding current maturities, including $150 million of 3.67% Series A notes issued in June 2013. It disclosed plans to issue an additional $50 million of 3.75% Series B Senior Notes on December 17, 2013.
- Principal risks discussed include intense competition; volatile wholesale gasoline costs, retail fuel margins and supply; cigarette demand, costs and taxes; seasonality and weather; and environmental compliance and remediation costs. The filing said risk factors had not materially changed from the fiscal 2013 Form 10-K.
- Environmental remediation liability was approximately $0.4 million at July 31, 2013; management cautioned that future costs or undiscovered liabilities could exceed accruals. The company had received approximately $15.9 million in state-program reimbursements since program inception.
- The hot-fuel litigation settlement had preliminary court approval and included pump information commitments and a monetary payment described as immaterial; final approval was still contemplated. Management believed other pending or threatened matters would not materially adversely affect results or financial position.
- Gross unrecognized tax benefits were $10.3 million, of which $6.7 million would affect the effective tax rate if recognized. Management expected these benefits to decrease by about $1.5 million within 12 months, while noting outcomes and timing are uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether gasoline margins and earnings remain sustainable without a comparable level of renewable fuel credit sales; fuel margins are sensitive to competitive and wholesale-market conditions.
- Progress against the store construction, acquisition, replacement and capital-spending plans, and the returns generated by that investment.
- Debt and liquidity after the planned $50 million Series B note issuance, including the impact of increased borrowing on interest expense and financing flexibility.
- Whether merchandise and prepared-food margins recover from cigarette pricing pressure and higher food costs.
- Final resolution of the hot-fuel settlement, developments in uncertain tax positions, and any changes in environmental remediation exposure.