Casey’s General Stores, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended January 31, 2020. Casey’s operated 2,193 stores in 16 Midwestern states. Unless noted otherwise, amounts below are in millions of dollars.
Financial results
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $2,248.2 | $2,048.1 | $7,362.4 | $7,174.5 |
| Income before taxes | $43.0 | $54.1 | $263.5 | $233.8 |
| Net income | $34.0 | $41.8 | $201.8 | $178.7 |
| Diluted EPS | $0.91 | $1.13 | $5.43 | $4.83 |
| Adjusted EBITDA (non-GAAP) | $120.4 | $128.8 | $491.2 | $458.4 |
- Q3 revenue increased 9.8%, but net income fell 18.8%; management attributed the decline primarily to lower relative fuel contribution and higher operating expenses. Nine-month net income increased 12.9%.
- Revenue less cost of goods sold, excluding depreciation and amortization, was $496.9 million in Q3 (22.1% of revenue), versus $470.3 million (23.0%) a year earlier. For nine months it was $1,619.6 million (22.0%), up from $1,502.4 million (20.9%).
- Q3 same-store sales increased 3.5% for grocery and other merchandise and 2.8% for prepared food and fountain. Same-store fuel gallons declined 2.0%. Reported fuel gallons rose 3.3%, reflecting store growth; fuel margin was 21.7 cents per gallon versus 22.1 cents.
- Q3 grocery gross margin rose to 32.9% from 31.9%, while prepared food and fountain margin declined to 60.2% from 62.3%, reflecting higher commodity costs and promotions. Nine-month fuel margin per gallon was 23.0 cents, up from 20.8 cents.
- Q3 operating expenses increased 10.5% to $377.3 million; same-store operating expenses excluding credit card fees rose 5.4%. Nine-month operating expenses increased 8.2% to $1,130.6 million. Management cited more stores, technology costs, credit card fees, and Q3 incentive compensation timing.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $399.7 million, compared with $377.8 million. Investing cash outflow was $372.7 million, including $363.9 million of property and equipment purchases and $12.6 million for acquisitions. Financing cash outflow was $46.7 million. Cash declined to $43.5 million from $63.3 million at April 30, 2019.
- At January 31, 2020, current assets were $389.6 million and current liabilities were $1,104.8 million; the current ratio was 0.35. Management said the lower ratio largely reflected reclassifying $569 million of 5.22% senior notes due August 9, 2020 as current and intends to refinance them.
- Balance-sheet current maturities of long-term debt were $577.7 million and long-term debt and finance lease obligations, net of current maturities, were $715.1 million. Lines of credit totaled $76 million outstanding: $65 million on the $300 million revolving facility and $11 million on the $25 million bank line. The company reported $150 million of 3.67% Series A notes and other senior notes with rates from 3.51% to 3.77%, in addition to the near-term maturities.
- Management expects cash, operating cash flows, and available credit facilities to meet working-capital needs. Fiscal 2020 capital spending was projected at $516 million; $376.6 million had been spent in the first nine months, primarily on store construction, remodeling, and acquisitions.
Outlook, risks, and notable items
- No earnings or sales guidance was provided. The company reported 50 new-store constructions and 10 acquisitions through January 31, offset by 12 closures; 11 acquisition stores were under agreement and 88 sites were in the new-store pipeline, including 15 under construction.
- Management cited softer Midwest fuel demand and unfavorable fuel market conditions in Q3. The company’s evolving fuel-price optimization strategy contributed to higher fuel margins over recent quarters but also lower same-store fuel gallons. It sold fewer renewable fuel credits in Q3: 8.9 million for $1.7 million, versus 20.6 million for $3.6 million.
- The Q3 effective tax rate fell to 21.1% from 22.7%, primarily due to favorable permanent differences following federal tax legislation. Nine-month depreciation expense benefited from an approximately $5 million adjustment related to underground storage tank useful lives.
- Casey’s adopted ASC 842 lease accounting on May 1, 2019, using a modified retrospective approach; prior periods were not restated. It reported $20.0 million of operating lease right-of-use assets and $14.9 million of finance lease right-of-use assets at January 31, 2020.
- For a Joplin, Missouri distribution facility, the company had $3.4 million of construction in progress related to an arrangement involving up to $51.4 million of industrial development revenue bonds. The purchase option prevented sale accounting; the assets remained on Casey’s balance sheet.
- Management stated pending or threatened legal matters were not expected to have a material adverse effect. Risks include competition, fuel and RIN price volatility, food safety, data security, technology and distribution disruptions, regulation, and compliance with debt covenants. Disclosure controls were deemed effective, with no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Progress and terms for refinancing the $569 million note due August 2020 and the $7.5 million note due March 2020.
- Whether fuel margins and same-store fuel volumes stabilize, and whether Q3 prepared-food margin pressure persists.
- Execution, funding, and returns on the $516 million fiscal 2020 capital-spending plan, store pipeline, and Joplin distribution-center project.
- Underlying operating-expense trends, including technology, credit card fees, and incentive compensation; distinguish reported growth from the effect of additional stores.
- Changes in unrecognized tax benefits ($9.8 million at January 31, 2020) and the outcome of IRS examinations identified in the filing.