Caseys General Stores Inc (CASY) Q4 2021 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. And welcome to the Q4 FY 2021 Casey’s General Stores Earnings Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to turn the call over to Brian Johnson, Senior VP. You may begin, sir.

Thank you. Good morning. And thank you for joining us to discuss the results from our fourth quarter and fiscal year ended April 30, 2021. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today is Darren Rebelez, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer. Before we begin, I’ll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company’s supply chain, business and integration strategies, plans and synergies, growth opportunities, performance at our stores and the potential effects of COVID-19. There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including, but not limited to the integration of the pending Buchanan Energy acquisition, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of COVID-19 and related governmental actions, as well as other risks, uncertainties and factors, which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events and Casey’s disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Now I’d like to turn the call over to Darren to discuss the fiscal year results. Darren?

Thanks, Brian, and good morning, everyone. The past 12 months have been like no other and that includes our astounding financial results, which we’re pleased to share today. Casey’s 2021 fiscal year yielded the strongest results in our 53-year history and I am humbled to be the one that gets to share how we delivered this phenomenal performance with you today. I want to begin my comments by personally recognizing the over 40,000 people that make our business go every day. We cannot deliver on our progress to make the lives of our guests and communities better every day without you.

Thanks, Darren, and good morning. I too am pleased to be able to share in reporting some remarkable performance with you today, as I marked my first year with the company. Our team deserves all the credit; we could not be prouder of the dedication and the agility that they’ve exhibited this past year. The fourth quarter was really a tale of two quarters. Sales in the first half were muted by extremely cold weather throughout most of February and same-store comparisons were challenging given the company’s strong performance last year right before COVID-19 showed up. As anticipated, our same-store sales comps then came roaring back once we began lapping the shutdowns from the pandemic. Please note that the prior year had an extra day due to leap year, but given the size of the pandemic’s impact, it’s not material to year-over-year comparisons. Total revenue for the quarter was $2.4 billion, which is an increase of $565 million or 31% from the prior year. This was due to an increase in retail sales of fuel of approximately $445 million driven by an increase in the number of gallons sold and the higher retail price of fuel, along with an increase in inside sales of $115 million. Same-store fuel gallons sold were up 6.4% compared to the same period a year ago. Total gallons sold were up 10% to 535 million gallons. Our centralized fuel team continues to successfully balance volumes and margin, as we aim to grow gross profit dollars. Casey’s fourth quarter fuel margin was $0.33 per gallon versus $0.41 per gallon in the prior year. The company did not sell any RINs during the quarter. The average retail price of fuel during this period was $2.70 a gallon, compared to $2.05 a year ago. Same-store inside sales were up 12.8% for the quarter as guest traffic counts improved compared to the start of the pandemic. Total inside sales rose 14.4% to $913 million. For some additional context, our two-year stacked fourth quarter same-store inside sales growth is 7.2%. Inside margin rose 100 basis points to 39.9%.

Thanks, Steve. First, I would like to congratulate the entire Casey’s team again for delivering a record year and impressive results. Their hard work and dedication are going to be called upon once again as we look ahead to fiscal 2022. Casey’s is well-positioned to not just compete but to win and accelerate our growth. Why? Because our business model is uniquely positioned to take advantage of this moment, given our strategic plan and specifically the momentum ahead for our differentiated food business, our recent M&A milestones and the strength of our balance sheet. I couldn’t be more excited about the opportunities that are with Casey’s this coming fiscal year. We’re seeing positive momentum for our prepared food items, from pizza to bakery and beverages; we expect that trend to continue. Color and innovation within our prepared food and fountain category will also drive results in fiscal 2022. In April, we rolled out a new made-from-scratch Cheesy Breadstick product that has been a big hit with our guests. What’s particularly fun about this product is that it leverages our made-from-scratch pizza dough that we’ve been using on our pizza for many years. Our dough, the key differentiator from our competitors, will leverage this strength to springboard other innovation in the not-too-distant future. In addition to elevating our food offerings, the stores have never been more guest-ready and merchandised to deliver product sales volume and velocity. Resetting our stores has resulted in our in-store experience working even harder for us just in time for peak summer traffic. A key component that we’ve reached was to optimize the placement of our private label products. We’ve already become the number one brand for packaged bakery, meat snacks, as well as nuts and seeds in-store. Looking ahead, we plan to double the number of SKUs offered under the Casey’s brand to keep the momentum rolling on this initiative. We’re listening to and building deeper relationships with our guests to better serve them. Through a new, more robust guest insights and analytics capability, we’re growing our knowledge and understanding of our guests and will have greater visibility into our customers’ preferences and needs than ever before. With over 3.6 million Casey’s Rewards members, we have a captive audience that will enable us to target and effectively communicate promotions that can influence guest behavior. Casey’s Rewards members spend more per transaction than a typical guest. Also, Casey’s Rewards members actively redeem promotional offers and shop at significantly higher frequency than those who don’t. Using loyalty program data allows us to tailor segmented campaigns for our guests that will be even more effective. Finally, given our strong balance sheet, the recently completed Joplin distribution center and the macroeconomic pressures, the smaller operators may have difficulty navigating through. I am very bullish on our ability to grow our store count. Our dedicated M&A team is making considerable progress and, given the likely changing tax environment, the timing might be right for those operators that choose to exit the industry. We will be ready to assist them when the time is right to transition their business and we believe we’re excellent stewards of the businesses as we add our prepared foods to their stores. In closing, as you could see, I am very proud of our team’s performance and remain extremely optimistic for our company’s immediate and long-term future. Of course, none of this will be possible without our 40,000 team members who out there are working extremely hard every day to serve our guests and each other and our communities. Thank you for all you do for Casey’s. We will now take your questions.

Our first question comes from Karen Short with Barclays Capital.

Housekeeping, I just want to clarify, in terms of your quarter-to-date commentary on gallons and in-store comps, is that where you are trending today and then I had a bigger picture question?

No. That’s where we expect to land for the entire quarter. We’re actually a little ahead of that quarter-to-date today and that’s a function of just the timing in the prior year of the shutdowns and the re-openings. So the shutdowns were more significant at the beginning of the first quarter last year. It’s a little easier comp. So that number that we gave is where we expect to land for the first quarter.

Okay. And then I guess, I just wanted to talk a little bit on your mid‑teen commentary on OpEx. So, obviously, you pointed out — I am assuming in rank order what the contributing factors are on the mid‑teen guidance for growth. But I guess, obviously, you have an algorithm of EBITDA of 8% to 10% growth and with this comp guidance and your OpEx guidance we’re getting to kind of mid single-digit to high single-digit decline in EBITDA for the year. So wondering if you could kind of push that out a little bit more, because it doesn’t seem like you should be getting higher sales growth, I guess, for the OpEx that you’re guiding to?

I’ll maybe start with that. So there is a couple of things embedded in there, Karen. So, the easiest way for me to think about the components of the OpEx is, we’re going to get 9% more units coming in with that approximately 200 stores and 75% of those units are going to come essentially now, right? We have already closed the Buchanan. We’re closing Circle K this month. So that’s coming in in the early first quarter essentially fully loaded and so that’s a big component of that increase and so facts if you’re doing a little bit of averaging on the rest of the units 7% to 9% of the increase is just the timing of the new units coming in and that leaves somewhere 7% to 8% for the rest of the OpEx on what we would call the mothership. And if you go back to the fact we will definitely have more hours in the system, because of the way we’re scheduling this year versus COVID and you have got rising wages. You actually — you have OpEx going up somewhere in that mid-to-high single-digit number, which is not terribly far off from where our medium-term algorithm would have us to be and we have not, obviously, made any comments specifically around EBITDA expectations. Clearly, the acquisitions are bringing incremental EBITDA associated with them. But our commitment to that 8% to 10% EBITDA growth over the medium term is we’re fully aligned behind that. I think we feel very, very good about our ability to achieve that. We just happen to have a pretty big slug of acquisition-related operating expense coming into the system all at the same time in this fiscal year.

Okay. But just to clarify on the wages, I think you’ve typically talked about kind of 5% being a standard pressure year in, year-out, is that — has that changed into this year or is that still the right kind of number to think about?

I think we’ll have higher than that this year. I think we’re currently running about 100 basis points or so higher than that number with our current forecast, right? We’re dealing with the same dynamic that you’re reading about in the paper for all the retailers. There is clearly labor pressure in terms of both availability and wage rates in the system. So that would be reflective of what we know today and I think it’s a touch higher than what we had in the last year or two for sure.

Okay. Thanks so much. I’ll go back in the queue.

Our next question comes from Bonnie Herzog with Goldman Sachs.

Thank you. Good morning, everyone. I had a question this morning on your prepared foods same-store sales. It ended up much stronger in the quarter than it was trending early on where I think your trends were actually negative. So, could you share how each of the months in the quarter maybe for us were trending and really when things turned positive resulting in sales up being 13.4%? And then if you could provide how this business has been trending so far in May and early June, I think that would be really helpful. I am curious also to hear how consumer behavior has evolved in the last couple of months, especially with vaccination counts increasing. Has conversion been increasing a lot and what about basket sizes and maybe some comments on shopping hours? Thank you.

Yeah, Bonnie, trends were up in the quarter. If you recall in our March call, we were just coming out of February. In February we had some really adverse weather situations throughout the Midwest and so that got compounded by the fact we’re cycling over a really strong prepared foods performance the prior year and so we were a little bit depressed on the prepared foods going into that call. Of course, right after that, the back half of March and all of April we’re cycling over the shutdowns from COVID. So things materially shifted and accelerated. That was also to a certain extent because things were starting to re-open a little bit and relax. So we saw great momentum in the prepared foods business and we continue to see that momentum moving forward and so what we’re seeing from a consumer behavior standpoint is the morning day part is trying to recover a bit. We’re not all the way back to pre-COVID levels, but if you look at our traffic patterns we have had some significant improvement in the morning day part and in the overnight day part, which affects the breakfast category as well. People are starting to go back to work; we’re now in the summer and, of course, schools are out. So we don’t think that full recovery in the morning day part is really going to kick in until the fall when the schools are back in session. But at the moment, we’re experiencing some nice increases in the prepared foods and we expect the momentum to continue throughout the summer.

Our next question comes from Bobby Griffin with Raymond James.

Good morning, everybody. Thank you for taking my questions. Just one quick housekeeping, I want to check on the OpEx. Does the mid‑teens commentary for FY 2022 include the $11 million of acquisition costs?

Yes. It’s a fully loaded number. Yes.

Okay. And are you going to one-time out that cost or should we include that in, when we arrive and everything’s going to be on a GAAP basis, just want to make sure we get the model apples-to-apples in the first quarter?

We will convert to our reporting on a GAAP basis and just quantify the impact of all the transaction-related activity.

Perfect. I appreciate the detail. And then, I guess, bigger picture for me, just diving into the fuel margin a little bit. Fourth quarter in a row I believe a pretty material outperformance versus the industry, as well as in a rising crude environment as well going on this quarter. So just curious when you look at that is, do you believe that’s still somewhat a function of the COVID environment or at this point, is the outperformance really a function of all the work the fuel team has been doing on sourcing and pricing and that type of outperformance could be somewhat sustainable going forward?

Yeah, Bobby. I would say it’s a combination of both of those things and certainly our fuel team has done a fantastic job of navigating this environment and it’s a challenging environment to say the least. But we still are executing on pricing very well — the team is doing a great job there. And then on the procurement side, we’re at 75% of our fuel volume under contract at this point and we have opportunities to continue to refresh and renew some of those contracts and we think we have some favorability there as well. But I would have to say, at this point, I think, which is where you’re going, after a year of these kind of margins, I have to believe that the pressures on the smaller operators are not going away and we just talked about labor pressures that certainly are coming, the EMV liability shift just occurred, that’s happening, credit card fees are rising, those are all pressures that smaller operators simply don’t have a lot of levers to mitigate and so they’re forced to take that in fuel pricing and that’s constructive to margins for the industry. So I have said all along I think that we probably won’t continue to stay at this level of margin. But I don’t think we’re going back to pre-COVID levels of margin either; we will be somewhere in between there. But as long as this challenge in the industry persists I think we’re going to see that reflected in more elevated fuel margins.

Okay. Great. And I guess, lastly for me real quick on prepared food, great to see the sales trends really start to pick up as we start to lap these comparisons and the country reopens. Just the pathway back to kind of the 62% gross margin range, if that business was then before COVID? Is that all just a function of volume or given some of the inputs, is it pricing and mix of business — anything there just to help us think about how we can return back to that pre-COVID gross margin range?

Yeah. I think there’s a couple of things there and certainly velocity helps the margins as the write-offs as a percentage of the sales volume decrease. So, certainly, that’s a component of it. There’s a mix component as well, where the breakfast day part tends to be a little bit higher margin, but we’re not completely regained the velocity in the morning day part that we had before. So we’re still working on that. And then there’s also the assessment of whether we have retail pricing opportunities as well. But we think all of that is part of the equation to getting those margins back to more historic levels.

Thank you. Our next question comes from Ben Bienvenu with Stephens.

Hi. Thanks. Good morning, guys.

Good morning.

Good morning.

I want to piggyback on Karen’s questions about OpEx. You stated your commitment to the long-term EBITDA growth algorithm. I am curious, you’ve — I think within that, you’ve targeted a high single-digit OpEx growth as a component of the EBITDA. If we continue to see an inflationary wage environment, would you expect that level to be higher and would that potentially impair your ability to deliver the EBITDA growth that you would like to? And then I am also curious, as you think about the variability on OpEx this year, if you deliver upside growth to your same-store sales, would you expect your OpEx growth to accelerate as well or could we get a little bit better leverage on that if your same-store sales growth accelerates more than you expect?

Good morning, Ben. I’ll start maybe to handle the first question first. We’re not walking away from our algorithm commitment at all. I think we feel very good about our ability to continue to generate EBITDA consistently over the medium-term and long-term in that 8% to 10% CAGR range. We feel good about that. I mean to the extent, there is incremental wage pressure in the system — and for sure there is — we’ll go back to what Darren talked about before. What would you expect us to do, right? We have a lot of tools given our scale to counteract that. We will schedule smarter. We will look for ways to automate more within the store environment. There are pricing levers at certain price points available for us to take. And so we will take all of the actions you would expect anyone with a decent size of labor component of their cost structure to take. And so I don’t feel like pressure on OpEx in any discrete period of time puts us into a situation that all of the other levers available to us aren’t able to offset. I think we may have to run a slightly different play for sure, but there’s plenty of optionality in our model to keep us on the path of generating the EBITDA targets that we have.

And Ben, I would just add to that. Those targets, 8% to 10% EBITDA growth, are CAGR numbers. And so over a period of time, there’s a lot of timing that goes into that. Obviously, we had a very strong year this past year that we’re wrapping up. We’ve got some unique things going into this year, where we’re closing two big acquisitions and there are costs associated with those early on; all those stores hit early on. So I don’t think that the algorithm is at risk at all. There is just a timing and sequencing element to it. And to Steve’s point, around the increased cost — these costs are not unique to Casey’s. A lot of the cost pressures that we’re experiencing are cost pressures that the entire industry is experiencing as well. So we do think there’s going to be an inflationary component to what goes on. We’re currently assessing that. The good news for us is that we were proactive in negotiating cost of goods for this calendar year, so we’ve already got costs locked in through the end of the calendar year in a lot of our major categories. So to a certain extent we’re insulated from some of the cost pressure that’s coming on some of our in-store categories, but the rest of the industry may not be. And so we’ll be able to leverage that and as prices move up, we’ll be able to move that up as well and be able to counteract some of the cost pressures we’re experiencing.

I think maybe the last thing I’d add, Ben, to that point, is just a reminder that a quarter of our OpEx is not store related. I would fully expect on that component of the business we’ll work very hard to keep that flat. We’ll get the benefit of spreading overhead over a larger and larger base of stores; we don’t need to add overhead at the same rate that we’re adding store units and so that will provide some natural offset to anything that is happening in the field.

Okay. Understood. Very helpful. I want to ask about your commentary that you didn’t sell any RINs in the quarter — obviously, we’re in a very inflationary RIN price environment; supply and demand is tight in that market. I am curious are you holding at bay your RINs and expecting to sell them in future quarters? And on the same lines, how is your increased contracted fuel levels impacting your ability to generate RINs; does that have any bearing on the number of RINs that you’re able to fill?

I’ll start with the second part first. Our contracts with our suppliers really don’t impact the number of RINs that we collect. So there’s really no impact there. With respect to selling the RINs, our team monitors the RIN market closely every day. The fact of the matter was RIN prices were going up pretty ratably throughout the entire quarter. So we didn’t see a need to sell into a rising market. So we held onto them and we’re waiting to opportunistically assess when those RIN values level out. And then we do protect ourselves on the downside; if they start to slide back we could sell them at a certain price. So that’s kind of how we’ve approached it. We’ll continue to do that opportunistically and so that’s where we’re at on that one.

Thank you. Our next question comes from John Royall with JP Morgan.

Hey. Good morning guys. Thanks for taking my question.

John, good morning.

Can we talk about the cadence of synergy capture on Bucky’s in the first three years as you see it now? I think your fiscal 2022 guide suggests probably not much hitting in the first year? And then do you have an EBITDA estimate on the Circle K stores you can speak to?

Hey, John. Good morning. Your premise is right. I don’t think there’s going to be a significant synergy capture number associated with Bucky’s — certainly not in the first half of this year as we get our feet under us. We had committed to about $23 million of total synergy capture over a three-year period of time. If you think about the pieces, we’ll get some of the G&A and the fuel-related procurement synergies. I think some of that will come through in the current fiscal year albeit probably not in the first half. But the majority of the synergies are going to be associated with uplift around inside the store mix as we put kitchens into a lot of those stores, and obviously it takes time for us to permit those sites and to do the actual renovation. So I would expect our PP&E number this year reflects the fact we’ll be spending extra money to remodel those stores. I think the synergy capture associated with that spend is probably more of a fiscal 2023 item. But we will probably get a couple million dollars this year, but I think that will be back-half loaded.

The only thing I’d add is when you do these acquisitions, you build your synergy targets pro forma based on what you believe going into it. Once you own it, you get under the hood and you get to really see everything that’s going on. I’ll tell you, our team on the ground is even more optimistic now about the potential synergy capture than we were going into it. So we feel very, very confident that on both of these transactions our synergy targets are well within reach and perhaps have some further upside.

Okay. That’s helpful. Thank you. And then can you parse your guidance for inside sales of mid single-digit between prepared foods and grocery maybe just high level? And then any commentary on margins on the grocery side in fiscal 2022, just this coming off the drag from the mix you had during the pandemic?

Directionally, if you just think of what we’re lapping from a comp standpoint, I would expect a prepared food number for the year to be stronger on a year-over-year basis than the grocery number. If you just start thinking of those two, you have to average back to the inside sales. We’re not going to quantify those two, but mathematically prepared food should have an easier set of comps, frankly, than the grocery side of the business. From a margin perspective on the grocery side of the business, I think we feel very good about that. A lot of the initiatives that influenced the good performance on margin we had in the fourth quarter around strategic sourcing — Darren referenced a lot of the cost-of-goods contracts are sorted here for this fiscal year and I think they’re favorable for us. Obviously, private brand penetration is only going to help us here. The mix impact from merchandise resets is going to help us. So I think it’s reasonable to expect some momentum behind margin accretion in the grocery side of the business going forward, although not necessarily the same quarter-over-quarter outperformance we might have seen in the fourth quarter every time.

Thank you. Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

Good morning and thanks for taking the question.

Good morning.

So, in terms of the increased wage pressure that you are seeing with everybody else and as far as the ability to offset that, you touched on a little bit that the small operators are feeling the pain too. Just wondering about your ability to offset that whether you’re looking at higher gas margins or increasing pricing inside the stores, how should we think about that?

Anthony, I don’t want to get into the specifics of what exactly we will do, but we have a pretty wide range of tools at our disposal. We do have retail pricing that we can adjust. We have fuel pricing that we can manage. Our prepared foods business presents a unique opportunity; those products are not commoditized like a lot of other categories within the store where the consumer knows the typical price. We can be more efficient with our general operations and labor, and we put a lot of effort behind optimizing our scheduling to make sure we’re providing the right amount of labor for our stores and meeting guest demand. So there are a lot of different levers we’ll pull and we continue to monitor that and operate as efficiently as we can.

Got it. Okay. Thanks for that. And then just wondering if you could quantify as far as the Casey’s Rewards Program as far as spending per transaction or per visit, how that is different from a new member and frequency that you’re seeing so far from your loyalty members?

With respect to that, we have a deferred revenue impact on the grocery category of about 20 basis points; on prepared food and fountain it’s a little bit higher, about 60 basis points. Certainly, our Rewards Program guests are our most frequent shoppers and our most loyal guests. They come to the store more often and they tend to spend more money when they do. That’s been a real positive for us as we continue to grow that database. We continue to learn more about them and their habits so we can more directly market to them and their cohorts and drive more frequency. We’re up to 3.6 million members; that number continues to grow and we’re really pleased with how quickly that ramped up considering we launched that program right when the pandemic started.

Thank you. Our next question comes from Kelly Bania with BMO Capital Markets.

Hi. Good morning. Thanks for taking my questions.

Good morning.

Hi, Kelly.

Just want to go back to the questions about EBITDA CAGR. Maybe the better way to ask the question is are you thinking about growth from fiscal 2021 — a lot of volatility but a very fuel-margin driven year for EBITDA and earnings. Is that a good base that we can think that we can continue to have that algorithm of 8% to 10% off of that or are there any anomalies that we should think about or look maybe at the prior year to think about a more normalized algorithm of growth from?

Kelly, I think when you’re looking at the algorithm, you should consider that fuel margin has been a favorable tailwind for us throughout the pandemic. We expect those margins to be elevated from where they were a couple of years ago pre-pandemic, but we don’t expect them to necessarily maintain at the levels we experienced in the last fiscal year, and that will start to normalize as volumes come back. On the store side, we expect volumes to recover over the course of the year to something resembling pre-pandemic levels. That’s really how the algorithm works. So both of those things will shift, but ultimately it should average out to the 8% to 10% EBITDA CAGR that we’ve committed to. When we made that commitment we said it was a CAGR because timing and variables happen from year-to-year. The pandemic created one variable; we also have acquisition integration creating another variable. But we still feel very bullish about the idea that the algorithm works; it’s just a matter of timing and sequencing as the recovery and the integration play out.

Okay. Thank you. That’s helpful. In terms of the gallon comp outlook for mid single-digit, I’m curious how your share is tracking in gallons and what your strategy is. Maybe we were thinking that would be a little higher next year based on national averages, but curious what you’re seeing in your market and how you’re managing that comp gallon strategy at this point?

What we’re seeing in our geography based on all the information we can gather is we’re outperforming our competitors from a gallon standpoint as well as a margin standpoint. Recall our strategy has been to optimize gross profit dollars and that’s a balancing act between growing profitable gallons. I think we’ve done a good job with that so far. The cadence of that growth will largely depend on how we execute and how things return to more normal. In our geography traffic is starting to improve, people are starting to go back to work, but now we’re in the summer and school is out, so we think the summer will probably normalize a little and then we expect to see more recovery in the fall. Most school districts appear to be going back to in-person school which will put more people out and about and help drive recovery. So we expect to continue growing gallons and we don’t believe we’re losing market share.

Thank you. Your next question comes from Matt Fishbein with Jefferies.

Hey. Good morning. Thanks for squeezing me in here. Can you remind us where these acquired stores are in terms of cost per store relative to the base? I think you said a quarter of the OpEx is not store related in terms of the total company. In terms of the expected wage pressure next year, store wage is probably the larger contribution to the total increase. Which is generally seeing more pressure right now, is it store wages or warehouses and distribution? Also if you could provide any color on maybe how much of the mid‑teens increase in OpEx is owing to the full year of Joplin being up and running?

Hi, Matt. Generally speaking, it’s a tight market for us on the warehouse/distribution side in terms of wages and labor availability as it is in the store labor market. I’m not sure I would draw much distinction between that. There is certainly less wage pressure as a general rule on salaried staff, but on the distribution side it looks a lot like the store environment based on what we see right now. To your question around the acquired stores, it’s a mix. On average a typical Bucky’s store is a little bit bigger than an average Casey’s store, so those stores would come in with a higher OpEx per store than our average, but they’re also going to generate higher EBITDA per store. The Circle K deal tends to be smaller stores generally than our average footprint stores compared to the Buchanan conversation.

On Joplin, our Joplin distribution center is going to save us money on a year-over-year basis because we’re taking miles off the road. So we have several million dollars of distribution savings from Joplin in fiscal 2022, which is embedded in that overall OpEx number. That’s helping us offset some of the other increases and supports the 25% of OpEx that is non-store related.

Thank you. Your next question comes from Paul Trussell with Deutsche Bank. Krisztina Katai is on for Paul.

Hi. Good morning. This is Krisztina Katai on for Paul. Thanks for squeezing us in here. I have a follow-up question. You talked about your outlook for inside comp sales to be up mid single-digit. Can you walk us through the various puts and takes for gross profit margins for inside sales as we think about the various cost components like cheese and any potential planned promotions you might have?

I’ll start with cheese. Right now we’re about 70% locked in for the first quarter. I think we’ll see a little bit of deflation on cheese in the first quarter — a couple pennies per pound — that would be a modest tailwind for margin. Over the total year I would be comfortable that the cheese costs will be fairly stable and not have a significant impact on margin one way or the other, though there is a little benefit in the first quarter. On product cost for the grocery side, I think we’re well insulated from inflation on the product cost standpoint. That should be a tailwind for us in the grocery category. We are more exposed to commodity cost on the prepared foods side beyond just cheese where we’ve got proteins, etc., that have a bit more pressure. Overall, I think the more remarkable inflationary pressure is on the wage side more than the product side as we sit here today.

Got it. That’s helpful. Secondly, I wanted to ask about capital allocation priorities. You completed your largest acquisition to date. Store growth will be accelerated as we exit COVID. But you do have a $300 million share buyback authorization. How do you think about the balance between strategic initiatives, paying down debt and resuming a share buyback program at some point?

Our strategy has been and continues to be that we’re going to invest our discretionary capital toward growth. After we satisfy the dividend, we’ll invest in growth opportunities and that’s what we have been doing and will continue to do. As long as those growth opportunities present themselves, we don’t have short-term plans to take advantage of the share buyback authorization. It’s out there; we have the authorization, but we see better near-term returns by investing in growth. From a leverage standpoint the balance sheet is in great shape; we’re about 2.5 times debt-to-EBITDA post-closing the Buchanan transaction. We will pay down some debt over the course of the year and we like to have that ratio down in the low 2’s. Aside from that, that’s how we’re looking at it: first invest in growth, take care of the dividend, delever a little, and the share repurchase authorization remains available if we choose to use it.

Just to reinforce Darren’s commentary, the reason we’re over-indexed in growth is because from a value-creation standpoint, if we can drive incremental EBITDA and improve returns on capital with growth investments, we think that’s the right play for shareholders. We don’t see an end to those opportunities in the near-term and so it feels like the right place for us to put marginal investment dollars for the next couple of years based on what we see today.

Thank you. Your next question comes from Chuck Cerankosky with Northcoast Research.

Good morning, everyone.

Hi, Chuck.

In looking at some of these inflationary trends, especially in your cost of goods area, is there any opportunity for inside margin, i.e., forward buying to help you out other than fuel?

Yes. We do some of that with cheese commodity — we occasionally do that with other commodities. We de facto lock in supply agreements with a lot of grocery providers on the CPG and DSD side of the business. We have locked in our cost of goods for the calendar year for several categories. So we have essentially done that on the grocery side and where it makes sense for us, we’ll do it on the prepared foods side. There’s just a bit less forward certainty on the prepared foods side by the nature of the contracts, but we will take forward-buying actions where it makes sense.

Thank you.

Our last question comes from Brian McNamara with Berenberg Capital Markets.

Hey. Good morning. Thanks for taking the question. You’re a quarter removed from the big store reset and I’m curious how the private brand rollout is trending relative to your internal expectations. You exited Q3 at about 3% penetration; it seems like you stayed there through Q4. How do you see private brand penetration a year from now?

Brian, we’re really pleased with how that’s progressed. More recently we’re getting a little bit closer to 4% mix of private brands as we go into the summertime and some of the beverage categories start to accelerate — bottled water in particular. We’re nearly 50% share in bottled water within our stores for the Casey’s brand. We’ve also got another 100-plus items in the pipeline that we expect to roll out over the next four to six months. So we feel like we’re well on track to continue to grow that business. We haven’t given out any real targets for this year, but suffice to say we feel really good about the innovation around those categories, the pipeline that we have and the continued rollout. We expect to continue to grow that share at a meaningful clip.

Got it. And then just one quick last one: speaking with another industry participant recently, they said 2021 could be the biggest year ever in terms of industry consolidation. It sounds like you guys are optimistic as well, but I’d be curious on your thoughts on the opportunities you’re seeing in M&A and the drivers of those opportunities. Thank you.

We’re pretty bullish on the opportunity within the industry and we’ve talked about some of those drivers during the call — increased cost pressures, regulatory pressures, and the need to have scale and capability to compete effectively. Another factor that could create tailwinds for M&A is potential changes to capital gains tax treatment. If capital gains rates were to rise materially, some independent operators who are marginal may decide to sell now. We’ve seen increased interest and our M&A team is actively reaching out to candidates across our geographies. We’re having conversations and believe there will be more opportunities to come.

Thank you. This concludes the Q&A portion of today’s conference. I’d like to turn the call back over to Darren.

All right. Well, thanks everybody for joining us this morning on the call and we’re looking forward to visiting with you again on our first quarter conference call in September. Thank you.

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day.