CASEYS GENERAL STORES INC quarterly report, Q1 FY2020

Business context and reporting period

Casey’s General Stores, Inc. operates convenience stores primarily in the Midwest. This unaudited Form 10-Q covers the three months ended July 31, 2019 (fiscal Q1 2020), compared with the three months ended July 31, 2018. The company operated 2,161 stores in 16 states at quarter-end and reports one operating segment.

Financial and operating performance

Revenue increased 1.5% and net income increased 22.2%. Fuel revenue fell 1.2% as average retail fuel prices declined 4.0%, partly offset by 2.9% more total gallons sold; same-store fuel gallons decreased 2.0%. Same-store grocery and other merchandise sales rose 3.2%, and prepared food and fountain sales rose 1.6%. Fuel margin was 24.4 cents per gallon versus 20.5 cents. Grocery and other merchandise margin declined to 31.3% from 32.4%; prepared food and fountain margin was 62.2% versus 62.0%.

Capital expenditures for property and equipment were $101.4 million; total cash used in investing activities was $104.6 million. Financing activities used $40.8 million, including $10.6 million of cash dividends; no shares were repurchased during the quarter. The quarterly dividend declared was $0.32 per share, compared with $0.29.

Balance sheet, debt, and liquidity

At July 31, 2019, total assets were $3.837 billion and total liabilities were $2.348 billion. Long-term debt and capital lease obligations, net of current maturities, were $1.303 billion; current maturities were $18.8 million. The company had $50 million drawn on its $300 million revolving credit facility and no borrowings on its separate $25 million bank line. Current assets were $438.1 million and current liabilities were $575.0 million, a current ratio of 0.76. Management said cash, operating cash flow, and available credit were expected to meet working-capital needs.

Changes, outlook, and notable items

• Management attributed stronger earnings primarily to improved fuel margins, lower operating expense growth, and operating 76 more stores than a year earlier. Operating expenses rose 5.7%; same-store operating expenses excluding credit card fees rose 2.5%.
• Management anticipates fiscal 2020 capital spending of $516 million, primarily for store construction, acquisitions, and remodeling. At quarter-end, 11 acquisition stores were under agreement and the new-store pipeline included 107 sites, 35 under construction.
• Management described a more proactive fuel-price optimization strategy as contributing to higher fuel margins and lower same-store gallons, alongside softer Midwest demand.
• An out-of-period inventory adjustment reduced current-quarter grocery and other merchandise margin by $6.6 million, or about 1.0 percentage point. Depreciation expense was lower than expected due to a $4.1 million adjustment related to underground storage tank useful lives.
• The effective tax rate was 23.6%, versus 21.2%; the prior-year rate benefited from a one-time adjustment to deferred taxes following enacted state-law changes.
• The company adopted ASC 842 lease accounting on May 1, 2019 using the modified retrospective approach and did not restate prior periods; management said lease activity was immaterial to the consolidated financial statements.
• Gross unrecognized tax benefits were $8.4 million at quarter-end, including $6.6 million that would affect the effective tax rate if recognized. The IRS was examining tax years 2012, 2016, and 2017; management estimated a possible $1.1 million decrease in gross unrecognized benefits over the next 12 months.
• Management stated pending or threatened legal matters were not expected to have a material adverse effect. The filing highlights competition, fuel-margin and supply volatility, tobacco regulation, environmental compliance, weather, and liquidity needs as risks. No material changes to previously disclosed risk factors were reported.

Important facts for investors to verify

• Whether improved fuel margins can persist given lower same-store gallons and volatile fuel costs.
• The nature and implications of the $6.6 million inventory adjustment and the $4.1 million tank-life adjustment, including comparability of future margins and depreciation.
• Progress and funding for the planned $516 million fiscal 2020 capital program, acquisitions, and store pipeline.
• Debt levels, facility availability, and liquidity as investment spending continues; the current ratio was 0.76.
• Developments in the IRS examinations and potential changes in unrecognized tax benefits.