Wednesday, August 09, 2006

Casey's General Stores: "A Convenience Store and a Whole Lot More?"

Casey's General Stores, Inc. (CASY-$22.17) is a little-known convenience store chain that operates 1,413 stores in nine Midwestern states, primarily within Iowa, Illinois, and Missouri. The Company traditionally has located its stores in small towns (as not served by national-chain convenience stores). The stores carry a broad selection of food including freshly prepared foods such as pizza, donuts, and sandwiches; beverages; tobacco products; health and beauty aids; automotive products and other non-food items. The stores also offer gasoline for sale on a self-service basis.

The chain—from a page lifted out of Sam Walton’s playbook—markets itself toward smaller communities, for management believes that a Casey’s General Store provides a service not otherwise available in small towns and that a convenience store in an area with limited population (as few as 500) can be profitable if it stresses sales volume and competitive prices. The Company’s store site selection criteria emphasize the population of the immediate area and daily highway traffic volume.

In the year ended April 30, 2006, Casey earned a record $60.5 million, or $1.19 per share, compared with $36.8 million, or 73 cents per share, for the prior year.
Sales rose 25.4 percent to $3.5 billion from $2.8 billion.

Gasoline sales are an important part of the Company’s revenue and earnings. Over the past three fiscal years, gasoline revenue accounted for approximately 67% of total revenues [71% in FY '06] and the gasoline gross profit accounted for approximately 24% of total gross profit.

Tobacco Products have averaged approximately 10% of total revenue over the past three fiscal years, and the tobacco gross profit accounted for approximately 12.8% of total gross profit for the same period.

Grocery & Other Merchandise — sales continued to be strong. Net sales for the year were up 9.4% to $779.3 million. Same-store sales [for stores open more than twelve months] were up 5.7%, well above the internal goal of 3 percent, with an average margin of 31.9% for the year (up 100 basis points from the prior year). The annual goal was to increase same-store sales 3% with an average margin of 31.5 percent. The Company outperformed the sales and margin goal for the year by capitalizing on increased store traffic brought in by the introduction of the lottery and enhancing its point-of-sale technology (POS).

Commissions on lottery sales were nearly $4 million in fiscal 2006.

Prepared Food & Fountain —The annual goal was to increase same-store sales 5.5% with an average margin of 60.5%. The Company increased same-store sales 7.4% for the year and achieved an average margin of 63 percent. Net sales for the year increased 12.3% to $229 million. Corporate credited the introduction of profitable new products and leveraging POS data to align menu items with customer demand (and to manage inventory) for the excellent results.

Liquidity and Capital Resources

Casey’s balance sheet continues to be very strong. At April 30, cash and cash equivalents were $75.4 million and shareholders’ equity rose to $523.2 million, up over $54 million. Long-term debt net of current maturities was down $16.6 million to $106.5 million. At the end of the year, long-term debt to total capital ratio was 24 percent.

[Ed. note. In our view, the balance sheet is stronger than that construed by ratio analysis. The Company owns its Corporate Headquarters and Distribution Center operations on a 45-acre site in Ankeny, Iowa. Additionally, Casey’s owns the land at 1,317 locations—$211.9 million is listed at cost on the balance sheet—and the buildings at 1,329 locations]

In the year ended April 30, 2006, net cash provided by operations increased $18,078 (13.9%) to $147.8 million primarily because of an increase in net earnings and a large increase in accounts payable ($45.5 million). This result was partially offset by an increase in inventories ($23.3 million).

The Company generated free cash flow of approximately $47.8 million. On the year-end conference call, CapEx was broken down as follows: “2006 was about $100 million………As far as new stores, it was about $15 million. Replacements —replacements of stores are about $12 million. Maintenance and remodeling, about another $10 million or so…. Transportation, about $5 million. Information system, about $10 million. The warehouse addition that we talked about earlier is about $10 million. And then the remainder, which I think is about $40 million, is for acquisition activity.”

Going forward into fiscal 2007, management expects CapEx (depending on acquisition activity) to be somewhere in the neighborhood of $115 million –to- $120 million.

Reasons to Invest

Also on the call, management talked about a balanced focus on operational improvements (e.g. POS) and revenue growth, citing the following Fiscal 2007 goals:

  • Increase same-store gasoline gallons sold 2% with an average margin of 10.8 cents per gallon;
  • Increase same-store grocery & other merchandise sales 3.9% with an average margin of 32.2 percent;
  • Increase same-store prepared food & fountain sales 7.9% with an average margin of 63.4 percent;
  • Hold the percentage increase in operating expenses to less than the percentage increase in gross profit; and,
  • Acquire 50 stores and build 10 new stores.

Looking forward, predictable growth remains the critical investor concern. Aside from acquisition-driven growth, corporate ability to fully integrate best practices throughout its store portfolio—if properly executed—should lead to strong growth and higher margin opportunities in the coming years:

  • Rollout of higher margin products, such as bottled water, sports drinks and energy drinks;
  • Product expansion of its fountain program to include offerings such as Pepsi, Mountain Dew and Dr. Pepper;
  • The Company began marketing made-from-scratch pizza in 1984, expanding its availability to 1,310 Corporate Stores (94%) as of April 30, 2006. Management believes pizza is the Company’s most popular prepared food product. The Company continues to expand its prepared food product line, which now includes ham and cheese sandwiches, pork and chicken fritters, sausage sandwiches, chicken tenders, popcorn chicken, sub sandwiches, pizza bites, breakfast croissants and biscuits, donuts, breakfast pizza, hash browns, quarter-pound hamburgers and cheeseburgers, hot dogs, and potato cheese bites.

We applaud management’s initiatives, for although retail sales of non-gasoline items during the last three fiscal years have generated approximately 33% of the Company’s retail sales, such sales resulted in approximately 76% of the Company’s gross profits from retail sales.

Gross profit margins for prepared food items, which have averaged approximately 61% during the last three fiscal years, are significantly higher than the gross profit margin for retail sales of gasoline, which has averaged approximately 6% during the same period.

The Company’s portfolio-enrichment strategy to increase same-store sales, coupled with cost-containment initiatives (such as POS technology and the addition of 98,000 square feet to the Distribution Center), should serve as a platform for predictable organic growth.

Valuation Analysis

On a forward 12-month P/E basis, the Common Stock is reasonably priced at 14 times April 2008 consensus estimates of $1.58 per share. We look for multiple expansion once management demonstrates its ability to execute on its growth strategy.

The intrinsic value of Casey’s Common Stock is $47.00 per share. [growth rate of 14.5%--excludes growth potential of a large merger—more than 50 stores—within a 500-mile radius of its Ankeny, Iowa Distribution Center, operating margin of 3.4%, equity risk premium of 3%]

Albeit the stock will tread water until management can deliver consistent operational and financial performance.

Investment Risks

The convenience store industry is highly competitive. Food, including prepared foods, and nonfood items similar or identical to those sold by the Company are generally available from various competitors in the communities served by Casey’s General Stores. Convenience store chains competing in the larger towns served by Casey’s General Stores include 7-Eleven, Quik Trip, Kwik Trip, and regional chains.

Approximately 62% of all Casey’s General Stores are located in areas with populations of fewer than 5,000 persons, while approximately 12% of all stores are located in communities with populations exceeding 20,000 persons—effectively limiting the competition.

Casey's advantage can be attributed to the fact, too, that it has a good track record of buying up smaller chains in its core territories and either strengthening its presence or closing stores “across the street” from existing locations (Casey closed 10 of the Gas ‘N Shop stores purchased in the past eighteen months because they were in direct competition with existing Casey’s stores in the same market areas.)

The volatility of wholesale petroleum costs could adversely affect operating results. In the past three fiscal years, gasoline revenue accounted for approximately 67% of total revenues and the gasoline gross profit accounted for approximately 24% of total gross profit. As we all know, crude oil and domestic wholesale petroleum markets are marked by significant volatility in price The Company attempts to pass along wholesale gasoline cost changes to its customers through retail price changes; however, this is not always possible, for the timing of any related increase or decrease in retail prices is affected by competitive conditions.

If management is unable to identify, acquire, and integrate new stores, this could adversely affect the Company’s ability to grow its business. From May 1, 2005 through April 30, 2006 the Company acquired 67 convenience stores. Every acquisition growth strategy involves integration risks, including post-deal financial underperformance, loss of key managers, and a failure of due diligence (discovering new liabilities of companies or businesses acquired).

Corporate Governance

Oliver Cromwell, Lord Protector of England from1653 until his death in 1658 (a less-than-handsome man) purportedly instructed Sir Peter Lely, paint “all these roughnesses, pimples, warts, and everything as you see me, otherwise I will never pay a farthing for it (portrait).”

Warts and all—the 10Q Detective felt it prudent to sketch for our readers a pimply disclosure found in Casey’s recently filed Proxy Statement with the SEC.

Ronald M. Lamb, who had been CEO since 1996, when he replaced founding chairman Donald Lamberti, recently stepped down. Apropos, he will retain his annual base salary of $700,00—all for being the Chairman of the Executive Committee.

Messer. Lamb gets to keep his present office. His duties, as outlined in an amendment to his Restated Employment Agreement (an 8-K filed with the SEC on July 12, 2006), state that “ Lamb shall act as liaison between the Chief Executive Officer of the Company and the Board of Directors to assure that all matters for consideration are communicated to members on a timely basis. At times when neither the Board of Directors nor the Executive Committee are in session, Lamb shall be available to receive the report of the Chief Executive Officer on their behalf.” Including bonus, Lamb will make $1.0 million per annum.

“And like the Old Soldier of that ballad, I now close my military career and just fade away, an old soldier who tried to do his duty as God gave him the light to see that duty. Good-by.”
And so said a retiring General Macarthur.

Unfortunately, in the United States, old CEOs do not fade away—they become titular Chief Executives—just like Ronald Lamb.

But the self-enrichment (at the expense of shareholders) does not stop there. In addition to his pension, upon his retirement from the Company, Mr. Lamb will be entitled [he owns approximately $18 million in Company stock] to receive benefits from the Supplemental Executive Retirement Plan (SERP) to receive an annual retirement benefit equal to one-half of his then-current salary (i.e. $350,000).

Additionally, should Mr. Lamb, age 70, die—before retiring—the Company is obligated to pay his surviving spouse Mr. Lamb’s $700,000 salary for two years (after which his wife would receive monthly benefits equal to one-half of his retirement benefits for a period of 20 years or until her death whichever occurs first). [Ed. note. Is this a shareholder-funded insurance plan?]

“A convenience store and a whole lot more!”—Definitely for insiders…maybe for investors?


George said...

Using my Fat Pitch Finder spreadsheet, I'm only getting an intrinsic value of $25.50 for Casey's. I'm not seeing how you are coming up with an intrinsic value of $47. I guess we are just using different methods. I'm focusing on free cash flows, and the capital expenditures for CASY are pretty high so that might be why I'm getting a low intrinsic value.

Anonymous said...

Wish I was his wife

Anonymous said...

good thing there is minimum wage workers