Coming into this week’s fourth-quarter earnings report, management at Casey’s General Stores (NASDAQ: CASY) had lowered expectations throughout the year. Forecasts for the company’s two most important segments — groceries and prepared foods — started high last September, but were repeatedly adjusted to reflect leaner times.
Unfortunately, the company still couldn’t hop over the lowered bars. Management blamed bad weather, rising wholesale prices, and macroeconomic conditions. Even the company’s popular pizza business — which has been a key part of many investment theses — saw its comparable sales decline.
Casey’s General Stores earnings: The raw numbers
Before we delve into the “how” and “why” of the shortfall, let’s take a look at the headline figures.
|Metric||Q4 2018||Q4 2017||Year-Over-Year Change|
|Revenue||$2.09 billion||$1.85 billion||13%|
|Free cash flow||($65 million)||$35 million||N/A|
It’s important to note, however, that these results need to be viewed through a lens specific to Casey’s. Because gas sales provide over 60% of the company’s revenue — but the price of gas is largely out of management’s control and it provides the lowest margins — revenue growth isn’t a great indicator. And while free cash flow went negative during the quarter, much of that could be attributed to the company completing a huge building blitz of new locations.
Instead, it’s important to break down how the company performed in its three comparable-store (comps) categories in the fourth quarter: fuel, groceries, and prepared foods.
- Fuel comps in gallons sold grew 2.0% with an average margin of $0.163 per gallon, compared to $0.172 a year ago.
- Grocery comps shrank 0.4%, with a margin of 31.2%.
- Prepared foods comps fell 1.3%, with an average margin of 59.7%.
Across the board, these weren’t great results. Management said that the decision to discontinue 24-hour service at several locations — something that was recently lauded as a growth initiative — contributed to shrinking comps in groceries and prepared foods. However, management claimed the move resulted in a significant reduction in operating expenses relative to the amount of sales the company was making in the extended hours.
Below, I’ve included the original fiscal goals from the beginning of the year, the most recently revised goals, and the actual results from the entire year.
|Division||Original FY 2018 Goals||Most Recent Revised FY 2018 Goals||Actual FY 2018 Results||Met Comps Expectations? (Original/Revised)|
Comps of 1%-2%
Margin of $0.18-$0.20
Comps of 2.2%-2.7%
Margin of $0.185-$0.195
Comps of 2.3%
Margin of $0.185
Comps of 2%-4%
Margin of 31%-32%
Comps of 2%-3%
Margin of 31.5%-32.5%
Comps of 1.9%
Margin of 31.8%
Comps of 5%-7%
Margin of 61.5%-62.5%
Comps of 2%-3%
Margin of 61%-61.5%
Comps of 1.7%
Margin of 61.0%
While the shortfall in groceries was narrow, management was clearly expecting a lot more from prepared foods. Oddly, on the conference call, executives said that they were encouraged by results so far in fiscal 2019 thanks — in part — to promotional activity. (Fiscal 2019 started May 1.) Usually, this means cutting prices on items like pizza or wings in response to competitive pressures. While it draws in more customers, it also means reduced profitability.
Perhaps not surprisingly, management also said that prepared food comps so far in fiscal 2019 are coming in at the lower end of guidance (included below).
Management also reviewed the long-term value creation plan put in place last quarter, without making any major changes to speak of. You can read more about the plan here.
The company essentially met all of its build-out goals for the fiscal year, with 111 stores being built and opened or acquired, 30 stores being replaced, and 74 stores being remodeled.
One of the reasons I included the beginning, revised, and actual results from 2018 in my table above is because I believe forecasts for the current year need to be viewed through a lens: Management has done a great job of forecasting fuel results, a decent job forecasting grocery sales, and a very poor job of forecasting prepared foods sales.
Here’s what the company believes it will accomplish in the current year.
|Division||Comps Goal||Margin Goal|
|Fuel||1.5% to 3.0%||$0.185 to $0.205|
|Groceries||1.5% to 3.0%||31.5% to 32.5%|
|Prepared foods||1.5% to 3.0%||60.0% to 62.0%|
Additionally, the company expects to construct 60 new stores, and acquire at least 20 locations. Major store remodels, on the other hand, are expected to be much lower, as most company locations have undergone a remodel within the past 10 years. As such, capital expenditures are expected to be lower, and that should help raise free cash flow moving forward.
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