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With New Expectations, Casey's General Stores Shows Consistency

By Brian Stoffel – Dec 11, 2018 at 5:45PM

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The one segment that underperformed is almost completely out of the company's control.

Coming out of the Great Recession, Casey's General Stores (CASY 1.40%) was a rocket stock -- septupling in value by 2016. Not only was the small Midwestern convenience store chain buoyed by an improving economy, but the popularity of its pizza also offered a huge boost to earnings.

Since a change in the executive suite, however, the stock -- and the company -- have floundered. The main culprit has been a mismatch between management's forecasts and the reality that growth was coming nowhere near those expectations.

This fiscal year, however, CEO Terry Handley decided to forecast much more modest growth. With that as a backdrop, the company has generally been producing favorable results. This week's fiscal second-quarter earnings release shows that trend continuing. 

A car filling up with gasoline at a gas station, showing a close-up of the pump in the gas tank from a side view.

Image source: Getty Images.

Casey's earnings: The raw numbers

Before we dive into the details of the company's earnings, let's look at the headline numbers.

Metric Fiscal Q2 2019 Fiscal Q2 2018 Growth
Revenue $2.54 billion $2.15 billion 18%
EPS $1.80 $1.28 41%

Data source: Casey's General Stores.

Whenever earnings are able to grow that much faster than revenue, it's music to investors' ears. There were two levers primarily responsible for the big jump in earnings. First, federal and state taxes fell by 16% -- something that, while out of the company's direct control, allowed a lot more cash to flow to the bottom line.

Second (and more important), operating expenses jumped just 6.6%. This is evidence that the company's decision to keep fewer 24-hour stores -- while focusing on its value creation plan -- is bearing fruit. Management added to that plan with a few key updates, including:

  • Hiring key executives for fuel procurement and digital initiatives.
  • Focusing on price optimization both inside (food and drink) and outside (fuel) the stores.
  • Launching the long-awaited Fleet Card program.

In his prepared remarks, Handley said, "The ongoing efforts around operating-expense control, combined with a continued focus on strategic pricing, new store openings, and the favorable impact of tax reform, produced strong diluted earnings-per-share growth."

Digging deeper

Casey's operates three segments: fuel, groceries, and prepared food. Here's how the most recent quarter stacked up versus management's forecast for both comparable-store sales (comps) and each division's margins.

Metric Fiscal 2019 Goal Goal Met? Q2 2019 Results (Decline)
Fuel comps 1.5% to 3% No (1.1%)
Fuel margin $0.185 to $0.205 Yes $0.20
Grocery comps 1.5% to 3% Yes 2.7%
Grocery margin 31.5% to 32.5% Yes 32.4%
Food comps 1.5% to 3.5% Yes 2.2%
Food margin 60% to 62% Exceeded 62.4%

Data source: Casey's General Stores IR

The fact that Casey's hit all but one target is important. And it's an even bigger deal that the lone target it missed is almost completely out of the company's control; fuel is almost entirely dictated by macroeconomic factors. Handley admitted that softer consumer demand was the main reason for the lower sales of gas.

When you think about it, that means fewer people were filling up with gas than expected, and the company still met its goals in groceries and food. So the company's strength isn't solely because people visit stores while getting gas. They actually go there for the food, too.

In the grocery segment, packaged beverages and cigarettes were the growth sources. In prepared foods, Casey's focus on breakfast offerings helped push sales into their stated range.

Looking ahead

For the rest of the fiscal year -- which we are halfway through -- the news looks mostly positive. The goals you see above remain exactly the same, with the exception of fuel. And even there, it's a mixed bag: Comps estimates were revised down to a midpoint of a 0.25% decline, but the average margin was revised up by a half-penny to $0.20 per gallon. 

The company still expects to construct 60 new stores during the year, and acquire at least 20. Investors should keep a close eye on how well the company meets its goals, and the impressive leverage currently being wrung out of the value creation plan.

Brian Stoffel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Casey's General Stores. The Motley Fool has a disclosure policy.

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