Casey's General Stores (CASY), which operates convenience stores in 16 Midwestern states (primarily Iowa, Missouri, and Illinois), finished FY19 on a strong note with an impressive Q4 (Apr) report last night.
CASY has now posted four consecutive double-digit EPS beats. This consistency is especially impressive and rare for a company that does not provide guidance. It's more typical for a non-guiding company to be all over the board, with misses and beats all mixed together as sell side analysts take stabs in the dark as to how to model each quarter. That erraticism had featured some in CASY's reporting in the past, as it reported a couple of EPS misses before this recent run of impressive beats.
A wrinkle with CASY that makes it difficult to forecast is that a very high percentage of its revenue comes from gasoline sales (63% of FY19 sales), which are constantly changing, and gasoline margins vary quite a bit quarter-to-quarter. Also, gasoline is its largest revenue contributor, but it's also the lowest margin relative to other categories such as grocery, prepared food, and fountain drinks.
For FY19, gasoline margin was 8.0%, up slightly from 7.9% in FY18 but well below other categories: grocery/other merchandise was 32.1%, and prepared food/fountain margin was 62.2%. The idea here is that gasoline, while providing revenue at low margins, brings in customers, who will hopefully purchase higher margin in-store items alongside their gas purchases.
Despite the nice upside to EPS, CASY actually struggled in the Fuel segment as same-store gallons sold in AprQ fell -2.8%. For the year, same-store gallons sold were down -1.7% with an average margin of 20.3 cents per gallon. CEO Terry Handley said the company "experienced a challenging wholesale cost environment throughout the quarter. However, our balanced approach to retail fuel pricing resulted in a considerable increase in gross profit." So, while CASY spent more to buy gas and sold fewer gallons, it was able to keep selling prices at a good level.
Its next biggest category, Grocery and Other Merchandise at 25% of FY19 revenue, did quite well, with same store comps up +5.7% in AprQ and +3.6% for FY19 overall. "Refinements in product offerings and promotional strategies in higher margin items contributed to increased same-store sales growth and margin expansion," according to Handley.
It may not seem like a big deal, but CASY has gotten much better at tweaking its in-store offerings to make it more attractive to customers. Gasoline brings in the customers, but the in-store offering is where the money is made. More profit dollars (revenue less COGS) are made from Grocery/Other than from Gasoline even though it's just a fraction of the revenue. The in-store offering, then, is really important.
With CASY having more of a rural/farm setting, we had also had the thought that tariffs and China trade issues generally may be hurting CASY as agricultural sales/pricing have been weak in 2019. Flooding in the Midwest has also been a problem, and farm bankruptcies are starting to rise. However, it does not seem to be having too much impact on CASY. In fact, CASY sort of reminds us of another general retailer, Tractor Supply (TSCO), which also is situated primarily in rural areas. TSCO keeps putting up big numbers consistently. It seems the concerns about rural areas may be misplaced.