Casey’s General Stores, Inc. — Q1 FY2011 Form 10-Q
Reporting period: Three months ended July 31, 2010; comparisons are with the three months ended July 31, 2009. Balance-sheet comparisons are with April 30, 2010. Unless otherwise stated, financial amounts are in millions of dollars.
Business context
Casey’s operated 1,533 convenience stores in nine Midwestern states, primarily Iowa, Missouri, and Illinois. Stores sell gasoline, grocery and general merchandise, and prepared food and fountain products.
Financial results and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $1,362.0 | $1,187.9 | +14.7% |
| Gross profit / gross margin | $234.0 / 17.2% | $220.1 / 18.5% | Margin down 1.3 points |
| Operating expenses | $152.4 | $132.4 | +15.1% |
| Earnings before income taxes | $59.5 | $67.1 | Down |
| Net earnings | $37.3 | $44.2 | -15.6% |
| Basic and diluted EPS | $0.73 | $0.87 | Down |
| Net cash provided by operations | $103.7 | $74.5 | +39.2% |
| Cash used in investing activities | $39.4 | $31.2 | Use increased |
| Cash used in financing activities | $17.9 | $18.2 | Use decreased slightly |
Revenue growth reflected higher gasoline sales, including an 11.1% increase in average retail price per gallon and a 6.8% increase in total gallons sold. Same-store gasoline gallons rose 1.5%. Gasoline gross margin was 16.43 cents per gallon versus 15.70 cents, although the reported gasoline margin as a percentage of sales fell to 6.3% from 6.7%. Grocery and other merchandise sales rose 6.7%; prepared food and fountain sales rose 7.6%.
Grocery and other merchandise margin declined to 32.8% from 34.3%, attributed primarily to cigarette price competition, beverage promotions, and a higher LIFO charge. Prepared food margin held at 63.8%. The effective tax rate rose to 37.3% from 34.2%; the prior-year rate benefited from a nonrecurring tax benefit.
Operating expenses included $6.238 million of takeover-related legal and advisory fees. Management said EPS would have been approximately $0.81 without these fees. Operating expenses would have increased 10.4%, rather than 15.1%, excluding them.
Cash and cash equivalents were $198.1 million at July 31, 2010, versus $151.7 million at April 30. Current assets were $347.0 million and current liabilities $308.8 million, a 1.12 current ratio. Total debt, including current maturities, was approximately $165.4 million; the $50 million bank line of credit was undrawn. Operating cash flow growth was driven mainly by increases in accounts payable, accrued expenses, and income taxes payable.
Material changes, outlook, and unusual items
- Capital spending was $39.6 million in the quarter. Management expected fiscal 2011 spending of $189 million to $243 million and targeted annual store-count growth of 4% to 6%. The company began construction on 13 new and 9 replacement stores during the quarter.
- After quarter-end, Casey’s issued $569 million of 5.22% senior notes due 2020. Proceeds were intended principally to fund a self-tender offer for up to $500 million of shares and to repay existing notes. The $500 million self-tender closed August 25 at $38 per share; Casey’s bought 13,157,894 shares, approximately 25.8% of shares outstanding as of August 31. This financing and repurchase occurred after the July 31 balance-sheet date.
- Couche-Tard’s unsolicited bid increased to $38.50 per share by September 1. The board recommended that shareholders reject it. Casey’s reported $6.2 million in first-quarter response costs and expected additional fiscal 2011 expenses that it said could be material to financial position and results.
- On September 2, Casey’s received a preliminary proposal from another strategic party at $40 per share. The board said the proposal substantially undervalued the company but authorized discussions; no transaction was assured.
- Litigation includes gasoline “hot fuel” cases, including a Kansas class certified for certain liability and injunctive claims, as well as lawsuits relating to the takeover contest, defensive measures, and recapitalization. The company and board said they intended to contest the claims. The company also reported other routine legal, regulatory, and environmental matters.
- Management cited competition, volatile wholesale gasoline costs and supply, tobacco demand and taxes, economic weakness and consumer trading down, and environmental compliance as risks. It reported $197,000 accrued for estimated remediation costs and warned actual environmental costs could exceed accruals. Management expected liquidity from operations and the credit line to meet working-capital needs; future results remain subject to stated risks.
Important facts for investors to verify
- Whether operating performance and margins hold up after the quarter’s increase in gasoline prices, and whether grocery margin pressure persists.
- The full cost and earnings impact of takeover-related legal and advisory spending and the outcome of the Couche-Tard offer, related litigation, and third-party discussions.
- The company’s post-quarter debt, interest obligations, liquidity, and share count following the $569 million note issuance and $500 million self-tender.
- Whether planned fiscal 2011 capital expenditures and 4%–6% store-growth target are achieved, and how they affect cash generation.
- Developments in the Kansas hot-fuel litigation, other shareholder litigation, and environmental or tax contingencies; the filing says unrecognized tax benefits were $5.772 million and management expected about $1.2 million to reverse within 12 months.