Casey’s General Stores, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the fiscal quarter and six months ended October 31, 2018 (fiscal 2019). Casey’s operated 2,097 stores in 16 states and reported one operating segment. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended October 31, 2018 | Six months ended October 31, 2018 |
|---|---|---|
| Revenue | $2,538.0; up 17.8% | $5,126.4; up 20.7% |
| Income before taxes | $90.6 | $179.7 |
| Net income | $66.6; up 36.2% | $136.8; up 29.5% |
| Diluted EPS | $1.80, versus $1.28 | $3.70, versus $2.75 |
| Adjusted EBITDA (non-GAAP) | $166.9; up 14.6% | $329.6; up 9.4% |
Margins and sales drivers. Revenue less cost of goods sold, excluding depreciation and amortization, was 20.1% of revenue in both the quarter and half-year, compared with 21.7% and 22.2%, respectively, in the prior-year periods. Fuel gross margin was 20.0 cents per gallon in the quarter versus 19.7 cents; same-store fuel gallons sold declined 1.1%, which management attributed mainly to softer demand. Grocery and other merchandise same-store sales increased 2.7%, and prepared food and fountain same-store sales increased 2.2% in the quarter. Inside-category margins improved, aided by product mix and strategic price increases. Revenue growth also reflected higher fuel prices and 94 more stores than a year earlier.
Cash flow and investment. Six-month operating cash flow was $304.3, up from $241.6. Investing cash outflow was $197.8, compared with $269.3, including $198.4 of property and equipment purchases and $2.6 of net acquisition payments. Financing cash outflow was $108.2; it included $37.5 of share repurchases and $20.2 of dividends. Cash declined $1.8 to $51.9. Management budgeted $466 million for fiscal 2019 store construction, acquisitions, and remodeling.
Debt and liquidity. Long-term debt, net of current maturities and issuance costs, was $1,284.0; current maturities were $15.4. No amount was drawn on the $150 million bank line at October 31, versus $39.6 million outstanding at April 30. The current ratio was 0.81. Management said cash, operating cash flow, and the credit line should meet working-capital needs.
Material changes and management commentary
- Lower fuel margins as a percentage of fuel revenue reflected higher fuel costs and selling prices, although cents-per-gallon margin increased year over year in the quarter. For the six months, fuel margin was 20.3 cents per gallon versus 19.5 cents.
- Operating expenses rose 6.6% in the quarter and 9.2% year to date, primarily reflecting 94 additional stores. Same-store operating expenses excluding credit-card fees fell 0.1% in the quarter and rose 0.7% year to date; management cited focus on labor-hour management.
- The effective tax rate fell to 26.5% for the quarter and 23.9% year to date, from 36.9% and 37.6%, respectively, primarily due to the lower federal corporate tax rate under the Tax Cuts and Jobs Act.
- Casey’s adopted the revenue-recognition standard using the modified retrospective method. Adoption affected the timing of gift-card breakage and pizza-box coupon revenue and reduced opening retained earnings by a net $4.1 million. Management expected to finalize remaining Tax Reform Act provisional adjustments in fiscal 2019’s third quarter.
- Store pipeline included 23 acquisition stores under agreement, 95 land-bank sites, and 36 locations under construction. The company repurchased no shares during the quarter under its current $300 million authorization.
Outlook, risks, and contingencies
Management expects fiscal 2019 capital spending of $466 million, primarily for store construction, acquisitions, and remodeling, funded mainly by cash and operating cash generation, with debt or other financing available as circumstances require. The filing does not provide earnings or same-store-sales guidance.
Key risks discussed include intense competition; volatility in fuel supply, wholesale costs, retail margins, and demand; tobacco regulation and taxes; environmental compliance and remediation costs; seasonality and weather; and the sufficiency of future liquidity. A new risk factor concerns implementation of the ERP system: its first phase was completed in November 2018, but delays, costs, errors, or disruptions could affect operations, reporting, or internal controls. Management stated pending or threatened legal matters were not expected to have a material adverse effect. Environmental remediation liabilities and uncertain tax positions remain subject to estimation and resolution; the IRS was examining tax year 2012.
Important facts for investors to verify
- Whether fuel pricing and margins remain resilient as same-store fuel gallons softened and fuel margins as a percentage of revenue declined.
- Whether growth in prepared food and merchandise sales and margins offsets fuel-market pressure and higher store operating costs.
- Whether the $466 million capital plan and store pipeline can be funded while maintaining liquidity and managing approximately $1.30 billion of reported debt, including current maturities.
- Whether ERP implementation proceeds without material cost, operational, financial-reporting, or internal-control problems.
- Whether tax-rate benefits, unrecognized tax benefits, and environmental remediation estimates change as audits, regulations, and claims develop.