Casey’s General Stores, Inc. (NASDAQ:CASY) Q2 2023 Earnings Call Transcript

Casey’s General Stores, Inc. (NASDAQ:CASY) Q2 2023 Earnings Call Transcript December 7, 2022

Casey’s General Stores, Inc. beats earnings expectations. Reported EPS is $3.69, expectations were $3.16.

Operator: Good day, and thank you for standing by. Welcome to the Casey’s General Stores’ Second Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead.

Brian Johnson: Good morning and thank you for joining us to discuss the results from our second quarter ended October 31, 2022. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer. Before we begin, I’ll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company’s supply chain, business and integration strategies, plans and synergies, growth opportunities, and performance at our stores.

There are a number of known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including but not limited to the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine and related governmental actions as well as other risks, uncertainties and factors which are described in our most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey’s disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.

A reconciliation of non-GAAP, GAAP financial measures referenced in this call as well as the detailed breakdown of the operating expense increase for the second quarter can be found at our website at www.caseys.com under the Investor Relations link. With that said, I’d now like to turn the call over to Darren to discuss our second quarter results. Darren?

Darren Rebelez: Thanks, Brian, and good morning everyone. We’ll dive into the strong second quarter results in a moment. But first, I want to thank our team for their commitment to our guests and especially during the holiday season, I’m so grateful for what we’ve accomplished this quarter and so far this year. This fall we saw our guests head to Casey’s for everything they need, from our fast delicious breakfast offering, including fresh bean-to-cup coffee to convenient fill-up or delicious pizza meal occasion. On the heels of last year’s breakfast relaunch, our breakfast offering pulled guests in with a fan favorite our loaded Breakfast Burrito as well as our buzzworthy LTO, the ultimate Beer Cheese Breakfast Pizza featuring Busch Light beer cheese sauce.

This only a Casey’s offerings generated store traffic, online pizza orders, and a lot of conversation about Casey’s this fall. In November, we held our Annual Veterans Giving Campaign across all our stores to raise funds for organizations to support veterans and their families. As a veteran myself, I know the great sacrifice that these families have made and the challenges they face. With the help of our generous guests and partners at PepsiCo, we’ve raised over $1 million to help two outstanding organizations. The Children of Fallen Patriots and Hope For the Warriors. These funds will allow the charities to have an even greater impact on the lives of veterans and their loved ones. Thank you to our vendor partners, each Casey’s team member that made the donation ask in our stores, and especially to our guests who truly do good when they shop at Casey’s.

Now let’s discuss the results from the quarter. As you’ve seen in the press release, we had an excellent second quarter. Diluted EPS finished at $3.67 per share, a 42% increase from the prior year, and was a record high for the second quarter. Inside sales remained strong despite the challenging economic environment, driving inside gross profit up almost 9% to $504 million. The company generated $138 million in net income, an increase of 42% and $272 million in EBITDA, an increase of 25% from the prior year. Our differentiated business model is resilient in these challenging economic conditions as we have strong execution of our strategic plan across grocery and general merchandise, prepared food and dispensed beverage, and fueled with excellent execution by store operations.

I would now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 7.9% from second quarter or 14.4% on a two year stack basis with an average margin of 39.8%. Our team did a tremendous job with our vendor partners managing the product mix, in-stock levels, and retail price point adjustments. We saw strong performance in pizza both slices and whole pies as well as alcoholic and non-alcoholic beverages. We were able to partially offset some inside margin pressure in the prepared food and dispensed beverage category through select pricing adjustments and finding the right product mix within the grocery and general merchandise category. Same-store prepared food and dispensed beverage sales were up 10.5% or 15% on a two year stack basis, with an average margin of 56.7% versus 50.6% a year ago.

Sales were up due to strong performance in pizza slices and whole pies, as well as cold dispensed beverages. We had better product availability in both cups and donuts, which led to improved performance within the bakery and dispensed beverage categories. We had sequential improvement with margin versus first quarter, but ingredient costs, particularly cheese continued to pressure profit margins. Same-store grocery and general merchandise sales were up 6.9% or 14.2% on a two-year stack basis, with an average margin of 33.3%, which is the same as it was for the year ago period. The second quarter showed excellent results in both non-alcoholic and alcoholic beverages as we continue to see great results by leveraging our approximately 1,500 stores with a liquor license and growing our private label sales.

For fuel same-store gallons sold increased 0.3% with a fuel margin of 40.5 cents per gallon. Our diesel business had a great quarter with low double-digit volume growth. We saw cost volatility throughout the quarter and the fuel team navigated through well and continues to appropriately balance profitability and volume as we optimize gross profit dollars. Fuel margin was also positively impacted by the sale of $11.1 million worth of RINs during the quarter. I’d now like to turn the call over to Steve to discuss the financial results for the second quarter. Steve?

Steve Bramlage: Thank you, Darren, and good morning. Before I jump into the financials, I would also like to take a minute to acknowledge the team given the very strong performance throughout the entire business. The company showed great resiliency throughout the quarter in all three legs of our business led by store operations performed exceptionally well. Total revenue for the quarter was $4 billion, an increase of $716 million or 22% from the prior year. Total inside sales for the quarter were $1.3 billion which is an increase of $129 million or 11% from the prior year. For the quarter, grocery and general merchandise sales increased by $88 million to $917 million, an increase of 10.6%. Prepared food and dispensed beverage sales rose by $42 million to $351 million, which is an increase of 13.5%.

Results were favorably impacted by operating 3% more stores on a year-over-year basis. And our in-stock levels did improve during the quarter versus the prior year, which helped inside sales, especially in prepared food. Second quarter retail fuel sales were up $587 million to $2.6 billion due to a 5% increase in gallons sold to $702 million as well as a 22.6% increase in the average retail price per gallon. That average price of fuel during the period was $3.75 a gallon compared to $3.06 a year ago. As a reminder, we define gross profit as revenue less cost of goods sold but excluding depreciation and amortization. Casey’s had gross profit of $811 million in the second quarter, an increase of $93 million or 13% from the prior year. This was driven by higher inside gross profit of $41 million or 8.9% as well as an increase of $52.5 million or 22.7% in fuel gross profit.

Inside gross profit margin was 39.8%, down 90 basis points from a year ago. The grocery and general merchandise margin was 33.3%, which was flat with the prior year. The merchandising team has done a good job, given the environment with its ability to offset inflationary pressure via mix management, joint business planning with our partners and retail point – price point adjustments. Prepared food and dispensed beverage margin was 56.7%, and that’s down 390 basis points from the prior year. The decreased margin was negatively impacted by commodity costs, specifically cheese, which were $2.24 a pound in the quarter and that compares to $1.96 per pound last year or a 14% increase. This negatively impacted the PF&DB margin by approximately 90 basis points.

The category results were impacted by a LIFO charge which had an adverse impact of approximately 25 basis points. Fuel margin for the quarter was 40.5 cents per gallon and up 5.8 cents per gallon from the prior year. Fuel gross profit benefited by $11 million of RINs sales or about 1.5 cents per gallon. Total operating expenses were up 7.7% or $39 million in the second quarter. Approximately 2% of the operating expense increase was due to unit growth as we operated 83 more stores than the prior year period. Same-store credit card fees rose due to higher retail fuel prices and they accounted for about 1% of the operating expense increase in the quarter. Another 1% of the increase was due to a non-cash impairment charge and approximately 1% of the increase is also due to internal fuel expense that rose that’s related to our grocery self-distribution business.

Increases to same-store employee expenses have been offset by a reduction in-store labor hours specifically in training and overtime. Our store operations team has done outstanding work operating our stores more efficiently without negatively impacting the guest experience, resulting in only a 1.3% growth in same-store operating expense excluding credit card fees. This is an impressive feat considering the inflationary headwinds that are impacting the business right now. Net interest expense was $13.5 million in the quarter, that’s the same as the prior year. And as a reminder only 17% of our debt is floating rate, which limits our exposure to rising rates. The effective tax rate for the quarter was 23.6%, and that compares to 25% in the prior year.

The decrease was driven by a one-time benefit that we recorded due to an income tax reduction in Iowa. Net income was up versus the prior year to $137.6 million, an increase of 42%. EBITDA for the quarter was $271.7 million compared to $217 million a year ago, that’s an increase of 25%. Our financial flexibility remains excellent. On October 31, cash and cash equivalents were $415 million and we have remaining capacity of $469 million on our lines of credit, giving us ample total liquidity of $884 million. Furthermore, we have no significant maturities coming due until fiscal 2026. Our leverage ratio calculated in accordance with our senior notes is now 1.9 times. That’s the same as it was prior to the Bucky’s and the Circle K acquisitions and it’s generally in line with our preferred long-term target.

Our balance sheet still has plenty of capacity to make sound strategic investments as they present themselves. For the quarter, net cash generated by operating activities of $210 million less purchases of property and equipment of $95 million resulted in the company generating $115 million in free cash flow compared to $135 million in the prior year. At the December meeting, the Board of Directors voted to maintain the dividend of $0.38 per share per quarter. We will continue to remain balanced in our capital allocation going forward leaning into the many EBITDA and ROIC accretive investment opportunities that are in front of us. We will also stay opportunistic related to our $400 million share repurchase authorization, but we didn’t repurchase any shares this quarter.

Due to the strong year-to-date performance, we are going to modify certain aspects of our fiscal 2023 outlook. The company now expects same-store inside sales to be up approximately 5% to 7% which is an increase from the previous range of up 4% to 6%. Total operating expense increase is expected to be near the low end of the annual range, which is approximately 9% to 10%. And the tax rate is now expected to be between approximately 24% to 25% for the year. The company is not updating its annual outlook for the following metrics; inside margin is expected to be approximately 40%, the company expects same-store fuel gallons to be flat to up 2%, the company continues to expect to add approximately 80 stores in fiscal 2023, and expects to exceed the stated three-year commitment we have of 345 new units.

Interest expense is expected to be approximately $55 million, depreciation and amortization are expected to be approximately $320 million, and the purchase of property, plant and equipment is expected to be between $450 million to $550 million – $450 million to $500 million, excuse me, including approximately $135 million in one-time store remodel costs for recently acquired stores. I would note that capital spending on store openings are back half weighted of the year versus our initial expectations due to ongoing construction delays and local licensing and inspection challenges. As for our November results met our expectations for the current quarter. November inside sales are at the low end of our revised annual guidance. November same-store fuel gallons are comparable to our second quarter results.

November fuel margins remain quite elevated and are closer to our first quarter experience than to our second. Our expectations for third quarter operating expense growth were that they will be at or slightly below the low end of our revised annual guidance. And finally, cheese costs are currently a similar headwind in percentage terms to the second quarter. I’ll now turn the call back over to Darren.

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Darren Rebelez: All right thanks, Steve. I’d like to again say thank you and congratulations to the entire Casey’s team for delivering a great quarter. Due to them we’re confident in delivering on our improved fiscal ’23 outlook. During the first half of the year, our merchandising team has done an excellent job driving business inside store by offering guests value and quality on products, including our private label program, our revamped breakfast and coffee offering, and our made-from-scratch pizza. The store operations team continues to execute the store simplification plan, was able to do this while efficiently managing operating expenses including reducing same-store labor hours by 3%. For prepared food and dispensed beverage margin, we continue to manage our costs prudently, while holding our relative value proposition for our guests.

We’re very pleased with the top line growth in PF&DB thus far. With respect to store growth, our business development team is evaluating strong deal flow, and we will remain disciplined with respect to valuations. We’re able to leverage our strong balance sheet to achieve this and have unique flexibility to flex our balance sheet if the right opportunity presents itself. This is especially useful in the current macroeconomic environment where there are still inflationary, supply chain, and numerous other pressures. Casey’s has historically been resilient in recessionary times as the business model allows for our guests to find quality and value conveniently. Our fuel team has done an excellent job maximizing fuel gross profit dollars, balancing volume and margin.

The team has been able to grow gross profit dollars without losing share. The first half of the year has been very volatile for fuel pricing and having a centralized pricing and procurement team has been paramount for the success of the fuel business. On the digital side, orders through our mobile app now represent 66% of all digital revenue, which is primarily driven by whole pies. We’ve added more grocery and general merchandise items to the app as well. As of October 31, we were at 5.8 million rewards members, adding over 400,000 members in the quarter, because our team continues to drive value for rewards guests. This has resulted in our rewards participation rate reaching 37.8% which is a 600 basis point increase from the prior year’s second quarter.

As we look ahead to the remainder of fiscal 2023 and beyond, I remain confident in Casey’s business model in the phase of uncertain times and believe we can thrive in challenging economic environments. We can adjust to guest needs quickly and the strength of our balance sheet will enable us to act quickly when growth opportunities arise. We’re halfway through our fiscal 2023 and we are in a great spot to close out both the fiscal year and our three year strategic plan. And as we close out the current strategic plan, we’re excited to host an Investor Day on June 27 in New York where we will be discussing our plans for the next few years. We look forward to sharing with our investors, our vision for fiscal ’24 and beyond, so please hold that date.

We’ll now take your questions.

Q&A Session

Operator: Thank you. Our first question comes from the line of Anthony Bonadio with Wells Fargo. Your line is now open.

Anthony Bonadio: Yes. Hi, good morning guys. Congrats on the beat. So I just wanted to ask about OpEx for starters. It looks like the revised guidance seems to imply little improvement and maybe even some level of cost acceleration in the back half, especially if I pull out that impairment charge in Q2. Can you just talk about your assumptions there and what might be driving that?

Steve Bramlage: Yes, hi, good morning Anthony. This is Steve. I think the – probably the biggest incremental headwind really the only incremental headwind of note that we would be looking at right now would be incremental investment compensation – I’m sorry, incentive compensation for the organization, just given the strong results year-to-date, that’s going to be partially offset, if retail prices of fuel continue to trend down, that would be a little less, credit card headwind and OpEx spends than we have been looking at this time last quarter. But generally, beyond those two things, I think most of our operating OpEx assumptions are largely unchanged.

Anthony Bonadio: Okay, that’s helpful. And then just on unit growth. Obviously you guys are running quite a bit below the run rate for that 80 store target for the year. Can you just talk about what gives you confidence in your ability to hit that target? And then how are you currently planning organic openings in the back half? And then what does that imply about your expectations around potential deal flow?

Darren Rebelez: Yes, Anthony, this is Darren. Yes, we are confident in getting to that 80 unit number for the year. We are also a little bit of a slow start for sure and a lot of that was just driven on some supply chain and permitting challenges earlier in the year. Most of those had been largely resolved, and we have stores under construction right now. So it’s – so that’s about half of the 40 units will be NTIs. And as we have a clear line of sight to getting to that number and probably a little bit above that. On the acquisition side, we’ve got a number of deals that are under agreement. So we just got to get them to close and we have confidence that we will close those and we have a couple of others that we’re in advanced stages of – we’re just not prepared to talk about right now, but given that we should comfortably get to the 80 store number that we have targeted for the year.

Operator: Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Your line is now open.

Bonnie Herzog: All right. Thank you. Good morning, everyone.

Darren Rebelez: Good morning, Bonnie.

Bonnie Herzog: I had a question on the consumer and just wanted to hear from you, what behavior changes you might be seeing either during your quarter then possibly in November? I guess I’m asking or thinking about it in the context of the lower prices at the pump. So curious if there’s been any change there. And also then inside your store, any changes with downtrading, pack sizes, et cetera?

Darren Rebelez: Yes, Bonnie. Just as a reminder, when we look at our guests, we buy from middle-to-upper income and lower income. So for our guest base, about 72% of our guests make over $50,000 a year. So we put them in the middle-or-upper income and then we have the lower income consumers, I draw that distinction because they’re really behaving differently. The middle-to-upper income consumers are really not changing much of their behavior, we still see them coming frequently and buying the products with they traditionally bought with some minimal exceptions for that. With a lower income consumer, we’re seeing a couple of different changes that you kind of alluded to, they are certainly shifting more to private label product and seeking out the value there.

We see them trading into more ethanol blended fuels, they tend to price the retail cheaper than non-ethanol blended fuels. We’re also starting to see some behavior where they’re taking different products and using those as meal replacements. So think of a protein shake or enhanced juices as a – as an alternative to a meal. So we’ll see some of that. The other thing we’re seeing with lower income consumers is this, which actually works out as a benefit to us, is they are ordering less deliveries for pizza. But what they are doing is stopping ordering pizza, they’re just simply picking it up at the store, because it’s cheaper than having it delivered. So we’re starting to see at that lower end where some guests are trading value for convenience.

But, overall, we’re seeing strong shopper engagement across the board, it’s just some different behaviors within each of the categories.

Bonnie Herzog: That’s helpful and then just quick follow-up on that, is that behavior accelerating in any way, Darren? Just again thinking, the last month or two has been pretty consistent some of these pressures that you called out.

Darren Rebelez: Yes. I’d say in some respects, it’s probably accelerating a little bit from first quarter to second. I would say on the fuel side is moderated a bit, given the fact that retail prices have come down for fuel. So – but by and large, it’s been fairly consistent.

Operator: Thank you. Our next question comes from the line of Ben Bienvenu with Stephens. Your line is now open.

Ben Bienvenu: Hi, thanks, good morning.

Steve Bramlage: Good morning.

Darren Rebelez: Good morning, Ben.