Casey’s Earnings Hit by Lower Fuel Margins

Lower fuel margin impacted diluted earnings by approximately $0.52 per share

c1Convenience-store and gas-station operator Casey’s General Stores Inc. (NASDAQ: CASY) announced its Q2 FY17 on December 07th, 2016.

The Ankeny, Iowa-based Company operates convenience stores in 14 Midwestern states, mainly Iowa, Missouri, and Illinois. It offers a selection of short eats; beverage and tobacco products; health and beauty aids; automotive products; and other non-food items. Its stores also offer gasoline or diesel for sale on a self-service basis.

In addition, Casey’s operates a store selling mainly tobacco products. Casey’s operates its own distribution centers, delivering about 90% of in-store products as well as about 75% of the fuel sold at its stores. Casey’s operates under three segments: Fuel, Grocery and Other Merchandise, and Prepared Food and Fountain. Read more about Casey’s financial results below.

Q2 FY17 financial highlights

During Q2 FY17, Casey’s revenue remained flat at $1.92 billion compared to the year-ago period, but lower than consensus estimates of $1.94 billion. Supermarket chains in general witnessed low demand for their products owing to competition from online merchants such as Amazon.com Inc. (NASDAQ: AMZN) and big box retailers such as Wal-Mart Stores Inc. (NYSE: WMT), The Kroger Co. (NYSE: KR), and Whole Foods Market Inc. (NASDAQ: WFM), which offer a greater variety of products and services. Despite store expansions and an increase in product categories, convenience and food service stores witnessed headwinds in the form of food deflation and soft consumer sentiment.

c2For Q2 FY17, Casey’s gross profit dollars excluding fuel were up 7.5% and total fuel gallons sold grew 7.1%. Despite higher volume of fuel sold, fuel margin was 18.6 cents per gallon versus 24.7 cents per gallon in the year ago comparable period, which impacted diluted earnings by approximately $0.52 per share.

During Q2 FY17, Casey’s operating expenses increased to $295.3 million from $267.9 million in the year ago same period, mainly due to costs involved in operating more stores compared to the Q2 FY16, as well as the continued rollout of the various growth programs. Hurt by higher expenses and lower margins, Casey’s Q2 FY17 profit slumped to $57.18 million, or $1.44 per diluted share, from $79.03 million, or $2.00 per diluted share, a year earlier. Year-to-date, diluted EPS was at $3.14 versus $3.57 a year ago.

On the brighter side, the Company is well-positioned for future growth as the number of sites under contract for new-store construction grew to 84, which is nearly double from a year ago.

Segmental highlights

Fuel: For Q2 FY17, same-store fuel gallons sold were up 3.7% with an average margin of 18.6 cents per gallon. The Company’s goal for FY17 is to increase same-store gallons sold 2.0% with an average margin of 18.4 cents per gallon. Same-store gallons sold for the reporting quarter were well ahead of the annual goal as retail fuel prices remained low and the fuel saver programs continued to drive incremental gallon sales. Fuel margin per gallon for Q2 FY17was lower than the year-ago comparable period due to decreased volatility in wholesale fuel costs. The Company sold 17.8 million renewable fuel credits for $15.9 million during Q2 FY17.

For H1 FY17, total gallons sold jumped 7% to 1.1 billion gallons, while gross profit dollars fell 3.3% to $203.5 million primarily due to a lower margin. Year-to-date, same-store sales were up 3.3% with an average margin of 19.1 cents per gallon.

Grocery and Other Merchandise: Casey’s goal for FY17 is to increase same-store sales 6.2% with an average margin of 32%. For Q2 FY17, same-store sales grew 3.1% with an average margin of 32%. A slowing of in-store traffic and tightening of consumer spending caused by the ongoing pressures in our operating area adversely impacted same-store sales throughout the quarter. However, the Company continues to be an industry leader in same-store sales growth of many key products within the category, including cigarettes. Year-to-date, same-store sales were up 3.8% with an average margin of 31.8%. Total sales for H1 FY17 were up 6.5% to $1.1 billion while total gross profit dollars grew 5.8% to $353.7 million.

Prepared Food and Fountain: Casey’s goal for FY17 is to increase same-store sales 10.2% with an average margin of 62.5%. Same-store sales for Q2 FY17 were up 5.1% with an average margin of 62.9%. As with other food service operators, Casey’s continued to experience a softening of in-store traffic that resulted in same-store sales below its annual goal. Total sales for the second quarter were up 8.3%, while same-store sales remained consistent with Q1 FY17. Year-to-date, total prepared food and fountain sales were up 8.7% to $492 million, and total gross profit dollars were up 8.5%.

Other highlights

Store expansion: Casey’s annual goal for FY17 is to build or acquire 77 to 116 stores, replace 35 existing locations, and complete 100 major remodels. During H1 FY17, the Company built and opened 11 new stores, acquired 6 stores, completed 12 replacements, and remodeled 24 stores. In addition, the Company currently has 39 new stores, 22 replacement stores, and 37 major remodel stores under construction. Finally, the Company has 84 sites under contract for future new store construction and 15 acquisition stores under contract to purchase.

Dividend: Casey’s Board of Directors declared a quarterly dividend of $0.24 per share. The dividend is payable on February 15th, 2017 to shareholders of record on February 01st, 2017.

Cash position: As of October 31st, 2016, Casey’s had cash and cash equivalents of $177.9 million versus $75.7 million as of April 30th, 2016.

Inventory: As of October 31st, 2016, Casey’s had inventories of $208 million versus $205 million as of April 30th, 2016.

Guidance for FY17

For FY17, Casey’s expects same-store fuel gallons sold to increase by 2%, with an average margin of 18.4 cents per gallon. Same-store grocery and other merchandise sales are projected to grow 6.2% with an average margin of 32%. Same-store prepared food and fountain sales are forecasted to grow 10.2% with an average margin of 62.5%.

Stock Performance

c3Casey’s stock ended the day at $122.67, gaining 0.55%, at the close on Friday, December 09th, 2016, having vacillated between an intraday high of $122.84 and a low of $118.32 during the session. The stock’s trading volume was at 673,233 for the day. The Company’s market cap was at $4.78 billion as of Friday’s close.

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