Casey's Remodel Quandary

Chain reviews early results, plans for store growth on new states, markets

Published in CSP Daily News

By
Steve Holtz, Online News Director & Beverage Editor

ANKENY, Iowa -- As Casey's General Stores Inc.'s purposeful break from major store remodels enters its sixth month, the convenience store chain has discovered some discrepancies in the results at the 131 stores already remodeled--discrepancies it wants to iron out before moving forward with the program.

"In roughly the top half of those remodels, we're seeing returns on a double-digit … basis," said CFO Bill Walljasper yesterday during the company's conference call with analysts for its fiscal second-quarter 2012 ended October 31, 2011. "For the bottom half, it's significantly below that. So we're going to evaluate that group of stores to pick out the criteria of what's separating the bottom half and the top half, and then develop a plan to go forward with that as we head into the fourth quarter."

In June, Casey's announced that it would take a break in the remodel program to evaluate the results. To date, only about a dozen of the sites have been open 12 months or more, allowing for year-over-year comparisons, and so the next few months will be critical for Casey's to develop an ongoing strategy.

"Our plan at this point is to, over the next several months, evaluate the performance of those stores we have completed and try to be as effective as possible" with the redesign program going forward, Walljasper said.

Casey's launched the remodel project in August 2010, with the remodeled stores getting larger coffee and fountain offerings, made-to-order sub sandwich programs and expanded cooler capacity.

"We put a stop on the major remodel program at the end of the fiscal year," Walljasper said. "We completed 131, and now we're evaluating the performance. We want to get at least a full year of operation [results]."

Meanwhile, Walljasper stressed that Casey's continues to plan for growth in new states and markets, specifically Arkansas, western Kentucky and western Tennessee.

"Those are opportunities for us," he said. "We have land secured in Kentucky; we have land under contract in Tennessee; we have additional sites under contract in Arkansas. … As we start to penetrate those states, hopefully we'll gain a little traction on acquisitions in those states as well."

The chain opened its first store in Arkansas in April. Walljasper said Casey's stores could begin springing up in Kentucky and Tennessee as soon as the first quarter on the company's fiscal 2013, which begins in May 2012.

For the quarter, Casey's reported 99 cents in basic earnings per share compared to 51 cents for the same period a year ago. Year to date, basic earnings per share were $2.02 versus $1.27 for the same period last year.

"We are pleased with the second-quarter results, despite the continued challenges impacting our industry," said president and CEO Robert J. Myers. "We experienced a favorable gas margin and strong inside sales, resulting in a 15.6% increase in total gross profit."

Gasoline: The company's annual goal is to increase same-store gasoline gallons sold 1% with an average margin of 13.5 cents per gallon. For the second quarter, same-store gallons sold were down 2.9%, adversely impacted by a 30.9% increase in retail gas prices from the same period a year ago. The favorable gasoline margin environment continued in the second quarter resulting in an average margin of 16.7 cents per gallon.

"The average gasoline margin for the trailing four years is 14.2 cents per gallon," said Myers. For the year, total gallons sold were up 6.1% to 755.9 million with an average margin of 16.9 cents, while gross profit rose 14.6%. Same-store gallons for the year were down 2.8%.

Grocery & Other Merchandise: Casey's annual goal is to increase same-store sales 5.8% with an average margin of 32.8%. For the quarter, same-store sales rose 5.8% with an average margin of 32.5%. For the fourth consecutive quarter, the company experienced double-digit sales increases across all major areas of this category. As a result, total sales were up 15.8%.

"Competitive cigarette pricing continued to impact the margin in the second quarter compared to the second quarter a year ago," said Myers. "However, our cigarette margin began to stabilize in the second quarter as we start to cycle against the more competitive landscape that began about a year ago."

Despite the margin pressure from cigarettes, gross profit dollars increased 14.3% for the quarter. For the six months ended October 31, 2011, same-store sales were up 6% with an average margin of 32.5%. Total sales for the year are up 15.5% to $723 million.

Prepared Food & Fountain: The goal for fiscal 2012 is to increase same-store sales 7.7% with an average margin of 61.8%. Same-store sales were up 14.2% for the quarter and 14.8% year to date. The average margin for the quarter was 59.5%, down from the same period a year ago, primarily due to a rise in commodity prices.

"It is essential to have high-quality prepared food offerings at competitive prices to meet the needs of our value oriented customer base," said Myers. "This focus on our customers enabled us to increase sales by 20.2% and gross profit by 14.1% for the quarter, despite a decline in the margin."

Year to date, total sales were up 20.6% to $252.7 million compared to the first six months last year, with an average margin of 60.4%.

(See related story in this issue of CSP Daily News for more details on Casey's foodservice plans.)

Operating Expenses: Year to date, operating expenses increased 12.3% to $343.2 million. For the quarter, operating expenses were up 12.1%. After adjusting for the expenses associated with the unsolicited offer by Alimentation Couche-Tard Inc. in the prior year, expenses increased 18.4% in the quarter and 17.8% at the six month mark.

"The increase was driven primarily by operating 128 more stores this quarter and a $5.2 million increase in credit-card fees compared to the same period a year ago," said Myers.

Expansion: The annual goal is to increase the total number of stores 4% to 6%. At the mid-year point, the company had acquired 33 stores and completed eight new-store constructions.

"We are on pace to build approximately 30 stores by the end of the fiscal year," said Myers. "The acquisition environment continues to be active, and we remain optimistic about our long-term opportunities."

Ankeny, Iowa-based Casey's General Stores has 1,677 stores in 11 Midwestern and Great Plains states: Arkansas, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, Oklahoma, South Dakota and Wisconsin.

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By Steve Holtz, Online News Director & Beverage Editor
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