CASY

Business Context and Reporting Period

Company: Casey's General Stores, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Fiscal Quarter and Nine Months ended January 31, 2009
Business Overview: Operates 1,469 convenience stores in nine Midwestern states (primarily Iowa, Missouri, and Illinois) under the names "Casey's General Store," "HandiMart," and "Just Diesel." Revenue is derived primarily from retail gasoline sales and convenience merchandise.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue:
  • Quarterly: Decreased 26.5% to $848.8 million (from $1.15 billion). Driven by a 38.2% drop in gasoline revenue due to a 40.2% decline in average retail price per gallon, despite a 3.5% increase in gallons sold.
  • Nine Months: Increased 5.0% to $3.80 billion. Gasoline revenue rose 4.2% due to a 2.1% price increase and 2% volume increase.
• Profitability:
  • Quarterly: Net earnings increased 7.6% to $14.0 million. Gross profit margin on gasoline improved to 5.7% (from 4.7%), though margin per gallon decreased to $0.0994 (from $0.1352) due to competitive pricing pressure.
  • Nine Months: Net earnings decreased 0.5% to $70.1 million. Gasoline gross profit margin declined to 4.5% (from 5.0%).
• Operating Expenses: Decreased 1.4% quarterly due to lower credit card fees and fleet fuel expenses. For the nine months, expenses increased 5.9% due to higher credit card fees, $2.6 million in impairment charges for flood-damaged stores, and large health insurance claims.
• Cash Flow: Net cash from operations decreased 15.8% for the nine-month period to $102.8 million, primarily due to a significant reduction in accounts payable resulting from lower gasoline costs at period end.

Guidance, Outlook, and Risks

• Outlook: Management expects a challenging operating environment due to the weakening U.S. economy and increased unemployment in the Midwest. However, demand for gasoline and merchandise has not yet declined significantly.
• Expansion: The company plans to open 17 new stores by the end of the fiscal year, aiming for a 4% annual increase in store count. Budgeted capital expenditures for fiscal 2009 are approximately $130 million.
• Liquidity: Management believes cash flow from operations and a $50 million bank line of credit are sufficient to meet working capital needs.
• Legal Risks:
  • "Hot Fuel" Litigation: Defendant in class actions alleging misrepresentation of gasoline volumes due to temperature expansion. Cases are consolidated in federal court in Kansas.
  • Employment Litigation: Subject to collective actions under the Fair Labor Standards Act (FLSA) regarding unpaid overtime for assistant managers and non-management employees. Approximately 3,280 potential class members have opted in across two major suits. Management cannot estimate potential losses.
• Environmental Risks: Ongoing costs related to underground storage tank (UST) compliance and remediation. The company has an accrued liability of approximately $237,000 for estimated future corrective actions.

Investor Verification Checklist

• Gasoline Margin Volatility: Verify the sustainability of gasoline margins given the company's policy to price to competition and the recent sharp decline in wholesale costs.
• Legal Exposure: Monitor the status of the "Hot Fuel" and FLSA overtime lawsuits, as potential damages are unspecified and could be material.
• Capital Expenditure Execution: Confirm the company's ability to fund the $130 million capital budget through operations and existing credit facilities without diluting shareholders or increasing leverage significantly.
• Inventory Management: Review inventory levels ($99.0 million) relative to sales velocity, noting the significant reduction in inventory compared to the prior year ($124.5 million).
• Tax Contingencies: Assess the impact of FIN 48 on the effective tax rate, which increased to 37.1% quarterly due to tax contingencies.