Business context and reporting period
Casey’s General Stores, Inc. operates convenience stores primarily in the Midwest. This unaudited Form 10-Q covers the fiscal quarter and six months ended October 31, 2016 (fiscal 2017); comparisons are with the corresponding 2015 periods. At quarter-end, Casey’s operated 1,941 stores in 14 states and reported one operating segment. Unless stated otherwise, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Three months ended Oct. 31, 2016 | Three months ended Oct. 31, 2015 | Six months ended Oct. 31, 2016 | Six months ended Oct. 31, 2015 |
|---|---|---|---|---|
| Revenue | $1,920.1 | $1,924.6 | $3,890.1 | $3,973.2 |
| Gross profit | $443.5 | $443.0 | $893.3 | $854.2 |
| Gross margin | 23.1% | 23.0% | 23.0% | 21.5% |
| Operating expenses | $295.3 | $268.0 | $587.4 | $531.6 |
| Depreciation and amortization | $48.7 | $41.8 | $94.5 | $81.2 |
| Income before taxes | $89.5 | $123.2 | $190.8 | $221.4 |
| Net income | $57.2 | $79.0 | $124.6 | $140.8 |
| Diluted EPS | $1.44 | $2.00 | $3.14 | $3.57 |
Cash flow, debt and liquidity
- Six-month operating cash flow was $240.1 million, versus $250.3 million a year earlier. Property and equipment purchases were $203.6 million; investing cash outflow was $207.5 million, including $5.6 million for business acquisitions.
- Financing provided $69.6 million, including $100 million of long-term debt proceeds; the comparable period used $25.8 million. Cash increased $102.2 million to $178.0 million.
- At October 31, 2016, long-term debt, net of current maturities and issuance costs, was $915.1 million; current maturities were $15.4 million. A $100 million credit line had no borrowings. The filing reports long-term debt fair value of approximately $976 million.
- Current assets were $426.0 million and current liabilities $387.0 million; the current ratio was 1.10, compared with 0.84 at April 30, 2016. Management said cash, operating cash flow and the credit line should meet working-capital needs.
Material changes and operating trends
- Quarterly revenue was nearly flat, down 0.2%, while net income fell 27.7%. For the six months, revenue declined 2.1% and net income declined 11.6%.
- Fuel revenue fell as retail prices declined, despite higher volumes: quarterly fuel gallons rose 7.1% and same-store fuel gallons rose 3.7%; six-month gallons rose 7.0%. Quarterly fuel margin was 18.6 cents per gallon versus 24.7 cents; the six-month margin was 19.1 cents versus 21.1 cents.
- Inside sales strengthened. Second-quarter same-store grocery and other merchandise sales increased 3.1%, and prepared food and fountain sales increased 5.1%. For the quarter, those categories’ revenue rose 5.5% and 8.3%, respectively.
- Operating expenses rose 10.2% in the quarter and 10.5% for six months, driven by wages, more stores, expanded operating programs and wage-rate increases. Depreciation and amortization increased 16.4% for six months, primarily reflecting recent capital investment.
- Six-month adjusted EBITDA, a non-GAAP measure, was $306.2 million, down 5.1%. The company attributed the decline primarily to stronger fuel margins in the prior year.
Outlook, commentary, risks and unusual items
- Fiscal 2017 capital spending for store construction, acquisitions and remodeling is expected to be $496 million to $614 million. The company reported 39 stores under construction and 84 sites under contract, and annual goals of building or acquiring 77 to 116 stores, replacing 35 locations and completing 100 major remodels. These are management plans, not earnings guidance.
- In the first six months, Casey’s opened 11 new stores, completed 12 replacement stores and 24 major remodels, acquired six stores, and closed six stores.
- RIN sales generated $15.9 million in the second quarter, versus $4.7 million a year earlier. The filing identifies RIN price volatility and possible changes to renewable fuel regulations as risks to results.
- Early adoption of ASU 2016-09 resulted in a $3.046 million income-tax benefit in the first quarter; the company said the standard’s overall financial-statement impact was not material. The six-month effective tax rate was 34.7%, versus 36.4%.
- The “hot fuel” settlement remains subject to appeal; the company described its required class payment as immaterial. Management said other pending or threatened legal matters were not expected to have a material adverse effect.
- Environmental remediation spending was approximately $0.733 million for the six months; the accrued liability for estimated corrective actions was approximately $0.341 million. The company cautioned that future costs or undiscovered liabilities could exceed estimates.
- Principal disclosed risks include fuel-margin and supply volatility, competition, tobacco demand and costs, RIN and commodity price volatility, environmental compliance, seasonality, weather, taxes and increased indebtedness.
Important facts for investors to verify
- Whether fuel margins recover or remain below the prior-year comparison, and how fuel-price changes affect reported revenue and profitability.
- Whether growth in same-store merchandise and prepared-food sales can offset higher operating costs and store expansion expenses.
- Execution and funding of the stated capital-spending and store-growth plans, and the effect of additional borrowing on debt and liquidity.
- RIN market prices and regulatory developments, including the EPA’s review of petitions concerning the RFS point of obligation.
- Resolution of the hot-fuel settlement appeal, tax examinations and environmental obligations, including any changes to estimated liabilities.