CASY

Business Context and Reporting Period

Company: Casey's General Stores, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended July 31, 2009 (First Quarter of Fiscal 2010)
Business Overview: The Company operates convenience stores (Casey's General Store, HandiMart, Just Diesel) in nine Midwestern states, primarily Iowa, Missouri, and Illinois. As of July 31, 2009, there were 1,483 stores in operation. Revenue is derived primarily from retail gasoline sales and in-store merchandise (grocery, prepared foods, tobacco).

Key Financial Metrics

Note: All dollar amounts in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 24.2% ($379.4 million) compared to the prior year. This was driven primarily by a 34.2% drop in gasoline revenue due to a 37.7% decrease in the average retail price per gallon, despite a 5.5% increase in gallons sold.
• Profitability Increase: Net earnings increased 53.5% ($15.4 million). Gross profit rose 10.5% due to improved margins across all categories.
• Margin Expansion:
  • Gasoline: Gross margin increased to 6.7% (from 4.1%) and margin per gallon rose to $0.157 (from $0.156).
  • Grocery/Merchandise: Revenue increased 8.4% and margin improved to 34.3% (from 34.0%), aided by higher cigarette revenues from federal excise tax increases.
  • Prepared Food: Revenue increased 11.1% and margin improved to 63.8% (from 60.5%) due to lower cheese costs.
• Operating Expenses: Decreased slightly (0.3%) in absolute dollars due to lower credit card fees and fleet fuel expenses, though they represented a higher percentage of revenue (11.1% vs 8.5%) due to the revenue decline.
• Effective Tax Rate: Decreased to 34.2% from 38.0%, primarily due to the expiration of statutes of limitations on certain unrecognized tax benefits.

Guidance, Outlook, Risks, and Contingencies

Outlook and Capital Resources

• Capital Expenditures: The Company expended $31.4 million in the quarter. It anticipates expending approximately $165 million in fiscal 2010 for store construction, acquisition, and remodeling, funded by cash flow and existing credit lines.
• Store Growth: The annual goal is to increase the number of stores by 4%. Five new stores were opened and five replaced in the quarter.
• Liquidity: Management believes cash flow from operations and a $50 million line of credit are sufficient to meet working capital needs.

Risks and Contingencies

• Legal Proceedings (Hot Fuel Cases): The Company is a defendant in 45 similar lawsuits across 28 jurisdictions alleging misrepresentation of gasoline volumes due to temperature expansion. Management intends to contest these vigorously and does not believe it is liable.
• Wage and Hour Settlement: The Company reached a settlement agreement regarding two class actions (Jones and Wineland) involving approximately 83,800 employees. The Company agreed to pay $11.7 million (with $3.0 million covered by insurance) to resolve claims. The Company expressly denies liability. Final approval is pending a court hearing scheduled for October 9, 2009.
• Market Risks:
  • Gasoline Volatility: Profit margins are sensitive to wholesale cost fluctuations and competitive pricing.
  • Tobacco: Significant portion of revenue; subject to tax increases and anti-smoking campaigns.
  • Environmental: Ongoing costs for underground storage tank (UST) compliance and remediation. An accrued liability of $199,000 exists for estimated future costs.

Investor Verification Checklist

• Gasoline Margin Sustainability: Verify if the improved gasoline margin (6.7%) is sustainable given the highly competitive pricing environment and volatility in wholesale costs.
• Legal Settlement Impact: Confirm the final court approval of the $11.7 million wage and hour settlement and ensure no additional liabilities arise from the "hot fuel" litigation.
• Capital Expenditure Execution: Monitor the ability to fund the projected $165 million in capital expenditures without diluting shareholders or increasing leverage significantly.
• Same-Store Sales Trends: Track same-store sales growth in grocery and prepared foods to ensure the offset to declining gasoline revenue volumes continues.
• Environmental Liabilities: Review future disclosures regarding UST remediation costs and potential reimbursement from state trust funds.