Casey’s General Stores, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended July 31, 2014, compared with the three months ended July 31, 2013, unless otherwise noted. Financial statement amounts are in thousands of dollars except per-share data. Casey’s operated 1,837 stores in 14 states at quarter-end.
Financial performance
- Revenue: $2,291,186, up 8.3% from $2,114,749. Fuel revenue rose 6.1%, grocery and other merchandise rose 13.0%, and prepared food and fountain rose 17.1%.
- Profit: Gross profit increased to $374,176 from $345,510; gross margin remained 16.3%. Operating expenses rose 13.1% to $244,318, and depreciation and amortization increased 18.8% to $36,249. Net income decreased 6.1% to $52,290 from $55,710. Diluted EPS was $1.34 versus $1.43.
- Category margins: Fuel margin was 5.7% versus 6.2%; grocery and other merchandise was 32.5% versus 32.7%; prepared food and fountain was 59.9% versus 61.8%. Fuel margin per gallon fell to 19.63 cents from 22.11 cents.
- Cash flow: Operating cash flow was $116,357, down 15.8%. Investing used $119,006, including $88,789 for property and equipment and $30,774 for acquisitions. Financing used $2,245. Cash decreased $4,894 to $116,747.
- Liquidity and debt: Current assets were $380,454 and current liabilities $395,981; the current ratio was 0.96. Long-term debt, net of current maturities, was $853,545, with $427 in current maturities and no bank borrowings. The company had a $100,000 credit line available. Total liabilities were $1,605,633.
- Non-GAAP measure: EBITDA was $129,858 versus $129,536; adjusted EBITDA was $130,100 versus $130,452. Management said both were effectively flat year over year.
Material changes and management commentary
- Same-store fuel gallons sold increased 3.0%; total fuel gallons sold increased 8.8%. Management cited the fuel-saver program and $5,738 of renewable fuel credits. Credits were lower than the prior-year quarter’s $12,942, weighing on fuel profitability.
- Same-store grocery and other merchandise sales rose 7.7%, and prepared food and fountain sales rose 11.1%. Management attributed margin pressure in grocery partly to cigarettes and in prepared foods to higher cheese, meat, and supply costs.
- Operating expenses increased partly because 88 more stores were operating than a year earlier and the company expanded initiatives including extended hours, pizza delivery, and remodels. Store-level expenses for locations not affected by those initiatives rose about 5%.
- During the quarter, Casey’s built seven stores, opened four replacement stores, acquired 25 stores, and closed three. Acquisition purchase-price allocation was preliminary; goodwill and other intangible assets totaled $6,525.
Outlook, risks, and contingencies
- Plans: Fiscal 2015 target is to build or acquire 72–108 stores and replace 25 locations. Planned fiscal 2015 spending for construction, acquisitions, and remodeling is $360–$410 million; first-quarter spending was $119,563. Management expects cash, operating cash flow, and the credit line to meet working-capital needs.
- Key risks: Fuel-margin and supply volatility, intense competition, tobacco demand and tax/regulatory changes, seasonality and weather, and environmental compliance costs. Management noted that fuel profitability materially affects earnings and customer traffic.
- Environmental matters: The company spent about $430 on remediation in the quarter and accrued approximately $330 for estimated corrective-action and remediation costs. Management cautioned that future costs or liabilities could exceed estimates.
- Legal and tax matters: A proposed settlement in consolidated “hot fuel” litigation included pump disclosures and a payment described as not material; final court approval was pending. Gross unrecognized tax benefits were $9,759, and management expected a decrease of approximately $2,549 within 12 months, principally from statute-of-limitations expirations.
- Management reported no material change in risk factors from the FY2014 Form 10-K, and stated disclosure controls were effective with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether fuel margins and renewable-credit proceeds recover, and how fuel prices and gallons sold affect earnings.
- Whether same-store sales and store-expansion plans support returns while operating costs and capital spending rise.
- Acquisition integration, final purchase-price allocation, and the ability to fund the stated capital program while maintaining liquidity.
- Potential changes in environmental remediation costs, litigation outcomes, and unrecognized tax benefits.