Business context and reporting period
Casey’s General Stores, Inc. operates convenience stores primarily in 14 Midwestern states. This Form 10-Q covers the three months ended July 31, 2016, the first quarter of fiscal 2017. Casey’s had 1,933 stores at quarter-end and reports one operating segment.
Financial results and key metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $1,970.1 | $2,048.6 | (3.8%) |
| Gross profit | $449.8 | $411.2 | +9.4% |
| Gross margin | 22.8% | 20.1% | +2.7 percentage points |
| Operating expenses | $292.1 | $263.6 | +10.8% |
| Income before taxes | $101.3 | $98.2 | +3.2% |
| Net income | $67.4 | $61.8 | +9.0% |
| Diluted EPS | $1.70 | $1.57 | +8.3% |
| Operating cash flow | $161.3 | $105.4 | +53.1% |
| Capital expenditures for property and equipment | $82.3 | $100.1 | Lower by $17.8 |
Fuel revenue fell 10.8% to $1,147.0 million as average retail prices declined 16.6%; fuel gallons sold rose 6.9%. Fuel gross margin increased to 19.5 cents per gallon from 17.5 cents, and segment gross margin rose to 9.1% from 6.8%. Same-store fuel gallons increased 3.1%. Grocery and other merchandise revenue increased 7.5%, with same-store sales up 4.7%; prepared food and fountain revenue increased 9.1%, with same-store sales up 5.1%. Segment gross margins were 31.6% for grocery and other merchandise (32.6% prior year) and 62.8% for prepared food and fountain (62.5% prior year).
Adjusted EBITDA, a non-GAAP measure, was $157.4 million versus $147.4 million, up 6.8%. The filing cautions that this measure is not a substitute for GAAP results and may not be comparable with other companies’ measures.
Liquidity, debt, and balance sheet
At July 31, 2016, cash and cash equivalents were $189.5 million, versus $75.8 million at April 30, 2016. Current assets were $435.3 million and current liabilities were $420.1 million; the current ratio was 1.04 to 1. Long-term debt, net of current maturities and debt issuance costs, was $872.4 million, with $15.4 million of current maturities. Total debt including current maturities was approximately $887.8 million, up from approximately $838.0 million at April 30. A $100 million bank credit line was undrawn. The quarter included $50 million in proceeds from long-term debt issuance.
Cash provided by operations was $161.3 million; investing activities used $84.2 million, including $82.3 million for property and equipment and $2.9 million for business acquisitions. Financing activities provided $36.6 million. Dividends declared were $0.24 per share, versus $0.22 a year earlier.
Material changes, outlook, and notable items
- Revenue declined mainly because of lower fuel prices, despite higher fuel volumes and higher non-fuel sales. Higher fuel margins and gallons, plus a lower effective tax rate, helped lift net income.
- Operating expenses increased 10.8%, reflecting 46 more stores in operation, expansion of growth programs, and the effect of lower fuel prices on the revenue denominator. Depreciation and amortization rose 16.4% to $45.9 million.
- The effective tax rate fell to 33.5% from 37.0%. Early adoption of ASU 2016-09 generated a $3.046 million income-tax benefit, accounting for 300 basis points of the rate decrease; management also cited favorable permanent differences and lower state tax expense.
- Casey’s sold 17.9 million renewable fuel credits for $14.7 million during the quarter. Management cited elevated RIN values and declining wholesale fuel costs as contributors to higher fuel margins.
- For fiscal 2017, management expected capital spending of $496 million to $614 million, funded primarily by cash, operating cash flow, and recent senior-note proceeds. Its annual development goals were to build or acquire 77 to 116 stores, replace 35 locations, and complete 100 major remodels. At quarter-end, 39 new stores were under construction and 72 sites were under contract. These are management plans, not guarantees.
- During the quarter, the company completed three replacement stores and six major remodels, acquired three stores, closed one store, and opened no new-store constructions.
- Management said cash, operating cash flow, and the undrawn credit line should be sufficient for working-capital needs. Forward-looking results remain subject to competition, fuel-price and supply volatility, tobacco demand and taxation, environmental compliance costs, seasonality, weather, and the company’s increased indebtedness.
Risks and contingencies
The hot-fuel litigation settlement had been approved by the court, but was not final pending resolution of an appeal and expiration of appeal periods. The settlement included pump stickers and a class payment described as immaterial. Management stated that pending or threatened legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
Gross unrecognized tax benefits were $7.0 million at July 31, 2016; management expected them to decrease by approximately $3.2 million within 12 months, primarily due to statute-of-limitations expirations. Illinois was examining tax years 2011 and 2012, and the IRS was examining 2012. Environmental remediation accruals were approximately $0.4 million; the company cautioned actual future costs could exceed accruals. The filing reported no material changes to risk factors from the 2016 Form 10-K.
Important facts for investors to verify
- Whether improved fuel margins and RIN-related benefits persist as fuel costs, RIN values, and competitive pricing change.
- Whether same-store non-fuel sales growth and margins can offset continued operating-cost and depreciation increases as the store base expands.
- Progress and funding for the fiscal 2017 capital-spending and store-development plans, including the effect of additional borrowing on leverage and liquidity.
- Resolution of the hot-fuel settlement appeal, tax examinations and uncertain tax positions, and any changes in environmental remediation exposure.
- The sustainability of the lower effective tax rate, including the impact of the one-time share-based compensation accounting benefit.