Casey’s General Stores, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2015; balance-sheet comparisons are with April 30, 2015. Unless otherwise noted, financial amounts are in millions of dollars. Casey’s operated 1,904 stores in 14 states and reported one operating segment.
Financial performance
| Metric | Three months ended Oct. 31, 2015 | Year-over-year change | Six months ended Oct. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,924.6 | Down 10.5% | $3,973.2 | Down 10.5% |
| Gross profit | $443.0 | Up $71.7 | $854.2 | Up $112.0 |
| Gross margin | 23.0% | Up from 17.3% | 21.5% | Up from 16.7% |
| Operating expenses | $268.0 | Up 9.5% | $531.6 | Up 8.7% |
| Operating income | $133.2 | Not separately discussed | $241.5 | Not separately discussed |
| Net income | $79.0 | Up 58.5% | $140.8 | Up 40.9% |
| Diluted EPS | $2.00 | Up from $1.28 | $3.57 | Up from $2.56 |
| Adjusted EBITDA | $174.9 | Up 38.4% | $322.9 | Up 27.5% |
Operating income is calculated as gross profit less operating expenses and depreciation and amortization. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Sales and margins: Revenue declined primarily because average retail fuel prices fell 26.3% in the quarter and 26.1% year to date, despite fuel gallons increasing 7.7% and 7.8%, respectively. Same-store fuel gallons rose 3.3% in the quarter. The quarterly average fuel margin was 24.7 cents per gallon, versus 19.5 cents a year earlier; the six-month average was 21.1 cents versus 19.2 cents. Quarterly same-store grocery and other merchandise sales increased 7.5%, and prepared food and fountain sales increased 9.4%. The corresponding six-month increases were 7.2% and 9.8%.
Fuel gross margin improved to 10.5% for the quarter and 8.6% year to date. Prepared-food margin increased to 63.4% and 63.0%, respectively, mainly on lower input costs. Grocery and other merchandise margin declined to 31.5% in the quarter and 32.1% year to date. The quarterly comparison included a $5.2 million out-of-period warehouse-cost adjustment; management said it had no year-to-date impact. Operating expenses rose as the store base expanded and operating initiatives broadened; expense as a share of revenue increased, partly because lower fuel prices reduced the revenue denominator. Effective tax rates were 35.8% for the quarter and 36.4% year to date, both lower than the comparable periods.
Cash flow, balance sheet and liquidity
- Operating cash flow: $245.0 million for the six months, up 33.6% from $183.4 million. Management attributed the increase mainly to higher net income and timing of accounts-payable payments.
- Investing and financing: Investing cash outflow was $207.4 million, including $209.9 million of property and equipment purchases; the prior-year investing outflow was $228.2 million and included $34.3 million for acquisitions. Financing cash outflow was $20.5 million, including $7.7 million of long-term debt repayments and $16.3 million of dividends.
- Cash: Cash and equivalents were $65.6 million at October 31, 2015, up from $48.5 million at April 30, 2015.
- Debt and credit: Long-term debt, net of current maturities, was $830.6 million; current maturities were $15.4 million. The $100 million bank line of credit had no outstanding balance. Debt consisted mainly of senior notes with stated rates from 3.67% to 5.72%, plus capital lease obligations.
- Working capital: Current assets were $322.3 million and current liabilities $399.4 million, for a current ratio of 0.81 to 1. Management said cash, operating cash flows and the undrawn credit line should meet working-capital needs.
- Capital investment: Management’s fiscal 2016 capital expenditure plan was $436 million to $528 million; $209.9 million had been spent in the first half, primarily on construction, remodeling and store acquisitions.
Outlook, risks and other matters
- Management’s annual development targets were 75 to 113 new or acquired stores, 10 replacement stores and 100 major remodels. In the first half, the company opened 25 newly constructed stores, completed 11 replacements and 24 major remodels, acquired one store not yet open, and opened one store from a prior-year acquisition.
- Management linked higher earnings to stronger fuel margins, same-store sales growth, improved prepared-food margins and cost containment. Fuel margins were described as favorable but volatile; the filing does not provide specific earnings or sales guidance.
- Key risks include intense competition, fuel price and supply volatility, tobacco demand and pricing pressure, environmental compliance and remediation costs, seasonality and weather, and the possibility that cash generation may not meet future capital needs. Management cautioned that actual results may differ materially from forward-looking statements.
- Environmental remediation spending was approximately $1.1 million in the first half; the accrued liability for anticipated corrective actions was approximately $0.3 million. Management noted that future costs could exceed accruals and that additional environmental liabilities may emerge.
- The fuel-temperature sales litigation settlement had court approval, but was not final pending an attorneys’ fee order and expiration of appeal periods. A separate Fair Credit Reporting Act class action had been tentatively settled for an amount management considered immaterial; preliminary approval was granted after quarter-end.
- Gross unrecognized tax benefits were $8.9 million at October 31, 2015; management expected them to decrease by approximately $2.9 million within 12 months, primarily due to statute expirations. State and federal tax examinations were ongoing.
- Management reported disclosure controls were effective. It said remediation of a material weakness identified in fiscal 2015 had been completed as of April 30, 2015, with additional control enhancements expected during fiscal 2016. No material change in risk factors from the 2015 Form 10-K was reported.
Important facts for investors to verify
- Whether fuel margins remain favorable and how a reversal in wholesale or retail fuel conditions affects earnings and traffic.
- Whether same-store grocery and prepared-food growth and improved prepared-food margins continue to offset higher operating expenses.
- Progress against the fiscal 2016 store-development and $436 million to $528 million capital-spending plans, and the resulting effect on cash and debt.
- Final court approval and completion of the two disclosed class-action settlements, and any developments in tax examinations or environmental liabilities.
- Comparability of prior-year fuel and gross-margin data: the filing notes prior-period figures were revised for an immaterial error disclosed in the company’s Form 10-K/A.