CASY

Business Context and Reporting Period

Company: Casey's General Stores, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Fiscal Quarter and Six Months Ended October 31, 2007
Business Overview: The Company operates convenience stores under the names "Casey's General Store," "HandiMart," and "Just Diesel" in nine Midwestern states. As of October 31, 2007, there were 1,465 stores in operation (1,450 owned, 15 franchised). Revenue is derived primarily from retail gasoline, grocery, general merchandise, and prepared food sales.

Key Financial Metrics

(Dollars in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18.2% for the quarter and 17.5% for the six-month period compared to the prior year. This was driven by a 19.5% increase in retail gasoline sales (due to a 15.2% increase in average retail price per gallon) and strong growth in grocery and prepared food sales.
• Profitability: Net earnings surged 61.2% for the quarter and 68.6% for the six-month period. Gross profit margins on gasoline improved to 5% (quarter) and 5.1% (six months) from 4% and 3.8% in the prior year, respectively, due to declining wholesale costs.
• Operating Expenses: Operating expenses increased 14.9% (quarter) and 18.1% (six months), primarily due to a 26.7% increase in credit card fees resulting from higher gasoline prices and volume.
• Cash Flow: Net cash provided by operations increased 221.2% to $103.7 million for the six-month period, driven by higher net earnings and changes in working capital.
• Capital Expenditures: Cash used in investing activities decreased significantly to $47.1 million (six months) compared to $114.2 million in the prior year, largely because the prior year included a $66.7 million acquisition of the HandiMart chain.

Guidance, Outlook, and Risks

• Management Outlook: Management expects gasoline gross profit margins to eventually stabilize and return to historical levels of 10 to 11 cents per gallon over the long term, noting that current margins are above average. Capital expenditures for fiscal 2008 are budgeted at approximately $135 million.
• Liquidity: The Company maintains a $50 million bank line of credit and believes cash flow from operations will satisfy working capital needs. The current ratio improved to 1.15 to 1.
• Legal Proceedings:
  • "Hot Fuel" Cases: The Company is a defendant in five class-action lawsuits alleging misrepresentation of gasoline volumes due to temperature expansion. Proceedings are stayed pending rulings in the Eastern District of Kansas.
  • FLSA Action: A collective action regarding unpaid overtime for assistant managers was conditionally certified. The Company intends to contest the allegations vigorously.
• Environmental Risks: The Company faces ongoing costs related to underground storage tank (UST) compliance and remediation. An accrued liability of approximately $367,000 exists for estimated future corrective actions.
• Accounting Changes: The Company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) effective May 1, 2007, resulting in a $646,000 reduction to beginning retained earnings.

Investor Verification Checklist

• Gasoline Margin Sustainability: Verify if the current 5%+ gasoline gross margin is sustainable or if it will revert to the historical 10-11 cents per gallon as management predicts.
• Legal Exposure: Monitor the status of the "hot fuel" class actions and the FLSA overtime lawsuit for potential material liabilities.
• Capital Allocation: Confirm the execution of the $135 million capital expenditure budget for store construction and remodeling.
• Debt Structure: Review the terms of the $100 million 5.72% Senior Notes and other long-term debt obligations regarding maturity dates and prepayment options.
• Environmental Accruals: Assess whether the $367,000 accrued liability for environmental remediation is sufficient given the number of USTs (3,093) and potential for future regulations.