Casey’s General Stores, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Fiscal quarter and six months ended October 31, 2013. Financial statements are unaudited; dollar amounts below are in millions unless noted. Casey’s operated 1,770 convenience stores in 14 states.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $2,015.9; up 5.5% year over year | $4,130.6; up 9.3% |
| Gross profit | $322.3; gross margin 16.0% vs. 14.6% | $667.8; gross margin 16.2% vs. 15.0% |
| Operating expenses | $216.5; up 13.9% | $432.5; up 14.0% |
| Net income | $41.3; up 25.7% | $97.0; up 35.0% |
| Diluted EPS | $1.06 vs. $0.85 | $2.50 vs. $1.86 |
| Cash from operations | — | $185.3 vs. $158.6 |
Quarterly gasoline gallons sold increased 9.8% overall; same-store gallons rose 4.2%. The reported average gasoline margin was approximately 16.7 cents per gallon. Grocery and other merchandise same-store sales rose 10.2%, and prepared food and fountain same-store sales rose 12.3%.
Cash, debt and liquidity
- At October 31, cash and equivalents were $113.3, versus $41.3 at April 30. Current assets were $352.7 and current liabilities $343.0; the current ratio was 1.03.
- Total debt, including current maturities, was approximately $812.1 ($803.8 long-term and $8.3 current), compared with $668.9 at April 30. The $100 million bank line was undrawn at quarter-end.
- During the six months, Casey’s received $150.0 in long-term debt proceeds and repaid $59.1 of short-term debt. Net cash from financing was $73.4.
- Investing activities used $186.7, including $162.9 for property and equipment and $24.5 for store acquisitions. Cash increased by $72.0 over the period.
Changes, outlook and notable items
- Improved earnings were driven principally by higher gasoline gross profit, including renewable fuel identification number (RIN) credits sold: $7.6 in the quarter versus $0.4 a year earlier, and $20.6 for six months versus $0.7. Grocery and prepared-food margins declined year over year, while operating and depreciation expenses increased.
- Operating expenses also reflected store growth and operating initiatives: more stores, expanded 24-hour operations and pizza delivery, replacement stores, and remodels. Management said store-level expenses at locations not affected by these initiatives rose about 4.9% for the quarter and 4.7% for six months.
- In the first half, the company completed 14 new-store constructions, opened 14 replacement stores, acquired 22 stores and closed nine. Its annual goal was to increase store count by 70–105, or 4%–6%.
- Management had anticipated fiscal 2014 spending of $313–$378 million for store construction, acquisition and remodeling. It expected operating cash flow and the bank line, together with other financing as needed, to meet liquidity and growth requirements.
- Subsequent to quarter-end, the company disclosed it would issue an additional $50 million of 3.75% Series B Senior Notes due 2028 on December 17, 2013.
- The effective tax rate declined to 35.0% for the quarter and 36.7% for six months, partly due to higher federal tax credits and an out-of-period stock-compensation tax adjustment.
- The company reported a preliminarily approved settlement in the “hot fuel” litigation, including pump disclosures and a payment described as not material. Management said other pending or threatened legal matters were not expected to have a material adverse effect.
- Gross unrecognized tax benefits were $11.4 million at October 31; management expected a decrease of approximately $1.5 million within 12 months, while noting amounts could change with audits, limitations expirations or other developments.
Risks and investor verification points
- Key disclosed risks include intense competition; volatile gasoline supply, costs and margins; tobacco demand and pricing pressures; environmental remediation and underground storage tank compliance; seasonality and weather; and the company’s increased indebtedness.
- Verify the sustainability of gasoline profitability and RIN-credit contributions, which materially supported margin and earnings comparisons.
- Monitor whether store expansion and initiatives deliver returns sufficient to offset higher operating costs and capital spending.
- Review debt levels and financing plans, including the subsequent $50 million note issuance, alongside planned capital expenditures and liquidity.
- Track grocery and prepared-food margins, unrecognized tax benefits, and environmental and legal contingencies. The filing reports no material change in risk factors from the FY2013 Form 10-K.