When Casey's General Stores (CASY 0.33%) reported its second-quarter results last month, lower margins on fuel had caused the company's earnings to drop about 28% compared to the previous year, and the company missed its comparable-store sales goals in both its grocery and prepared food segments. On the conference call, however, management outlined a handful of opportunities that should give shareholders reason for optimism in calendar year 2017. Let's take a look at what they had to say.
Image source: Casey's General Stores.
1. Increased prices will help
Though Casey's missed comps sales targets in its prepared-food segment, its margins for that segment were 62.9%, exceeding the company's target of 62.5%. Those sales and margins look set to expand a bit, with Casey's increasing prices on several items across the segment as of Nov. 1, 2016. Going forward, the company states that those increases will represent a 1% to 1.5% benefit to its prepared-food sales as a whole.
While price increases can sometimes be a risky proposition, turning potential customers away, Casey's CFO Bill Walljasper explained:
... we have this very concern coming with the prepared food category, as consumers certainly are more aware of their spending. But we have found, through our competitive pricing surveys, that we certainly are below market on a few key products. ... And so we'll still be under the market and the items that we're talking about necessarily aren't ones that people might pull back from.
Walljasper stated that while a portion of the price increases will be pass-throughs from cost pressures Casey's is seeing, they will still result in a net gain for the company, and that should drive margins for prepared food higher as well.
2. It's full speed ahead on store expansion
Another piece of welcome news from the call is that Casey's plans to accelerate its pace of expansion.
The company currently has 84 sites contracted for new stores, with most of those to be completed in fiscal 2018, which ends in April 2018, as well as 15 more stores it is under contract to purchase. In addition, Casey's has 39 new stores already under construction, plus 59 more that are in the process of being remodeled or replaced.
The company's store count at the end of last quarter was 1,941. Adding in the above figures, Casey's store count by the end of fiscal 2018 should be somewhere around the 2,075 mark, providing a nice opportunity to boost future earnings. And keep in mind this doesn't factor in additional improvements that should come as Casey's continues to convert many of its stores to 24-hour and pizza delivery formats.
3. Pizza is the gift that keeps on giving
While pizza from a gas station might not be everyone's thing, it's been a big hit for Casey's.
Walljasper said that pizza delivery, in particular, has been so successful, that Casey's is going to accelerate its rollout across its store base. They have already introduced delivery to 70 stores through the second quarter, and plan to convert an additional 90 locations to the delivery format by the end of this fiscal year.
The company is also pushing online ordering for pizza through its popular mobile app, which generates higher rates of repeat business. Downloads for the app have now exceeded 616,000. Since the app debuted last January, online pizza sales have grown more than 10%, and average online order sizes have grown -- they're now 20% higher than average phone orders.
What's the ultimate opportunity for Casey's with pizza delivery? Walljasper remarked:
When we first talked about pizza delivery in the first several years of that program, we were talking about more metropolitan areas for us or higher-populated areas, as the target, which is about half our store base. And now we're rolling these out into smaller communities. So if we are successful here, I think we have an opportunity to take that even little bit higher.
When you consider that just 552 of Casey's 1,941 stores -- or around 28% -- are currently equipped for pizza delivery, there should be several years of additional upside as the company introduces delivery to more and more communities.
Between a tailwind for the prepared-foods segment, more aggressive store expansion, and pizza sales that look set to rise, Casey's investors have a lot to look forward to.
