Q3 earnings were impacted by compressed margins due to a competitive cigarette environment, rising commodity costs and increased operating expenses related to store openings.
Year to date, basic earnings per share were $1.64 versus $1.87 for the same period last year. The results include approximately $27.4 million in expenses pertaining to the Casey’s recapitalization plan completed in the second quarter, as well as the unsolicited hostile offer and related actions by Alimentation Couche-Tard Inc., of which $1.7 million was recorded in the third quarter. Without those expenses, basic earnings per share would have been $0.37 for the quarter and $2.06 year to date.
Earnings in the quarter were impacted by compressed margins due to a competitive cigarette environment, rising commodity costs and increased operating expenses related to store openings. “Although rebranding a large number of stores in such a short period of time put a temporary strain on our operations, we are encouraged with our ability to drive same store customer traffic nearly 5%, resulting in double digit sales increases across all lines of our business,” stated president and CEO Robert Myers. “We believe we are gaining market share and the company is positioned well for future revenue and earnings growth.”
Gasoline – The company’s annual goal is to increase same-store gasoline gallons sold 1% with an average margin of 13.5 cents per gallon. For the third quarter, same-store gallons sold were up 3.5% with an average margin of 13.9 cents per gallon. “This category has exceeded our expectations in both gallon growth and margin throughout the first nine months of the fiscal year,” said Myers. Same-store gallons sold for the year increased 2.8% with an average margin of 15.1 cents, while gross profit rose 16.5%. For the year, total gallons sold were up 9.3% to 1.1 billion.
Grocery & Other Merchandise – Casey’s annual goal is to increase same-store sales 6% with an average margin of 33.9%. For the nine months ended Jan. 31, 2011, same-store sales were up 4.6% with an average margin of 32.3%. For the quarter, same-store sales rose 5.8% with an average margin of 30.9%. The company experienced double-digit sales growth across all major areas of this category in the third quarter, producing a 13.8% total increase in grocery and other merchandise revenue. The margin was affected by a competitive cigarette-pricing environment, promotional activity in some beverage items and a larger LIFO charge primarily due to higher cigarette costs. The LIFO charge in the third quarter was approximately $1.1 million higher than the prior year’s third quarter. “Even though the cigarette environment continues to be challenging, we experienced same store unit movement increases during the third quarter despite a national average decline,” said Myers. “Cigarettes are an important destination item in the convenience store industry. Being competitive and maintaining market share is imperative for long-term sales growth for other products.” Despite these items along with commodity pressures, gross profit in the third quarter was up 7.7%. Total sales for the year are up 10.6% to $902.2 million.
Prepared Food & Fountain – The goal for fiscal 2011 is to increase same-store sales 8% with an average margin of 63.1%. For the quarter, same-store sales were up 10.5% with an average margin of 62.1%, down from the same period a year ago primarily due to a rise in commodity prices. “Sales rose 16.5% during the quarter, which drove an increase in gross profit over 15%,” said Myers. “We are pleased with the gains we have been able to achieve in prepared foods despite escalating commodity pressures, and we remain optimistic about the continued performance of this category.” For the nine months, same store sales were up 6.5% with an average margin of 62.9%. Year to date, total sales were up 12.2% to $309.8 million compared to $276 million.
Operating Expenses – At the nine-month mark, operating expenses increased 16.8% to $457.2 million. Excluding $16 million of expenses related to the unsolicited hostile offer by Couche-Tard, expenses would have increased 12.7%. For the quarter, operating expenses were up 18.5%, driven by an increase in credit card fees, fuel expense and insurance. These three combined were up approximately $6.3 million. “We anticipated that the record number of stores acquired in the third quarter would impact operating expenses,” said Myers. “However, we still expect these stores to be highly accretive to earnings in their first full year of operation, and provide even further earnings enhancements long-term when we implement our food service program.”
Expansion – The annual goal is to increase the total number of stores 4-6%. Year to date, the company acquired 74 stores and completed 14 new-store constructions. “We are pleased with the recent acquisition environment and we have written agreements for an additional 20 locations that we expect to complete in the next six months,” said Myers. The company also replaced nine locations during the first nine months of the year and completed 39 major remodels.
Dividend – At its March meeting, the Board of Directors declared a quarterly dividend of $0.135 per share. The dividend is payable May 16, 2011 to shareholders of record on May 2, 2011.