Business context and reporting period
Casey’s General Stores, Inc. filed this Form 10-K for the fiscal year ended April 30, 2016. The company operated 1,931 convenience stores across 14 Midwestern states, with fuel and in-store merchandise sales as its principal businesses. The filing also reports fourth-quarter fiscal 2016 results.
Financial performance and liquidity
- Fiscal 2016 revenue: $7.122 billion, down 8.3% from $7.767 billion in fiscal 2015. The decrease primarily reflected lower retail fuel prices.
- Profitability: Gross profit was $1.614 billion, up 12.1%; gross margin rose to 22.7% from 18.5%. Net income increased 25.1% to $226.0 million; diluted EPS rose to $5.73 from $4.62. Operating expenses increased 9.7% to $1.054 billion, and depreciation and amortization rose 9.5% to $170.9 million.
- Sales mix and margins: Fuel revenue was $4.215 billion, down 18.1%, while gallons sold increased 7.4% to approximately 2.0 billion. Fuel gross margin increased to 9.1% from 6.8%. Inside sales increased 10.8% to $2.855 billion; prepared-food and fountain gross margin increased to 62.5% from 59.7%.
- Fourth quarter: Revenue was $1.583 billion versus $1.654 billion a year earlier; net income was $47.0 million versus $41.3 million, and diluted EPS was $1.19 versus $1.05. Same-store fuel gallons rose 4.6%; same-store grocery and other merchandise sales grew 7.4%, and prepared-food and fountain sales grew 8.2%.
- Cash flow: Cash from operations was $464.7 million, up 36.0%. Investing activities used $395.0 million, including $392.8 million for property and equipment and $7.3 million for acquisitions. Financing activities used $42.5 million. Cash and cash equivalents ended the year at $75.8 million.
- Debt and liquidity: Long-term debt, net of current maturities, was $822.9 million; current maturities were $15.4 million. The $100 million revolving credit line was undrawn. The current ratio was 0.84, unchanged from fiscal 2015. Management said cash, operating cash flow, and the credit line should meet working-capital needs.
- Other measures: Adjusted EBITDA, a non-GAAP measure, was $560.7 million, up 16.4%. Fiscal 2016 dividends declared were $0.88 per share, versus $0.80 in fiscal 2015.
Material changes versus the prior year
- Lower average fuel prices drove the revenue decline, but fuel volume increased and fuel margins improved. Fuel accounted for 59.2% of revenue, compared with 66.2% in fiscal 2015.
- Inside sales and gross profit grew, supported by store growth and operating initiatives including expanded hours, pizza delivery, and remodels. Annual same-store fuel gallons grew 3.0%; same-store grocery and other merchandise sales grew 7.1%; prepared-food and fountain sales grew 8.4%.
- The company opened 51 newly constructed stores, acquired five stores (four reopened during the year), completed 102 major remodels, replaced 11 stores, and closed three. Its Terre Haute distribution center opened in February 2016.
- Operating cash flow improved, while the company repaid $15.4 million of long-term debt. Long-term debt, net of current maturities, declined from $838.2 million to $822.9 million.
Outlook, risks, and contingencies
- For fiscal 2017, management anticipated capital expenditures of $496 million to $614 million, primarily for store construction, acquisitions, and remodeling, funded mainly by cash and operating cash flow, with long-term debt also identified as a source.
- Management emphasized that results are seasonal, typically stronger in the first half of the fiscal year. Key risks include intense competition; volatile wholesale fuel costs and margins; dependence on fuel-related customer traffic; changes in consumer preferences; weather; and labor, regulatory, food-safety, cybersecurity, and environmental exposures.
- Renewable fuel credit (RIN) sales contributed $31.0 million in fiscal 2016, including $9.1 million in the fourth quarter; RIN prices can fluctuate substantially. Fuel credit-card fees were approximately $100 million for the year.
- Environmental remediation spending was approximately $1.6 million in fiscal 2016, substantially submitted for state-program reimbursement; the accrued liability for anticipated remediation was approximately $341,000. The company reported no material joint environmental liability.
- The “hot fuel” litigation settlement provided for fuel-pump disclosures and a monetary payment described as immaterial; an award of fees remained subject to appeal. Management stated that pending or threatened matters were not expected to have a material adverse effect.
- Subsequent to year-end, the company issued $50 million of 3.65% senior notes due 2031 on May 2, 2016; the filing also described a planned additional $50 million issuance of 3.72% notes due 2031 in October 2016.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded controls were effective at April 30, 2016; a material weakness identified in fiscal 2015 had been remediated.
Important facts for investors to verify
- Whether improved fuel margins and rising gallon volumes can persist if wholesale fuel prices or competitive conditions change.
- Whether growth in prepared-food and other inside sales can offset fuel-price-driven revenue volatility while operating costs continue to rise.
- Execution and returns on the planned fiscal 2017 capital program, new stores, remodels, and the second distribution center.
- Debt repayment and funding needs, including the effect of the subsequent senior-note issuances and the company’s low current ratio.
- RIN revenue sustainability, environmental remediation exposure and reimbursements, and the resolution of the tax examinations and hot-fuel settlement appeal.