Casey’s General Stores, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Fiscal quarter and nine months ended January 31, 2014. Unless otherwise noted, financial amounts below are in millions of dollars; the filing reports them in thousands. Comparisons are with the corresponding prior-year period or April 30, 2013 balance-sheet date.
Business context
Casey’s operated 1,783 convenience stores in 14 states, primarily in the Midwest, with gasoline, grocery and other merchandise, and prepared food and fountain as its principal categories. The company reported one operating and reportable segment. In Q3 it completed 12 new-store constructions, opened five replacement stores, acquired two stores, and closed six.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $1,790.1 | $1,662.4 | $5,920.7 | $5,442.3 |
| Gross profit | $279.9 | $249.7 | $947.7 | $816.0 |
| Gross margin | 15.6% | 15.0% | 16.0% | 15.0% |
| Operating expenses | $214.7 | $189.9 | $647.2 | $569.3 |
| Net income | $14.7 | $15.5 | $111.7 | $87.4 |
| Diluted EPS | $0.38 | $0.40 | $2.87 | $2.26 |
| Interest expense, net | $9.9 | $8.8 | $29.2 | $26.3 |
Q3 trends: Revenue rose 7.7%, but net income declined 5.1%. Same-store gasoline gallons increased 3.8%; same-store grocery and other merchandise sales rose 6.5%, and prepared-food and fountain sales rose 10.7%. Gasoline gross margin was 4.7%, or approximately 14.36 cents per gallon; grocery and other merchandise margin was 31.1%, and prepared-food margin was 60.8%.
Nine-month trends: Revenue increased 8.8% and net income increased 27.9%. Diluted EPS rose to $2.87 from $2.26. Management reported non-GAAP EBITDA of $300.5 million, up 21.8%, and adjusted EBITDA of $303.4 million, up 20.9%; the filing cautions these measures are not GAAP measures.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $210.7 million, versus $194.5 million. Property and equipment purchases were $242.5 million; store-acquisition payments, net of cash acquired, were $26.6 million.
- Financing activities provided $117.1 million, including $200.0 million of long-term debt proceeds, offset partly by $59.1 million of short-term debt repayments. Cash increased $60.9 million to $102.2 million.
- At January 31, 2014, long-term debt, net of current maturities, was $853.7 million; current maturities were $8.2 million. The company had no bank-line borrowings and reported an aggregate $100 million line of credit.
- Current assets were $345.7 million and current liabilities $319.6 million; the current ratio was 1.08. Management stated that cash from operations and the bank line should meet working-capital needs.
- Shareholders’ equity was $701.8 million. The company declared dividends of $0.18 per share for the quarter, versus $0.165 a year earlier.
Material changes and management commentary
- Q3 operating expenses increased 13.1%, faster than revenue, reflecting more stores, expanded 24-hour operations, pizza delivery, replacement stores, and remodels. Challenging weather and a store fire added approximately $1.6 million in combined costs. Operating expenses were 12.0% of revenue, versus 11.4%.
- Gasoline gross margin benefited from renewable fuel identification number (RIN) credit sales: $3.4 million in Q3 versus $0.8 million a year earlier, and $24.0 million for the nine months versus $1.4 million. Management attributed much of the nine-month earnings improvement to higher gasoline margin and RIN sales.
- Grocery and other merchandise margins declined year over year, which management primarily attributed to cigarette pricing adjustments. Nine-month prepared-food margin also declined, mainly due to higher meat, cheese, and supply costs.
- Long-term debt increased from $653.1 million at April 30, 2013; the company issued additional $50 million principal of 3.75% Series B Senior Notes in December 2013. It also reported $569 million of 5.22% notes, $150 million of 3.67% Series A notes, $75 million of 5.72% notes, and $9.7 million in capital leases.
Outlook, risks and contingencies
- The company’s annual goal was to increase stores by 70–105, or 4%–6%. Its stated fiscal 2014 capital-spending expectation was $313–$374 million for construction, acquisitions, and remodels; it had spent $269.1 million on those activities during the first nine months.
- Management cited competition, volatile gasoline supply and margins, tobacco demand and pricing, weather and seasonality, liquidity and capital needs, and environmental compliance as risks. It said risk factors had not materially changed from the 2013 Form 10-K.
- The “hot fuel” litigation settlement had preliminary court approval and contemplated pump stickers and a monetary payment described as not material; final approval was still required. Management said other pending or threatened proceedings were not expected to have a material adverse effect.
- Gross unrecognized tax benefits were $11.8 million at January 31, 2014, including $7.7 million that would affect the effective tax rate if recognized. Management expected these benefits to decrease by approximately $1.5 million within 12 months, while noting outcomes and timing are uncertain.
- The company had an accrued liability of approximately $0.3 million for estimated environmental corrective-action and remediation costs. Management cautioned that future costs or liabilities could exceed accrued amounts. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether gasoline margins and RIN credit sales remain supportive of earnings, and how results perform without unusually high credit sales.
- Whether store growth, extended hours, delivery, and remodels generate returns sufficient to offset the associated operating-cost increases.
- Capital spending, acquisition pace, and debt levels relative to operating cash flow and liquidity.
- Developments in the hot-fuel settlement, uncertain tax positions, and environmental remediation obligations.
- Progress toward the stated 70–105-store growth goal and the fiscal-year capital-spending range.