CASY - My Mid-quarter Review
Who is Casey’s?
This company was founded in 1959, which makes it probably our oldest, and it’s headquartered in Iowa. Casey’s operates convenience stores under the Casey’s General Store name in 14 midwestern states, primarily Iowa, Missouri, and Illinois. The company’s stores offer a selection of food, including freshly prepared foods, such as pizza, donuts, and sandwiches; as well as beverages, tobacco, health and beauty aids, automotive products, and other nonfood items. Its stores also sell gasoline self-service. They operate somewhat over 2000 stores.
Casey’s fiscal quarters end at the end of Jan, Apr, July and October, so they haven’t yet reported this quarter.
What is your history with them?
I found out about them from TMF FlyGal. I’ve been a stockholder for roughly 6 months now. They are my sixth largest position, at about 6.4%. The vast majority of my purchases were at $104 to $108. These purchases had an average price of $106. The current price is $114, so they are one of my few stocks that hasn’t been dragged down by this bear market.
What they do, and why in the world would you invest in a chain of convenience stores?
Casey’s secret sauce is that they set up their stores in LITTLE towns of less than 5,000 population usually, although they have expanded into some of the small cities around. It’s not economical for the big chains to invest in little towns, or they just don’t want to bother, and that reduces Casey’s competition Their stores are a fixture in the region, and people, when traveling to another town, feel like they’ve come “home” when they see a Casey’s.
But what do they do to make money???
Selling fuel makes up two thirds of their revenue, but fuel sells at only about a 7% gross margin. But once people come to the store to buy gas they buy other things, with MUCH higher margins… and that’s where Casey makes its money. What that means is that you have to evaluate them on earnings growth, not revenue growth.
What we are interested in is Merchandise and Grocery, at about a 32% margin, but especially their Prepared Food and Fountain segment with an incredible 60% margin! And that includes their pizza, which is their specialty. In a way they are a pizza chain and café/restaurant chain, that also sells gas as a convenience for their customers.
They think of themselves as a chain of quick service restaurants (especially pizza, but lots of other stuff too), rather than convenience stores, or gas stations, but in reality they are all three.
What are they doing to increase profit?
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They are opening new stores and expanding into new states. They just built a second distribution center that will help with their expansion. We just learned they are already starting on a third distribution center. They are also expanding and enlarging stores.
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They have initiated extending hours to 24-hours, and are gradually initiating it in more and more stores, according to its success in increasing profits.
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They are initiating pizza delivery, and are also and are gradually initiating it in more and more stores, according to its success in increasing profits.
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Finally, they are growing same store sales.
So how successful have they been?
Remember that they haven’t reported this quarter yet (the January quarter). Well, for the last four quarters, their revenues have been $7.29 billion, down 10.6% from $8.15 billion. Sounds terrible, doesn’t it? But remember that most of their REVENUE is from gas, and gas prices have been down. However, cheaper gas allows them actually higher margins, and cheaper gas gives their customers more disposable income to spend on higher margin products. So…
Earnings in the same twelve months have been $5.63, up 64% (!) from $3.43 the year before. Their current PE is 20.2. Their rate of growth of 12 month trailing earnings is 64%.
Here’s what they said about the last quarter:
Fuel - The Company’s annual goal for fiscal 2016 is to increase same-store gallons sold 2% with an average margin of 16.7 cents per gallon. For the second quarter, same-store gallons sold were up 3.3% with an average margin of 24.7 cents per gallon.
Grocery and Other Merchandise - Casey’s annual goal for fiscal 2016 is to increase same-store sales 6.2% with an average margin of 32.1%. For the second quarter, same-store sales were up 7.5% with an average margin of 31.5%.
Prepared Food and Fountain - The goal for fiscal 2016 is to increase same-store sales 10.4% with an average margin of 60.8%. Same-store sales for the quarter were up 9.4% with an average margin of 63.4%. … Year to date, total sales were up 14.4% to $452.8 million and gross profit dollars were up 20.9% to $285.2 million. Year to date, same-store sales were up 9.8%.
Many of our strategic initiatives are focused on driving sales to this category. Major remodels, 24-hour conversions, and pizza delivery continue to deliver impressive sales gains, and lower ingredient costs enabled us to expand our margin.
Expansion - Our annual goal is to build or acquire 75 to 113 stores, replace 10 existing locations and perform major remodels on 100 existing locations. "We are pleased with the pace of our new store construction progress. Major remodels have shown to be an excellent initiative that will drive better performance out of our existing store base.
Dividend - Casey’s pays a quarterly dividend of 22 cents.
How has their stock been doing?
I bought three months ago at an average price of $106. It’s been as high as $128. The current price is $114.
To summarize
Casey’s has just over 2000 stores. They are in only 14 states and most of those have only been touched. There are over 30,000 towns with less than 10,000 population in the US. They have plenty of room for growth. Their new distribution centers are helping them grow into new parts of the country. This is an easy company to understand.
Saul
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