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Casey's General Stores Inc Continues to Fall Short of Stated Goals

By Brian Stoffel - Updated Mar 7, 2017 at 9:30AM

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Groceries, prepared foods, and store count growth will all likely fall below management's goals.

For a number of years, Casey's General Stores (CASY 1.32%) investors were rewarded by the small-town convenience chain's decision to become a major vendor of pizza and other prepared foods. But with that success has come increased competition. Combined with somewhat stagnant economies in the areas that Casey's operates -- namely, towns of less than 5,000 people in middle America -- the company has had trouble meeting its own expectations. That trend continued on Monday night when Casey's announced earnings for the third quarter of its fiscal year.

Three pizzas warming under a heater.

Image source: Getty Images.

Casey's General: The raw numbers

It's not worth paying too much attention to revenue, as the company has little control over the price of gas -- its main line of sales. The main profit levers are the company's focus on groceries and prepared foods. I'll break down those numbers later, but here are how the company's headline numbers panned out:

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$1.77 billion

$1.57 billion

13%

EPS

$0.58

$0.97

(40%)

Data source: Casey's General Stores, SEC filings.

The real drag was the fact that operating expenses rose by 12.6% while gross profit jumped only 4.9%. That mismatch meant a significant contraction of margins. Gross profit margins were almost cut in half, from 2.43% last year to 1.29% for the quarter ending Jan. 31, 2017.

CEO Terry Handley said this was "primarily driven by an increase in wages due to operating more stores this year compared to the same period one year ago, the continued rollout of the various growth programs, and wage rate increases."

Coming up short in two key divisions

Casey's is much more than just a gas station. It not only sells essential groceries and cigarettes, but has transformed itself into one of the biggest pizza makers in the country. Here's how each of the company's three segments performed during the quarter against the stated annual goals laid out nine months ago.

Segment

Comps Goal

Q3 Comps Actual

Margin Goal

Q3 Margin Actual

Fuel

2%

2.6%

$0.184

$0.179

Grocery

6.2%

3%

32%

31.1%

Prepared Food

10.2%

5.8%

62.5%

61.7%

Data source: Casey's General Stores.

This is where investors are likely to be truly disappointed. While fuel sales have consistently come in at or above management's expectations, grocery and prepared foods have not. And these are the two high-margin categories that shareholders count on to provide the lion's share of profit growth.

Handley pointed out in the company's press release that if you factor out the role of cigarettes, same-store sales accelerated from the previous quarter. He also highlighted the fact that same-store sales in prepared foods (mainly pizza) accelerated, too.

While that's heartening, it glosses over the fact that these figures are still coming in at roughly half of what management said to expect in the current year. Handley admitted that "pressures in our operating area persisted throughout the quarter."

But while that reasoning may have bought management some time and sympathy in previous quarters, it may be a more difficult task this time around. That's because other pizza vendors like Domino's (NYSE: DPZ) had blowout quarters, showing same-store sales growth of 12.2%. While these two don't necessarily serve the same customers, there is overlap.

Store growth hits a speed bump

It also appears as if Casey's will come up woefully short in terms of its expansion plans for the fiscal year -- which is already nine months old. Consider the following goals set forth by management, and where things stand now.

Data source: Casey's General Stores.

To be fair, the number of stores the company hoped to build or acquire ranged from 77 to 116 for the fiscal year, and I just put the mid-point of that. Even so, there's going to have to be a lot of building happening for Casey's to reach its goal.

Management pointed out that there were 33 new stores under construction, 21 replacement stores under construction, and 56 stores currently being remodeled. If all of those projects are completed by the end of the current quarter, Casey's would meet its remodel and replacement goals, but still fall considerably short of its new-store goal.

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