ANKENY, Iowa -- Casey's General Stores is beginning to see its recently adjusted cigarette-pricing structure pay off but still reports struggles with the category.
"Sales in the grocery and general merchandise category continued to be adversely impacted by the cigarette environment, resulting in same-store sales for the third quarter to be up just slightly." said Bill Walljasper, CFO of the Ankeny, Iowa-based chain of convenience stores. "However, we have seen steady improvement throughout the quarter after initiating recent price adjustments."
Excluding cigarettes, same-store sales in the quarter would have been up approximately 5.3%, while total earnings for the third quarter, which ended Jan. 31, were 40 cents per share, 3 cents below the same period a year ago.
"The earnings shortfall in the [third] quarter from a year ago is a result of a challenging cigarette environment" among other issues, Walljasper said during the company's third-quarter fiscal 2013 earnings conference call Tuesday.
Among the issues Casey's is facing with cigarette sales is an increase in the state tax in Illinois in late June, Walljasper said, "but prior and subsequent to that, we had seen a little bit more competitive pricing on packs in a number or areas of our business, but primarily in Illinois and Missouri."
As a result, Casey's initiated cigarette price adjustments in an effort to be more competitive.
"We felt we needed to maintain that competitive edge, so we did lower retail [prices] in areas where we saw that type of behavior," he said. "To put that into perspective, in about 50% of our store base, we now have what we call the MLP structure with Altria so we are in line with our competition."
MLP, or the Marlboro Leadership Price option, is a much-debated pricing program initiated by Altria's Philip Morris USA in 2011. The program, in essence, asks operators to forgo part of their typical price markup in exchange for incentives.
"What we have seen recently is a gradual improvement in carton movement and sales movement throughout the quarter," Walljasper said. "The most recent sales release for February same stores, if you exclude the extra day that was in last February, we would have experienced about a 3.5% same-store sales increase in cigarettes and a unit increase of about the same."
Ideally, Walljasper said, Casey's likes to match its competition's prices "on key products within the cigarette category. So you've got to evaluate what those key products are market by market and make sure that you are priced competitively."
The goal, ultimately, is to avoid scaring off customers with higher prices. "We certainly don't want to give them any reason not to come into our stores," Walljasper said. "And as more players get into the competitive landscape of selling cigarettes, it gets even more apparent that we need to be competitive in that area."
Casey's began making the price changes in mid-2012, and it saw the greatest payoff in the recent quarter.
"We've been making those price adjustments throughout the year, but a big chunk of those happened in late October and November. So we really didn't see the effect until the third quarter, and we're really starting to see some nice improvements. We're encouraged by that."
Casey's General Stores Inc., Ankeny, Iowa, owns and operates approximately 1,750 convenience stores in 14 Greater Midwestern states--Iowa, Illinois, Missouri, Kansas, Nebraska, Minnesota, Indiana, South Dakota, Wisconsin, Arkansas, Kentucky, Oklahoma, North Dakota and Tennessee.