Business context and reporting period
Casey’s General Stores, Inc. operates convenience stores, primarily in the Midwest. At October 31, 2011, it operated 1,677 stores across 11 states. This unaudited Form 10-Q covers the second quarter and first six months of fiscal 2012, ended October 31, 2011; comparisons are with the corresponding 2010 periods.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $1.783 billion, up 32.1% | $3.656 billion, up 34.8% |
| Gross profit / margin | $262.9 million / 14.7%, versus 16.8% | $529.7 million / 14.5%, versus 17.0% |
| Net earnings | $37.6 million, up 73.5% | $77.0 million, up 30.6% |
| Basic / diluted EPS | $0.99 / $0.98, versus $0.51 / $0.51 | $2.02 / $2.01, versus $1.27 / $1.26 |
| Operating expenses | $171.8 million, up 12.1%; 9.6% of revenue versus 11.4% | $343.2 million, up 12.3%; 9.4% of revenue versus 11.3% |
Gasoline revenue rose sharply as average retail prices increased, while total gallons sold rose 6.3% in the quarter and 6.1% year to date, partly reflecting more stores. Same-store gasoline gallons fell 2.9% in the quarter. Grocery and other merchandise same-store sales rose 5.8%, and prepared food and fountain same-store sales rose 14.2%. Gross profit dollars grew across major categories, but margins declined: prepared food margins were pressured by higher commodity costs; grocery margins by cigarette pricing and beer mix. Gasoline gross margin per gallon improved to 16.68 cents in the quarter and 16.93 cents year to date, even as gasoline percentage margins declined.
For the six months, operating cash flow was $188.9 million versus $165.6 million. Investing cash use was $151.6 million, including $114.3 million for property and equipment and $37.7 million for store acquisitions. Cash increased $26.6 million to $86.2 million. At October 31, total debt was approximately $679.3 million, including current maturities; long-term debt net of current maturities was $673.5 million. The current ratio was 0.97 to 1, and the $100 million bank credit line had no balance outstanding.
Changes, outlook, risks and unusual items
- Quarterly and year-to-date EPS comparisons benefit from prior-year unusual costs: the prior-year quarter included an $11.35 million debt-retirement loss and $8.08 million of Couche-Tard-related legal and advisory costs. Management said prior-year quarterly basic EPS would have been approximately $0.81 excluding those expenses. The six-month prior-year period included $14.31 million of Couche-Tard-related operating costs. Lower share counts following the prior-year share repurchase also affect per-share comparisons.
- The company acquired 33 stores during the first six months and spent $151.99 million on construction, acquisitions and remodeling. Management’s fiscal 2012 store-growth goal was 4%–6%; planned fiscal 2012 capital expenditures were $204 million–$267 million. Management said operating cash flow and the credit line were expected to meet working-capital needs. No earnings or sales guidance is provided in the filing.
- Management cited weak economic conditions and customers trading down to less expensive in-store items. Key exposures include competitive gasoline pricing, volatile wholesale fuel costs and supply, tobacco demand and taxes, weather and seasonality, and environmental compliance costs. Management reported no material change to the risk factors in its prior annual report.
- Four “hot fuel” lawsuits name the company as a defendant. A Kansas class was certified on specified claims, with trial scheduled for May 17, 2012; the relief sought and potential loss were not quantifiable. Management disputes liability and intends to defend the cases. Other pending or threatened legal matters were not expected by management to have a material adverse effect.
- Gross unrecognized tax benefits were $7.73 million at October 31, 2011; management expected about $1.41 million to decrease within 12 months, primarily due to statute expirations. Federal and state tax examinations were ongoing. Environmental remediation liability accrued was approximately $276,000; the company spent approximately $632,000 on assessments and remediation during the six months.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and profit growth can persist if fuel prices, gasoline margins, or store expansion moderate; distinguish higher fuel-price-driven revenue from underlying volume trends.
- How gross-margin pressure in prepared foods and merchandise, along with credit-card and transportation costs, affects future earnings.
- Capital spending, acquisition integration, and debt-service needs relative to operating cash flow and the stated store-growth and capital-expenditure plans.
- Developments in the hot-fuel litigation, tax examinations and uncertain tax positions, and environmental remediation obligations.
- The effect of prior-year debt-retirement and takeover-related costs, and the reduced share count, when assessing year-over-year earnings and EPS growth.