10-QPeriod: Q2 FY2009

CASEYS GENERAL STORES INC Quarterly Report for Q2 Ended Oct 31, 2008

Filed December 5, 2008For Securities:CASY

Summary

Casey's General Stores, Inc. (CASY) reported its third-quarter and first-half results for fiscal year 2009, ending October 31, 2008. The company experienced a notable increase in total revenue, driven primarily by a significant rise in gasoline sales due to higher prices, despite a modest increase in gallons sold. Non-fuel revenue segments, including grocery and prepared foods, also showed growth. However, the company faced margin pressures, particularly in prepared foods due to rising ingredient costs (like cheese) and a decrease in gross profit margins on gasoline sales, though the margin per gallon saw a slight increase. Operating expenses rose due to factors such as increased credit card fees associated with higher gasoline prices, higher diesel costs, and significant health insurance claims, as well as impairment charges related to flood-damaged stores. Financially, the company saw a decrease in net earnings for both the quarter and the six-month period compared to the prior year, largely due to increased operating expenses. Liquidity remains adequate, with cash flow from operations being the primary source, supported by a bank line of credit. Capital expenditures increased significantly year-over-year as the company invested in store construction, acquisition, and remodeling. Investors should note the ongoing legal proceedings, particularly concerning wage and hour claims, and the general economic uncertainty mentioned as a risk factor, which could impact consumer spending and operational costs.

Key Highlights

  • 1Total revenue increased by 16.8% year-over-year for the three months ended October 31, 2008, driven by a 20.7% increase in gasoline sales due to higher prices.
  • 2Gross profit margins on prepared foods and gasoline sales decreased, impacted by rising product costs (e.g., cheese) and price competition, although grocery and merchandise margins improved.
  • 3Operating expenses increased by 10.3% for the quarter, influenced by higher credit card fees (due to higher gasoline prices), increased diesel costs, health insurance claims, and flood-related impairment charges.
  • 4Net earnings for the three months ended October 31, 2008, decreased by 1.3% to $27.3 million, and for the six months by 2.3% to $56.1 million, primarily due to rising operating expenses.
  • 5Cash flows from operations decreased by 31.9% for the six-month period, mainly due to a significant reduction in accounts payable related to lower gasoline costs at period end.
  • 6Capital expenditures increased substantially by over 40% in the first six months of fiscal 2009 to $68.1 million, reflecting investments in store expansion and upgrades.
  • 7The company continues to face significant legal proceedings, including class-action lawsuits regarding overtime compensation for assistant managers and other store employees, with management believing it has strong defenses but acknowledging the inherent uncertainties of litigation.

Frequently Asked Questions

For the three months ended October 31, 2008, Casey's General Stores reported a total revenue increase of 16.8% to $1.39 billion, primarily driven by a 20.7% rise in gasoline sales due to a 19% increase in the average retail price per gallon, even though gallons sold saw only a modest 1.1% increase. Grocery and prepared food sales also contributed positively, increasing by 6% and 11% respectively.

Profitability is being affected by several factors. Gross profit margins in prepared foods decreased to 60.6% due to higher product costs, particularly cheese. Gasoline gross profit margins also declined to 4.2%, although the profit per gallon improved slightly. Operating expenses increased by 10.3%, driven by higher credit card fees associated with higher gas prices, increased diesel fuel costs, health insurance claims, and impairment charges for flood-damaged stores. These factors collectively led to a decrease in net earnings for both the quarter and the year-to-date period.

The company's liquidity appears adequate. Cash flow from operations is the primary source of liquidity, supported by a $50 million bank line of credit. The current ratio improved to 1.32:1 as of October 31, 2008, from 1.21:1 at the end of the previous fiscal year. However, net cash provided by operations decreased significantly in the first six months of fiscal 2009 compared to the prior year, largely due to changes in accounts payable related to gasoline costs.

Yes, Casey's General Stores is involved in several significant legal proceedings. These include class-action lawsuits alleging failure to pay overtime compensation to assistant managers and other store employees under federal and state laws. While management believes it has strong defenses, the company acknowledges the uncertainties of litigation and cannot currently estimate potential losses. Additionally, the company faces 'hot fuel' cases related to gasoline volume misrepresentation.