Casey’s General Stores, Inc. — Fiscal 2011 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended January 31, 2011; financial statements are unaudited. Amounts below are in millions unless stated otherwise. Casey’s operated 1,618 convenience stores in ten Midwestern states at quarter-end.
Financial performance
| Metric | Three months ended Jan. 31, 2011 | Prior-year quarter | Nine months ended Jan. 31, 2011 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $1,374.2 | $1,114.4 | $4,085.7 | $3,457.3 |
| Gross profit | $202.5 | $176.6 | $663.9 | $603.1 |
| Gross margin | 14.7% | 15.8% | 16.2% | 17.4% |
| Operating expenses | $151.5 | $127.9 | $457.2 | $391.3 |
| Interest, net | $8.9 | $2.7 | $19.6 | $8.2 |
| Net earnings | $12.9 | $17.2 | $71.9 | $95.0 |
| EPS, basic / diluted | $0.34 / $0.34 | $0.34 / $0.34 | $1.64 / $1.63 | $1.87 / $1.86 |
- Quarterly revenue rose 23.3%; gasoline revenue increased 26.9%, reflecting 12% more gallons sold and a 13.3% higher average retail price. Same-store gasoline gallons rose 3.5% in the quarter. Grocery and other merchandise revenue grew 13.8%, and prepared-food and fountain revenue grew 16.5%.
- Quarterly gross margin on gasoline was 4.9%, grocery and other merchandise 30.9%, and prepared food and fountain 62.1%. Grocery margin pressure reflected cigarette pricing, higher LIFO charges, and beverage promotions; prepared-food margin was affected by commodity costs and pizza promotions.
- Nine-month net earnings fell 24.4%. Drivers included higher operating and interest expense and an $11.35 million loss on early retirement of debt. Nine-month gross margin declined across the major categories.
- Operating expenses included $1.725 million of takeover-related legal and advisory costs in the quarter; the company reported $16.038 million of such charges for the first nine months. Excluding those charges, nine-month operating expenses increased 12.7%.
Cash flow, liquidity, and capital
- Nine-month operating cash flow was $182.4 million, versus $164.1 million. Investing cash outflow was $255.1 million, including $155.4 million for property and equipment and $101.0 million for store acquisitions. Financing cash outflow was $14.5 million.
- Cash declined to $64.4 million from $151.7 million at April 30, 2010. At January 31, current assets were $264.5 million and current liabilities $257.6 million; the current ratio was 1.03 to 1.
- Long-term debt, net of current maturities, was $678.9 million. It included $569 million of 5.22% senior notes due 2020, $100 million of 5.72% senior notes, capital lease obligations, and mortgage debt. The company also had $9 million drawn on its $50 million line of credit.
- The company issued $569 million of 5.22% notes, prepaid older notes, and repurchased 13,157,894 shares for approximately $500 million at $38 per share—about 25.8% of shares outstanding at August 31, 2010. The repurchase was financed principally with the new notes.
- Management said operating cash flow and the bank line should meet working-capital needs. Capital expenditures for construction, acquisitions, and remodeling totaled $256.4 million in the first nine months, above the original fiscal-year plan; management anticipated approximately $50 million in the final quarter.
Business developments, outlook, and risks
- The company acquired 74 stores during the first nine months, including 64 in the third quarter; it also opened nine replacement stores and completed six new-store constructions in the quarter. Its annual goal was to increase store count by 4% to 6%.
- Couche-Tard’s tender offer expired without buying shares. Casey’s ended discussions with 7-Eleven after rejecting its revised $43-per-share proposal. The board had stated that the proposals did not reflect Casey’s value and growth opportunities.
- No specific earnings guidance was provided. Management noted a weak economy and consumer “trading down,” as well as inflationary pressure on prepared-food costs. Gasoline margins remain exposed to wholesale-price volatility, competition, and supply disruptions; the company also identifies competition, tobacco demand and costs, environmental compliance, weather, seasonality, and increased debt as risks.
- Four “hot fuel” lawsuits name Casey’s; a Kansas court certified certain liability and injunctive claims as a class action, with trial scheduled for May 2012. Management said it would contest the case and did not believe the company was liable. Management did not expect pending or threatened proceedings, individually or collectively, to materially affect financial position or results.
- Gross unrecognized tax benefits were $6.282 million at January 31, 2011; management expected them to decrease by about $1.2 million over the next 12 months, though the timing and ultimate outcome of tax positions remain uncertain.
Important facts for investors to verify
- Whether same-store sales, gasoline volumes, and fuel margins remain resilient as wholesale prices and competitive conditions change.
- How lower merchandise and prepared-food margins, higher expenses, and debt-related interest costs affect future earnings and cash generation.
- Whether the store acquisition and remodeling program delivers expected returns and stays within revised capital plans.
- Debt covenants, refinancing and liquidity capacity, and the effect of the large debt-funded share repurchase on financial flexibility.
- Developments in the Kansas hot-fuel litigation, environmental obligations, and uncertain tax positions.