Casey's General Stores, Inc. (CASY) Earnings Call Transcript & Summary

Okay. Good afternoon to those of you on the East Coast, and good morning for those of you in the Midwest, such as guys at Casey's, or West Coast. So my name is Anthony Lebiedzinski. I'm the equity research analyst at Sidoti & Company that has covered the Casey's General Stores for long time. Ticker symbol is CASY. So thank you for joining us at the Sidoti Conference. We are very pleased to have with us today, Brian Johnson, Senior Vice President, Investor Relations and Business Development; and Chad Bruntz, Senior Analyst, Investor Relations. So the format of the call will be a virtual fireside chat. I'll start with my own questions. And for those of you in the audience who would like to ask a question, please type your question into the Q&A box within the Zoom screen or you can also send me an e-mail with questions, and I will work those questions into the chat today. So first, for those of you in the audience who may not be very familiar with Casey's, Brian, maybe can you give us a quick high-level overview of the Company and how Casey's fits into the fragmented convenience store sector?

You bet, Anthony. Thanks for the question. And by the way, happy to be here and be visiting with you all. Yes, Anthony, you hit on it right away. The industry is highly fragmented, roughly 65% of the stores in our industry are operated by individuals that own 10 stores or less. So certainly a lot of small operators, and I'll probably get into kind of our M&A strategy a little bit later in the call. With respect to how Casey's is different just within the industry, whether it be versus our larger or small peers, a couple of things. One is, over half our stores are in towns of 5,000 people or less. So we have this rural business model in the Midwest that serves us well for a variety of reasons. First of all, from a customer standpoint, oftentimes, in those smaller communities we are not only the gas station, preferred gas station for the town, but oftentimes, we're the primary grocery retailer, and oftentimes we're the best restaurant in towns on the small town. So we really enjoy being able to offer them a variety of products. Also from a competitive standpoint, it's difficult for higher tier competitors to penetrate those smaller markets. So we really have a competitive edge with respect to our peers in that regard. It's kind of a competitive moat, if you will, to operate in those smaller towns. One of the things that's a big differentiator for Casey's is our prepared food operation. We are actually the fifth largest pizza chain in America. It's a huge part of our business, roughly 25% to 30% of our inside mix is prepared food and dispensed beverage, which is considerably higher than our peers. And then finally, one other big differentiating factors for Casey's is our self-distribution model. We are vertically integrated throughout the supply chain. All of our stores are supplied through one of our 3 distribution centers. We have one here at our corporate store support center here in Des Moines, Iowa. We opened 1 up in Terre Haute, Indiana about 5 years ago. And actually, just this May, opened up our third distribution center down in Joplin, Missouri. And really that's a key factor that with our prepared food enables us to really have our best-in-class inside margins where we've routinely stayed above 40%, which is really kind of unheard of in the industry. From a growth strategy, we tend to like to stay within 500 miles of those distribution centers as well.

Got it. Okay. Thanks for that overview. I definitely appreciate that. So clearly, the prepared food and dispensed beverage category, as you mentioned, is the highest margin for you. Can you just quickly remind for those of you that are not familiar with the Company, just give a quick refresher as to the margin profile of that category?

Yes. I mean, so that specific category, it's roughly 1/3 of the gross possibly entire business, including fuel, and like I mentioned, about 28% of our inside sales. From a gross profit dollar margin standpoint, that category has historically been north of 60% margins for the prepared food and dispensed beverage. So it certainly has a high-margin category for us. It's important to understand how we've got to where we are with that category. It truly is our -- pizza is our flagship item within prepared foods. And it truly is a high-quality made-from-scratch product. It literally -- our employees start with flour and water in the morning and make the dough from scratch. And it is not a glorified frozen pizza concept, it truly is chop vegetables, 100% whole milk, Mozzarella cheese. And it's just very well regarded with our guests. It also is our biggest synergy we bring to acquisitions. So as we talk -- think about how we grow the business, both by way of organic growth and M&A, the vast majority of acquisition targets we have just do not have a prepared food program in place. In fact, if you look at one of our largest acquisitions we did just -- we just closed on in May, Bucky's, is the name of the store. These are high-quality stores. From a volume standpoint, they were double our fuel gallons. They were about 1.5 times our inside business. But they only had about a 7% penetration for prepared foods versus our 28%. So a tremendous opportunity with these smaller operators, even midsized operators to incorporate our prepared food alongside their traditional convenience store offerings.

Got it. Okay. Thanks for that. And I assume that 7% penetration that Bucky's had, that's probably better than a lot of other smaller competitors, right? So clearly, that's a big differentiator for you guys.

Absolutely. Yes, they actually did a pretty good job on the dispense. They did a better-than-average job on dispensed beverage, particularly Fountain and Frozen, and what I think we typically see. So you're exactly right, Anthony.

Right. Okay. Thanks. So can you talk about also some -- just sticking to the category. So can you talk about some of the recent menu changes you have made to the breakfast category? How big is the breakfast portion in relation to the rest of the day? And also, can you just talk about how COVID impacted the category and opportunities to grow from here?

Yes. That's -- happy to. Yes. So first of all, the breakfast daypart is roughly 25% to 30% of the prepared food and dispensed expense beverage top line. So it's a meaningful part of the day. And it is also the part of the day that was the most adversely impacted by the COVID restrictions, whether it be food restrictions, travel restrictions, that morning daypart really suffered when people started working from home. And so when we looked at -- one thing that we've been doing regardless of breakfast is we've created -- we brought on a lot more capabilities from a culinary innovation standpoint. We really have a better culinary process to test new products. And we thought that given that, hopefully, people start returning to work -- I will say that Delta variant put a little bit of a wrinkle to this plan, but we thought that the breakfast daypart was really the perfect place to start with a significant launch of new products through our culinary innovation processes. And what that really meant was, first of all, our prepared foods -- our pizza has always had a high-quality standard. I'll say our secondary offerings, our breakfast sandwiches, our regular sandwiches, some of our snacks in the prepared foods, just weren't at the same quality levels, our pizza has always been. And so that's where our focus was on this latest launch. So we added a breakfast burrito that has been very popular. Actually, that's been probably the favorite menu offering of the new products. It won't surpass breakfast pizza, but it certainly has proven to be very popular. We've also added a new -- what we were calling a -- it's our signature handheld. And really, what we're trying to do is capitalize off of our made-from-scratch dough is trying to move that dough into other menu items. For example, this particular handheld is basically egg, sausage, and we kind of wrap the dough around it, I'd almost call it like a breakfast hot pocket or a breakfast calzone type of thing, but it's been very well received. We did a similar thing actually outside of the breakfast daypart a few months ago where we revitalized our cheesy breadsticks to actually use our made-from-scratch dough versus using a basically heat-serve frozen product, and that was also well received. So that's part of the reasons why we're also trying to do some innovation around bringing in that made-from-scratch element to other items.

Got it. Okay. That all sounds good. So also inside your stores, you did some store resets a little while ago. What have you gained from these resets? And maybe if you could also talk about private label as an initiative for the Company?

Yes. No, you're right. We did some major resets starting in December of 2020, where we really look to kind of center the store. After that, we actually did some resets in the cold vault as well. I mean, really a couple of things from that. First of all, we really did a deep dive and rationalized the assortment within the store. We basically found that we were over-penetrated with size on certain categories just weren't turning at all. So automotive products. pet food, we were just over-indexed on shelf space to those. So we dramatically paired those back and added space for popular items such as meat snacks, and the trail mix, and seeds and nuts and those type of snack items that are popular right now. And then we also just did a little bit better job with our adjacencies of products. So making certain we have the salty snacks by the soft drinks and cooler, there's just greater affinity of buying those together that we were lacking before we did the reset. Another big aspect of this reset that you mentioned was allocating space towards our private label program, which has been very, very well received by our guests as well. As we sit here today with our private label program, we're at roughly 200 SKUs inside the store. We're sitting at about 4% penetration of our grocery and general merchandise category. And aspirationally, we think we can take that program to 10% of that category over the next several years. We haven't given a specific time frame on how long that will occur, but we do think that's a very attainable goal. And quite honestly, we're off to a great start. One of the things of having such a strong prepared food program is I think our guests really have a lot of confidence in driving the private label products, because of our brand strength from the quality of prepared food. So that was certainly helpful. One thing I will add on a -- on the private label program, we have 3 requirements for a product to go inside the store. The number one requirement is the retail price must be lower than the national brands it's competing against; the pendent profit must be higher than the national brand is competing against; and the quality has to be at or better than the national brands is competing against. So we're adhering towards those 3 requirements, and I think that's why you see the program off to such a great start.

All right. That's great to hear. It sounds like a well thought out plan. So moving to the different categories inside your stores. So obviously, the grocery and general merchandise category has a lot of different products embedded in it. But can you just talk about that segment's performance during COVID? And how should investors think about the grocery, general merchandise category going forward? I know you're also working on improving your centralized procurement capabilities. So if you could just kind of tie that in, that would be great.

Sure. You bet. So certainly, COVID impacted this category in a variety of ways. Obviously, we saw number of transactions come down as we saw volume adversely impacted by COVID. But we saw pack size or the basket size increase. And so if you think about beer and alcohol was a category that did tremendously well, we saw the higher pack sizes of beer in the basket, and it was offsetting kind of a lot of those single-serve package beverage items that were adversely impacted by COVID. We also saw cigarettes remain strong throughout COVID as well. Now that being said, as we've come out of COVID, we're still very pleased with the performance of the box, especially in light of these resets. I think our merchandising team deserves a lot of credit. From a packaged beverage standpoint, we're currently still kind of that mid-single-digit growth. On a two-year stack, same store basis were 17.6%. So I think that's tremendous performance in light of the strong performance during COVID. Beer and alcohol, it's gone more flat as of late, but on a two-year stack basis, it's sitting at 20%. So we're certainly showing an ability to kind of retain a lot of that positive volume we got during COVID. With respect to centralized procurement, that's really been helpful on a variety of fronts. First of all, it's really enabling us to more effectively enter into contracts with suppliers that are on terms, I guess, equivalent with a company of our size of scale. And so we feel like we're leveraging our size much more effectively with the centralized procurement team to get more favorable terms. I think there's also quite a bit more strategic sourcing initiative that's going on within that centralized procurement team we just didn't have the capabilities previously to undertake that. An example would be getting multi suppliers for a product to make certain we have redundancies in case there's a supply -- a hiccup in the supply chain, making certain we still have those products available and we're never out of stock. So certainly, we're kind of new in our centralized procurement journey, but excited about what that capability has to offer for our margins going forward.

Got it. Okay. Thanks for that. And then moving on to fuel. So obviously, the fuel pricing philosophy has changed quite a bit over the last few years. I certainly remember when you guys used to have the store managers go to see what the other guy is doing in terms of pricing. Obviously, things have changed quite a bit. So can you just talk about that in relation to your improved fuel margins? And kind of like what -- I know it's difficult to say for sure what the fuel margins will be, but over time -- I remember, back in 10, 15 years ago, the CPG used to be in the kind of mid- teen cent range, and that's gradually moved up over time. So can you give us -- just first, talk about like what you've done on the pricing side of the business and procurement? And then, how that ties into margins and your view going forward?

Yes, certainly. I've been with the Company for 18 years, and I can remember when if we got to $0.12 in a quarter or year, we were living pretty high in the hawk. So it certainly come a long way. And yes, so there's really been 2 significant changes in how we manage our fuel business over the last couple of years. You mentioned price optimization, you're exactly right, Anthony. Probably 3 years or so ago, we let the stores set their retail pricing. And really, they were giving -- given instruction to match the lowest competitor. And what we found is, they were just really slow to react, especially when prices were moving up, we just didn't move up fast enough. And your guests, when they come and patron your store, they're really good at telling you when you're too high and so you're quickly to move down, but they rarely talk to you when you're maybe under the market a little bit on price. So certainly, by moving that to a centralized pricing team. Now, we have a dedicated group of team members here at the store support center that -- they're scrapping the Internet daily for real-time competitor information. They have a strong understanding of where wholesale cost movement is going. And so we're just much more quick to move prices in an optimal fashion for gross profit dollars. As they get more data behind them, we're taking that data and trying to figure out which stores -- there're still price store -- there still are stores out there that need to match penny for penny with the lowest competitor in the market, but we also have plenty of stores that either because of our brand strength or because of a strong real estate position, they do not necessarily need to be matched penny for penny with the competition, can take a few more cents on fuel and not have an adverse impact of volume. And it's that kind of test and learn that, that team is still rolling out to this day. The other big element -- so that's been a huge, huge evolution that's really paying dividends here in the last couple of years. The other significant capability we've added is on the procurement side. We used to really only have, I think, a year or 2 ago, we were less than 4% of our gallons were under some sort of contract. We're now up to 75% of our gallons on some sort of contract of oil with an oil company or a terminal. And basically, that has given us a better price relative to where we were at before. Before we were trying to -- we said we were a low rack buyer, which was accurate, but the problem with a low rack process when you're exclusively low rack is oftentimes that low rack price does not have product behind it. So you're not guaranteeing product at that lower rack price. So with the contract in place, we're guaranteed product, we guaranteed a pre-competitive price by not having 100% of our gallons under contract though. For those occasions where that low rack price has product available. we're able to pull those gallons and still get an even more favorable cost and still satisfy the requirement of the 75% of our gallons that are under the volume commitment. So it's kind of the best of both worlds, and it's really been helpful as well on reducing the cost of product. And you can see it in our margin impact. It's been a favorable impact to fuel margin both those capabilities. As far as going forward, we can ask that a lot. COVID is also elevated fuel margins for the entire industry. Clearly, more rational pricing is how the industry is absorbing a lot of the pressures that are in the industry right now, both by way of lower volume and some of the labor challenges the industry is facing. And it's hard to say where we're land. I can tell you, we're not making long-term business plans around these really high north of $0.30 fuel margins. But as we get more and more quarters under our belt, we're getting a little more bullish on how long these high field margins will last. We certainly do not think we'll go back to pre-COVID levels for sure. If anything, the capabilities we've added will -- should keep us from going all the way back to there. But we don't think the industry is going to go back either. I think as long as you have labor challenges, as long as you have income tax uncertainty, as long as you have volume disruption from work from home, I think all those things are going to cause fuel margins to remain elevated. If you think about who we're competing against -- I made that comment earlier, that 65% of the operators are smaller operators, they don't have a foodservice program to lean on. They don't have digital customer engagement to rely on. They really only have that fuel pricing to meaningfully impact some of those pressures.

Got it. Yes. Thanks for that. And then as far as fuel volumes, so obviously, those got hurt by COVID, for sure. Now coming out of COVID, would love to hear your thoughts as to how we should think about the growth in volumes? And also just taking into account the fact that you do have cars being more fuel efficient, there are more electric vehicles out there on the road as well, I think in the Midwest, it's less prevalent than on the coasts, but maybe if you could just kind of talk about that as well?

You bet. Certainly. Yes. And from an electric fuel standpoint, a couple of things. I mean, you're right. The Midwest is a little more insulated for now. Certainly, we expect a continued rise in electric vehicles, but it's 0.2% of vehicles on the road in the Midwest are electric. So it's still 99.8% of the vehicles out there are gas powered. And so I think it will just take a little bit longer for that to roll out. But I think those long-term pressures really highlight the importance to continue to put all your focus inside the store. And so we talked about private label. We talked about prepared food and why it's important to have culinary innovation around there and keep that category relevant with your guests. I mean, I think if you look at our transactions inside the store, over 70% of our transactions inside the store are not attached to fuel. And so our business model is certainly a lot more resilient to any pressure on fuel, whether it be from those longer-term pressures you mentioned or even shorter-term challenges as well. And so we kind of view some of those more fuel-efficient vehicles, electric vehicles, I kind of view that as almost a healthy pressure for Casey's. I think if you didn't have a rewards program and if you didn't have prepared foods, it might be a little scarier world out there for those operators, and they might look to exit the business. It's a great time to sell your business right now. People are coming off with relatively high cash flow years with the elevated fuel margin and with all the uncertainty looking ahead, I think I'd be looking to exit the business if I was a smaller operator with those headwinds.

Sure. Okay. So just to clarify, it's only about 25% of your transactions in the store are tied with a fuel purchase?

More like 30%, closer to 30%.

Okay. Got it. And then you can measure that better, right, with the loyalty program that you have in the app? Okay.

Yes, that's exactly right. We have better visibility on our guests than we ever have before, both with our dedicated customer insights group and our loyalty program. And so that's been incredibly helpful. So with -- but certainly, we'll continue to see electric vehicles become a bigger part of the story. We've been getting asked a lot about electric vehicles at this conference and then just my regular interaction with shareholders. I think it's important to understand we have chargers in a handful of stores, kind of 15 to 20 stores right now. Our view on how we are putting charging in our stores is we're kind of taking a very cautious approach. We think there's going to be significant technological advancements in charging. And so right now, if you put a supercharger on your store, you're still looking at a 30-minute charge time to get the battery at least at 80% charge, that's a long time from a convenience standpoint. And so we want to make certain when we're ready to make our bets with charging infrastructure that we're using the technology that's kind of best-in-class, because we do think that charging time will come down over the next several years. So far, where we've been able to test it, we've been doing it in ways where we've been partnering with other companies. So Tesla, for example, or Electrify America. We've also partnered up with some local electric cooperatives who -- those partners are willing to pay the money to put the infrastructure in place. So we haven't had to pay a dime from a capital expense standpoint as we just started to learn a little bit about how those operations work.

Got it. Okay. Thanks for that. So I mean, if you're waiting 30 minutes to charge your Tesla, I mean, you can -- might as well get a whole pizza and [ some other stuff ]. All right. So -- and then -- so obviously, when you did the rollout of the loyalty program and the mobile app, I mean, there's quite a bit of capital you spent on that. Are there any other IT spending initiatives that you're looking to do just to increase operating efficiencies, just kind of thinking about that? And then I know -- try to tie that in there, I mean, obviously, the industry and everybody seems like they're dealing with worker shortages. So is there a way to try to automate any tasks that you may have to just deal with some of the issues that are out there?

That's a great question. A couple of things. Yes. First of all, with respect to the loyalty program, it's still -- we launched that 1.5 years ago and just recently exceeded 4 million members, and we're still putting a lot of energy behind evolving that loyalty program, that app. Probably the most important aspect or the things that we're most excited about as far as putting energy behind and developing is a more customized promotion effort towards those reward members. For example, if we're trying to get you to come into the store an extra time, maybe we're trying to add an occurrences or maybe we're trying to attach something, if you come in the store 3 times a week, and we know that Anthony always buys breakfast pizza, it doesn't do us any good to send you a donut coupon, whereas if we're going to try to get you in fourth time, we're going to maybe give you a deep discount and that slice of breakfast pizza if you come in on a Friday. So that's really the type of technological advancements we're looking at right now is a customized promotion opportunity with our guests. As far as on the efficiency side, we have made some investments on being more efficient on a scheduling standpoint. And it already is starting to pay dividends. We mentioned on the call that we've added about 2 million hours back to the labor pool as we've gone back to our store hours being to kind of pre-COVID levels. If you recall, during COVID, we had -- we turned off all our 24-hour stores. We scaled back how late in the night they were open. Even if they were 24 hours, the traveler restriction, we're -- we have since added all those hours back to the store. However, on a 2-year stack basis, we're still down 2%. So we -- on a same store, 2-year stack basis for labor hours. So we did not add back in all the hours that we took out as part of COVID. So that's the type of opportunity we see with respect to just being a little sharper on our scheduling of labor hours. As far as automation, nothing significant. We don't have any pizza robots in the back of store or anything like that yet. We still want that handmade pizza, but we're always looking for opportunities to become more efficient with our operations.

Right. Well, for automation, I was thinking more maybe in the warehouse, maybe if there are some opportunities, but that's fine. And obviously, you're dealing with worker shortages, higher wages, I assume there's no easy offset to that?

No, there's not. I mean, look, we're going to continue to be competitive with our pay. And so we need to staff our stores. We've got all these great things going on with respect to how we're driving the prepared food business. And so we certainly want to make certain we staff our stores accordingly. That being said, we did see improvement in application rates throughout the summer. Certainly, we think, as the unemployment benefits that ended early September, we think all those things will certainly begin to soften some of the pressure we've been seeing in labor, and certainly, we -- where we will choose to offset that. Obviously, we'll be competitive and make certain we're in tune with what our competition is paying as well. I think where we can potentially offset that if you think about our business, that prepared food category, we have a lot more pricing power in that category than what our peers do. So it is much easier to take a pizza slice up a dime than it is to increase cigarette prices, for example. So we'll continue to monitor that wage rate inflation and offset it accordingly with pricing if we need to.

Got it. Okay. So we're almost out of time here. But just quickly, as far as your marketing strategy, are you doing anything different as far as traditional marketing versus digital? Just -- are there any alternative marketing channels that you're looking to do as far as to get the word out about Casey's?

Well, certainly, the digital marketing is getting a lot of attention right now. I mentioned kind of that customization that we're trying to do. We've done a -- where we've done a few examples that have been like with some energy drinks. We know if you're a Red Bull customer where we -- doesn't do us any good sending you a Monster coupon, for example. So we've done some energy drink specific marketing to try to drive behavior and like what we're seeing there. We did have a big marketing push with our breakfast menu innovation, a lot of TV ads, a lot of radio ads, where we have the scale of stores that where it makes sense and obviously pushing that out to our reward members as well.

Got it. Okay. All right. Well, I do have some other questions, but we're already out of time. So again, thank you very much. I mean, are there any like quick final closing remarks that you want to share with investors about Casey's before we let you go?

Sure. I think at the end of the day, we're really happy with the hand we're holding right now. I think with respect to our prepared food program, prepared food, that was grab-and-go items, those were the items that were most adversely impacted by COVID. And so certainly, as we come out of COVID -- obviously, this Delta variant has made a little bit more challenging. But as we come out of Delta variant, we really think we're poised to see strong inside sales momentum, particularly within our prepared food program. So obviously, putting a lot of energy behind digital customer engagement. And then I'll also add that the private label program really is going to be impactful, especially to margins. I think 2 things. One is, I mentioned earlier, it's a better penny profit, but it really truly is a better value proposition for our guests. And I think that's why it's going to continue to grow like we hope to get -- we get closer to that 10% penetration.

Got it. Okay. Well, thank you very much. Definitely appreciate, Brian and Chad, joining us here. And thank you everyone who participated in the Casey's call here. Have a nice day, and you may now disconnect. Thank you again. Take care.

Thank you.

Thanks.