Casey's General Stores Inc. Continues to Defy Perceptions

Casey's General has become much more than just a gas station. Image source: Casey's.

When most people think of gas station convenience stores, the last thing they think is: "What a great investment!" But Casey's (CASY 1.64%), with over 1,800 locations throughout the Midwest, has been defying traditional labels for a while now, and that trend continued with its most recent earnings report on Tuesday after the market closed.

Earnings per share of $1.57 far surpassed analyst expectation of $1.40, and represented impressive 23% growth from the previous quarter. While Wall Street's response was tepid -- the stock shot up over 5% when the market opened yesterday, only to end the day down slightly -- there was lots for investors to like in the company's report.

Breaking it down into different segments
In order to understand Casey's business, it's important to grasp the three different divisions that exist within each store. Fuel brings in a lot revenue, but it is largely a carrot to entice customers to enter the stores and buy groceries or prepared goods.

That's why, if you click on the "gross profit" tab, you'll see that fuel contributes the least to the company's income, while groceries and prepared foods provide the lion's share of profit.

In order to better understand where the company is headed, management broke out specific goals for each division in terms of their comparable-store sales growth (comps) and average margin. As you can see below, with the exception of a close miss on prepared foods, it performed very well against its own benchmark.

Source: SEC filings.

CEO Robert Myers said that groceries comps far exceeded expectations because "cigarette sales performed well as we experienced volume increases throughout the quarter, especially in our premium brand."

It is the prepared food category, however, that has really gotten investors' attention. Casey's is now one of the top pizza companies in America. And it is able to profit more from the operation because it has locked in cheese prices of $1.89 per pound through December, as opposed to the $2.27 per pound it was paying just a year ago. While that may seem small, the extra cash goes right to the bottom line.

By the end of the year, all Casey's General stores will have online ordering available, which is expected to provide a significant lift to prepared food sales. And these sales are going beyond simple pizza delivery. As CFO Bill Walljasper said on its conference call, "We are seeing a significant uptick in the add-ons with respect to things like bread sticks, buffalo wings, and even extra toppings on the pizza."

This, along with the company's plans to remodel 100 new stores and open 40 to 50 new locations during the current fiscal year, will be the trend to watch in the coming quarters, and investors hope to benefit from the online ordering system, which is increasingly providing dinner for a large swath of America's Heartland.