Casey’s General Stores, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2011, with fourth-quarter results for the three months ended April 30, 2011. The filing is an annual report, not a standalone fiscal 2010 Q4 filing.
Business context
Casey’s operated 1,637 convenience stores across 11 Midwestern states, primarily Iowa, Missouri and Illinois. Its business combines retail gasoline with grocery and general merchandise and prepared food and fountain sales. It opened 20 newly constructed stores, acquired 89 stores, replaced 15 stores and completed 120 major remodels during the year.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $5.635 billion | $4.637 billion |
| Gross profit | $881.1 million | $792.4 million |
| Gross margin | 15.6% | 17.1% |
| Operating expenses | $607.6 million | $526.3 million |
| Net earnings | $94.6 million | $117.0 million |
| Diluted EPS | $2.22 | $2.29 |
| Operating cash flow | $261.4 million | $214.1 million |
| Cash and equivalents at year-end | $59.6 million | $151.7 million |
| Long-term debt, net of current maturities | $678.7 million | $154.8 million |
- Revenue rose 21.5%, reflecting higher average gasoline prices, increased gallons sold and higher inside sales. Gasoline represented 71% of revenue; gasoline sales increased 25.8% to $3.999 billion, while gallons sold rose 8.6% to 1.394 billion.
- Inside sales increased 11.9% to $1.611 billion. Same-store grocery and other merchandise sales grew 4.8% and prepared food and fountain sales grew 11.8% in Q4.
- Margins contracted: gasoline gross margin was 5.3% versus 5.6%; grocery and other merchandise was 32.2% versus 33.6%; prepared food and fountain was 62.2% versus 63.8%. Management cited competitive cigarette pricing and higher commodity costs, among other factors.
- Net earnings declined 19.1%. Higher operating costs, interest expense, debt-retirement expense and lower inside-category margins more than offset increased gross profit. Diluted EPS fell less, partly reflecting the substantial reduction in shares outstanding.
- Q4 diluted EPS was $0.60 versus $0.43 a year earlier. Q4 same-store gasoline gallons decreased 1.9%; average gasoline margin was approximately 15.6 cents per gallon.
Cash flow, liquidity and capital structure
- Operating cash flow increased 22.1% to $261.4 million. Investing activities used $325.5 million, including $113.6 million for acquired businesses and $214.6 million for property and equipment purchases. Financing activities used $28.0 million.
- Management reported fiscal 2011 capital expenditures of $328.1 million, primarily for store acquisitions and remodeling. It anticipated fiscal 2012 spending of $204 million to $267 million for construction, acquisitions and remodeling.
- Cash declined by $92.1 million to $59.6 million. Current assets were $293.9 million and current liabilities $294.5 million, a 1.0 current ratio versus 1.29 a year earlier. The company cited a $100 million revolving credit facility and operating cash flow as expected sources for working capital.
- Debt increased following issuance of $569 million of 5.22% senior notes due 2020. At year-end, debt included those notes, $100 million of 5.72% senior notes and lease and mortgage obligations. The company reported compliance with debt covenants.
- Casey’s used approximately $501 million to repurchase 13.16 million shares at $38 per share through a Dutch auction tender offer. Shares outstanding fell from 50.9 million to 38.0 million. Fiscal 2011 dividends paid were $0.505 per share.
Material changes, outlook and unusual items
- The company incurred approximately $15.8 million in legal and advisory fees related to the unsolicited Couche-Tard offer and related actions, and a proposal from 7-Eleven. It also recorded $11.35 million in debt prepayment expense after issuing the new notes and retiring older debt. Management said year-to-date EPS would have been approximately $2.65 excluding approximately $27.4 million of recapitalization and offer-related expenses; this is a management-presented, non-GAAP comparison.
- Management described the operating environment as challenging due to weak economic conditions, unemployment and higher gasoline prices, while saying these factors had not materially reduced overall demand to date. Sales are seasonal, typically strongest in the May–October warmer months.
- Management expected fiscal 2012 capital spending of $204 million to $267 million. It also disclosed a signed agreement to acquire 22 Kum & Go stores, subject to approvals and customary closing conditions, with an anticipated July 2011 closing.
- Key risks include volatile wholesale fuel costs and retail fuel margins, competition, higher credit-card fees at elevated fuel prices, tobacco regulation and demand, adverse weather, acquisition integration, food safety, environmental obligations and litigation.
- Four “hot fuel” lawsuits name the company, including a Kansas case with certified classes for certain liability and injunctive claims. The claims were unquantified, and management said it could not estimate a possible loss or range; the company intended to contest the matter.
- Environmental remediation liabilities accrued were approximately $231,000. Management stated that substantially all required upgrades for existing underground storage tank rules had been completed, but future rules or undiscovered contamination could require additional spending.
- The independent auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile the stated approximately $27.4 million of unusual expenses and assess the assumptions behind management’s adjusted EPS comparison.
- Review the new debt’s repayment schedule, interest burden, covenants and liquidity after the tender-offer repurchase and major store investment program.
- Track same-store gasoline volumes and margins alongside inside-sales growth and category-level margin trends.
- Assess the outcome and potential exposure from the hot-fuel litigation, as well as environmental remediation and self-insurance liabilities.
- Confirm the completion, purchase terms and integration results of the announced Kum & Go acquisition and other store acquisitions.