Casey’s General Stores, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal quarter ended January 31, 2017, and the first nine months of fiscal 2017; the filing date was March 6, 2017. Casey’s operated 1,954 stores in 14 states, primarily in the Midwest, with fuel, grocery and other merchandise, and prepared food and fountain as its principal categories. Amounts below are in millions unless otherwise stated; financial statements present dollars in thousands.
Financial results and key metrics
| Metric | Three months ended Jan. 31, 2017 | Prior-year quarter | Nine months ended Jan. 31, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $1,769.993 | $1,565.940 | $5,660.127 | $5,539.132 |
| Gross profit | $389.629 | $371.169 | $1,282.942 | $1,225.401 |
| Gross margin | 22.0% | 23.7% | 22.7% | 22.1% |
| Operating expenses | $292.321 | $259.625 | $879.738 | $791.185 |
| Depreciation and amortization | $51.152 | $43.822 | $145.682 | $125.028 |
| Interest, net | $10.559 | $10.132 | $31.174 | $30.225 |
| Net income | $22.835 | $38.099 | $147.407 | $178.938 |
| Diluted EPS | $0.58 | $0.97 | $3.72 | $4.54 |
| Adjusted EBITDA (non-GAAP) | $97.824 | $112.049 | $404.014 | $434.530 |
Cash flow and liquidity. Nine-month operating cash flow was $316.027 million, down 9.6%; investing cash outflow was $336.258 million, including $325.609 million for property and equipment and $13.565 million for acquisitions. Financing provided $60.177 million, including $100 million of long-term debt proceeds. Cash increased $39.946 million to $115.721 million. Capital expenditures, including acquisition-related spending as described by management, were $339.174 million. The current ratio was 0.97 at January 31, 2017. Long-term debt, net of current maturities and debt issuance costs, was $914.955 million; current maturities were $15.415 million. The company had a $100 million credit line with no borrowings outstanding.
Material changes and management commentary
- Third-quarter revenue rose 13.0%, but net income fell 40.1% and diluted EPS declined from $0.97 to $0.58. For the first nine months, revenue rose 2.2%, while net income declined 17.6% and diluted EPS fell from $4.54 to $3.72.
- Quarterly same-store fuel gallons increased 2.6%; average fuel margin was 17.9 cents per gallon versus 18.1 cents. Quarterly same-store grocery and other merchandise sales rose 3.0%, and prepared food and fountain sales rose 5.8%.
- Quarterly fuel revenue increased 18.6%, reflecting higher average retail prices and increased gallons. Fuel gross margin fell to 8.5% from 9.6%; grocery margin was 31.1% versus 31.2%, and prepared-food margin was 61.7% versus 62.0%. For the nine-month period, fuel margin per gallon was 18.7 cents versus 20.1 cents.
- Management attributed lower earnings to higher operating costs and depreciation, along with weaker fuel and inside-sales margins, partly offset by increased gallons and inside sales. Quarterly operating expenses increased 12.6%; management cited wage increases, more stores, growth programs, and higher credit-card fees. Depreciation increased with recent capital spending.
- The effective tax rate was 35.9% for the quarter versus 33.8%; for nine months it was 34.9% versus 35.9%. The nine-month comparison benefited from early adoption of share-based payment accounting guidance; a $3.046 million income-tax benefit was recorded in the first quarter.
Outlook, risks, contingencies, and unusual items
- Management forecast fiscal 2017 spending of $496 million to $614 million for store construction, acquisitions, and remodeling. It also reported annual operating goals of 77–116 new builds or acquisitions, 35 replacement stores, and 100 major remodels; these are not earnings guidance.
- At quarter-end, 33 new stores, 21 replacement stores, and 46 major remodels were under construction. The company had eight acquisition stores under contract and 91 sites under agreement for future builds.
- On March 3, 2017, after quarter-end, the board authorized repurchases of up to $300 million of common stock over two years.
- The company sold 16.3 million renewable fuel credits for $14.5 million in the quarter, compared with 15.2 million credits for $9.2 million a year earlier.
- The “hot fuel” class-action settlement remained subject to appeal and was not final; the settlement included pump disclosures and a payment described as immaterial. Management said pending or threatened legal matters were not expected to have a material adverse effect.
- Gross unrecognized tax benefits were $8.089 million, including $5.295 million that would affect the effective tax rate if recognized. Tax examinations were ongoing in Nebraska, Kansas, and for federal tax year 2012. Management expected the balance to decrease by approximately $3.153 million within 12 months, while noting outcomes and timing are uncertain.
- Environmental remediation spending was $1.128 million for the nine months; accrued estimated remediation liability was approximately $0.341 million. Management cautioned that future costs or undiscovered liabilities could exceed estimates.
- Principal risks include fuel-price and margin volatility, competition, tobacco demand and regulation, environmental compliance, weather and seasonality, and the sufficiency of future cash flows and financing. Management stated that a 100-basis-point interest-rate move would not materially affect pretax earnings.
Important facts for investors to verify
- Whether fuel margins and inside-sales profitability recover, and how fuel-cost volatility affects earnings and customer traffic.
- Whether wage, operating-program, and depreciation growth is offset by sales growth and store-level productivity.
- Actual capital spending, store openings and remodels versus stated plans, and the returns generated by that investment.
- Debt and liquidity needs after the $300 million repurchase authorization, including the timing and funding of any repurchases.
- Resolution of the hot-fuel settlement appeal, tax examinations and uncertain tax positions, and potential environmental remediation obligations.