Casey’s General Stores, Inc. — Q2 FY2011 Form 10-Q
Business context and period: Unaudited results for the three and six months ended October 31, 2010, compared with the corresponding 2009 periods. Casey’s operated 1,549 convenience stores in nine Midwestern states, primarily Iowa, Missouri and Illinois. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $1,349.5 | $1,155.0 | $2,711.5 | $2,342.9 |
| Gross profit | $227.4 | $206.4 | $461.3 | $426.5 |
| Net earnings | $21.7 | $33.6 | $59.0 | $77.8 |
| Basic EPS | $0.51 | $0.66 | $1.27 | $1.53 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $165.6 | $129.2 |
- Quarter revenue increased 16.8%; six-month revenue increased 15.7%. Growth reflected higher gasoline prices and volumes, more stores, and gains in merchandise and prepared foods.
- Quarter gasoline revenue was $927.6 million; total gallons sold rose 9.2%. Management reported same-store gasoline gallons increased 3.6% and average gasoline margin was approximately 14.9 cents per gallon.
- Gross margin declined to 16.8% from 17.9% for the quarter, and to 17.0% from 18.2% year to date. Lower merchandise margins reflected cigarette pricing competition and beverage promotions; prepared-food margins were pressured by commodity costs and pizza promotions.
- Quarter operating expenses rose 17%; excluding $8.1 million of offer-related legal and advisory fees, the increase was 10.8%. Interest expense increased, and the quarter included an $11.35 million loss on early debt retirement.
- Cash and equivalents were $188.3 million at October 31, 2010, versus $151.7 million at April 30. Current assets were $349.1 million and current liabilities $260.0 million; the current ratio was 1.34.
- Six-month investing cash use was $114.5 million, including $87.9 million for property and equipment and $27.4 million for store acquisitions. Net cash increased $36.6 million.
Material changes and unusual items
- Casey’s issued $569 million of 5.22% senior notes due 2020. Proceeds funded a $500 million share repurchase tender at $38 per share and repayment of older notes, including $11.35 million in prepayment penalties. The tender repurchased 13.16 million shares, approximately 25.8% of shares outstanding as of August 31.
- Total debt, including current maturities, was approximately $684.4 million at October 31, compared with approximately $179.3 million at April 30. Shareholders’ equity declined to $376.7 million from $824.3 million, principally reflecting the repurchase. The company reported no balance on its $50 million credit line.
- Net earnings included substantial takeover-related costs and the debt-retirement loss. Management estimated Q2 basic EPS would have been approximately $0.81 excluding those expenses, versus reported EPS of $0.51.
- The company acquired 10 stores during the first six months. Purchase-price allocation, including $10.6 million of goodwill, remained preliminary.
Outlook, commentary and risks
- Management’s annual store-growth goal was 4%–6%. Fiscal 2011 capital spending was expected to be $189 million–$243 million; $115.2 million had been spent in the first six months.
- Management stated that cash from operations and the credit line were expected to meet working-capital needs, and that future capital requirements were expected to be funded through operating cash, the credit line and potentially additional debt or securities.
- Couche-Tard’s $38.50-per-share tender offer expired September 30 without purchasing shares. 7-Eleven’s revised $43-per-share proposal was disclosed November 3, after quarter-end; Casey’s said discussions had ended and the board considered the proposal inadequate.
- Four “hot fuel” lawsuits remained pending; a Kansas court certified certain claims in one case, and no trial date had been set. Management disputed liability and intended to contest the matter. Other takeover-related shareholder and Couche-Tard litigation was dismissed without prejudice, with no company payments reported.
- Key disclosed risks include volatile gasoline costs and margins, intense competition, tobacco demand and tax changes, environmental compliance and remediation, economic weakness, weather and seasonality, and higher leverage following the self-tender. Environmental remediation liabilities were accrued at approximately $0.2 million; management cautioned actual future costs could differ.
- Gross unrecognized tax benefits were $6.1 million; management expected these to decrease by approximately $1.2 million over the next 12 months, while noting uncertainty in timing and outcome.
Most important facts for investors to verify
- Whether revenue and volume growth translated into sustainable earnings given lower category margins and higher expenses.
- The full effect of the $569 million debt issuance and share repurchase on interest costs, leverage, liquidity and future share count.
- Fiscal 2011 store-growth and capital-spending progress, and the eventual finalized acquisition purchase-price allocation.
- Developments in the hot-fuel litigation, tax examinations and environmental obligations.
- Any subsequent strategic transaction developments; the 7-Eleven proposal was post-quarter-end and no longer under discussion as reported.