Casey's General Stores Inc. (CASY 0.39%) operates in approximately 2000 gas-station convenience stores in 15 Midwestern states. The stores appear mostly in rural areas, with approximately 82% of the stores in locations with less than 20,000 people.
Casey's strategy is simple: Folks stop by to fill up the car and then go inside to shop. Casey's offers its customers grocery-store items: coffee, donuts, tobacco products, candy, and some of the best pizza you can get in a small Midwestern town.
Image source: Casey's General Stores.
A look at Casey's business
Casey's business is easy to understand. It's like the proverbial lemonade stand, except it sells a lot more than lemonade.
The company just finished fiscal year 2017 at the end of April. Below is a look at Casey's major categories of sales for the past year:
| Sales category | Fiscal Year 2017 |
|---|---|
| Fuel | $4414 million |
| Grocery and other merchandise | $2087 million |
| Prepared food and fountain | $953 million |
| Other | $52 million |
| Total revenue | $7506 million |
Data source: Casey's General Stores.
Management states that Casey's is suffering the same fate as brick-and-mortar retailers in general: lower consumer sales. Gasoline sales by the number of gallons sold were up by 2.1% over the previous year and exceeded the company's goal of a 2% annual increase. Yet in-store sales for both the grocery and prepared food categories grew by less than half the company's target.
Store expansion and home delivery
Casey's is growing its business by opening more stores and expanding its geographic reach. It added a new distribution center in Indiana and recently opened its first stores in the state of Ohio. For the fiscal year 2017, the company built and opened 48 new stores, acquired 22 stores, completed 21 replacements, and remodeled 103 stores.
The other way the company is growing sales is by adding pizza home delivery to many of its locations. Today about 25% of its locations offer the delivery service.
The elephants in the room
There is a lot to like about Casey's. It has been around since 1959, serving rural America. Now it faces the immediate challenge of the internet disrupting a portion of its in-store sales, and the long-term prospect of a country that may switch its fuel requirements from gasoline to electricity.
Rural shoppers can now purchase products via the internet, or watch streaming video entertainment at home, just as easily as city folks can. This produces a stay-at-home mentality that at the margins negatively impacts Casey's sales. The initial results are not good; the company missed its 2017 sales targets.
Casey's expanded its store count and hired employees based on the belief it would hit its fiscal 2017 sales forecast. When it missed that forecast for both groceries and prepared foods, its profits fell, as its expanded cost of operations ate into the gross-margin dollars it brought in from the products it sold. The company earned less money in fiscal year 2017 than in the prior two years:
| Metric | Fiscal Year 2017 | Fiscal Year 2016 | Fiscal Year 2015 |
|---|---|---|---|
| Earnings | $177.5 million | $226.0 million | $180.6 million |
Data source: Casey's General Stores.
What happens if vehicles become electric?
Once people begin to migrate to electric vehicles, the entire equation for Casey's may change. Even if Casey's replaced gas pumps with electric superchargers, the everyday energy needs of most automobile owners would be filled by charging their car at home. If you aren't stopping by Casey's for fuel, there's a good chance you'll pick up that pack of gum elsewhere.
The other problem that may hurt the company is all the real estate it owns. Casey's owns its locations, which means it has a lot of debt on its balance sheet: $907 million. Just as a consumer gets a mortgage to buy a house, Casey's has had to borrow to buy its properties. The company paid more than $41 million in interest payments in fiscal year 2017.
If the company's sales drop off, it cannot simply end its leases and walk away. It must sell the property -- and that is no small challenge.
This company's best days may be behind it
There is too much uncertainty in the wind to own Casey's. If we could travel back in time, this business, like a lemonade stand, would have real charm. Unfortunately, the disruptive forces it is beginning to face may turn this one-time market darling into a faded memory of a country store from days gone by.
