Casey’s General Stores, Inc. (CASY), Safeway Inc. (SWY): Two Grocery Companies to Buy, One to Avoid

World food retail market performance will grow at an estimated CAGR of 5.5% for the period of 2011-2016, a slight decline from 5.7% for the period 2007-2011. Grocery stores are facing stiff competition and price wars. Companies are battling these obstacles with strategies like expansion and store remodeling.

Three grocery stores are currently working on these strategies, which will improve their margins as well as profitability.

Casey's General Stores, Inc. (NASDAQ:CASY)

Strategic initiatives and improved margin

Casey’s General Stores, Inc. (NASDAQ:CASY) is growing through strategic initiatives. The company plans to convert 100 stores to a 24-hour format, remodel 25 stores, replace 20 stores, and add pizza delivery services to 107 stores in fiscal year 2014. The remodeled stores are also equipped with larger coffee and fountain offerings, and made-to-order sandwich programs. This plan will help increase free cash flow as the replacement of stores generates about a 50% boost in fuel, grocery, and general merchandise sales and about 80% boost in prepared-food sales. The company will generate free cash flow of $19.4 million in fiscal year 2014 and $28.2 million in fiscal year 2015 as compared to free cash outflow of $19.0 million in fiscal year 2013.

In the past two months, Casey’s General Stores, Inc. (NASDAQ:CASY) exceeded its target gasoline margin of $0.15 per gallon because of a recent surge in Renewable Identification Number, or RIN, value above $1. Casey buys gasoline and ethanol separately and then blends them. After blending, Casey’s General Stores, Inc. (NASDAQ:CASY) receives RIN that is a 38-character number assigned by the Environmental Protection Agency, or EPA, to each gallon of renewable fuel.

Under the Renewable Fuel Standard program, the EPA uses RIN to monitor the sale of fuel that should contain a minimum volume of ethanol. Casey’s General Stores, Inc. (NASDAQ:CASY) sells this RIN to obligated parties such as refineries. Flat gasoline demand and rising ethanol consumption targets surged RIN value. Therefore, the company’s gasoline margin will be $0.19 per gallon in the first quarter of fiscal year 2014.

Benefits from new stores, remodeling, and better margins will increase Casey’s General Stores, Inc. (NASDAQ:CASY) EPS to $3.90 in fiscal year 2014 from $2.86 in fiscal year 2013.

Sale of assets and mediocre free cash flow visibility

Last month Safeway Inc. (NYSE:SWY) announced the sale of its Canadian operations. It agreed to sell Canada Safeway Ltd., or CSL, to Sobeys for $5.64 billion in cash. Now it can focus more on its core operations in the U.S. CSL generated earnings of $260.71 million in fiscal year 2013. This sale will lower near-term earnings but will contribute to the growth of the core business. Safeway Inc. (NYSE:SWY) will invest some of these proceeds into its core business operations. Additionally, the company will likely pay down $2 billion of debt and will buy back some of its shares in order to improve shareholders’ value.