Caseys General Stores Inc (CASY) Q1 2022 Earnings Call Transcript

Good day and thank you for joining us. Welcome to the First Quarter Fiscal Year 2022 Casey’s General Stores Earnings Conference Call. At this time, all participants are muted. Following the presentations, there will be a question-and-answer session. I would now like to hand the call over to our speaker today, Brian Johnson, Senior VP of Investor Relations and Business Development. Please proceed.

Good morning, and thank you for joining us to discuss the results from our first quarter ended July 31, 2021. I am Brian Johnson, Senior Vice President of 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 meaning 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 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. A reconciliation of non-GAAP to GAAP financial measures referenced in this call as well as a detailed breakdown of the operating expense increase for the quarter can be found on our website at www.caseys.com under the Investor Relations link. Before I turn the call over to Darren, I'd like to point out that we changed the titles of two categories that we routinely disclose and discuss; grocery and other merchandise has been changed to grocery and general merchandise, and prepared food and fountain has been changed to prepared food and dispensed beverage. We believe these changes provide a better description of the categories. There's been no change to the products within the categories nor the calculation of sales and margin. With that said, I'd now like to turn the call over to Darren to discuss our first quarter results. Darren?

Thanks, Brian, and good morning, everyone. We're looking forward to sharing our results in a moment, but I would like to start with a top priority for Casey’s, supporting our team members and their safety in the continuing battle with COVID-19 due to the Delta variant. It's been a long 18 months and after some of this seemed nearly normal, our team is again experiencing COVID-19 case increases and related challenges. In spite of these obstacles, our team has performed exceptionally well and truly makes life better for our communities and guests every day. I couldn't be more proud of their resiliency and commitment to Casey’s. As our guests and communities shift gears from summer and head back to school, commuting for work and engaging in fall routines, Casey’s will be here ready to serve them. The return to schools is the time to come together in our communities. In August, Casey’s Cash for Classrooms giving campaign raised almost $1 million, thanks to our generous guests and passionate team members. These funds will support grants to local schools in our footprint. The grant applications opened in October, so we look forward to hearing from our communities on what their schools need. I'd also like to provide some exciting updates with respect to our Board of Directors. I'm proud to share that Greg Trojan, former CEO of BJ’s Restaurants, has joined the Casey's Board. He brings 25 years of experience leading national restaurant, retail, and consumer products companies like Guitar Center, House of Blues Entertainment, and California Pizza Kitchen. Adding Greg to the Casey's Board adds strategic expertise in areas that fuel the growth of our business; focusing on the guest, leading an exceptional restaurant-caliber food service program, and being a retail leader. We look forward to leveraging Greg's unique perspective and industry expertise to support Casey's growth and success. Additionally, our Board of Directors recently received recognition from 50/50 Women on Boards. This organization recognizes companies where female directors hold 50% of its corporate board seats. At Casey’s, we’re committed to equity and diversity and are honored to be recognized and appreciate the female leaders who are positioned on our Board. Finally, in July, we published our inaugural Environmental, Social and Governance or ESG report. I'm grateful to the entire Casey's team and our Board for their support as we developed and delivered this first report. We understand the responsibility that comes with our role as the heart of the communities, and we are committed to creating long-term value for all stakeholders. We look forward to sharing our progress along the journey. Now let's discuss the quarter’s results. As you see in the press release, we're off to a great start to the fiscal year. Diluted earnings per share were $3.19, just slightly off from the all-time high quarter one year ago. Adjusted EBITDA was $243.2 million, the highest quarterly EBITDA in company history. Sales volumes and margin improved dramatically as guest traffic began to rebound, driving an all-time high gross profit dollar quarter for the company. We also successfully completed the closing on two highly strategic acquisitions in the first quarter, and are already seeing good performance. I would now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 8% for the first quarter with an average margin of 40.5%. Grab-and-go items such as pizza slices, packaged beverages, and snacks were up significantly throughout the quarter as guest traffic improved. Same-store grocery and general merchandise sales were up 7% and the average margin was 33% compared to 32.2% for the same period a year ago. The store resets completed towards the end of last fiscal year continued to significantly benefit this category. Packaged beverages outperformed despite high comparisons during the pandemic, achieving a two-year stack same-store growth of 17.6%. Although alcohol sales have moderated and we're about flat versus pandemic-driven buying in the prior year, they still achieved a 20.2% two-year stack sales growth. Gross profit margin improved, due in part to our strategic sourcing efforts from our centralized procurement team. This category also benefits from our private label effort as we exited the quarter with a 4.4% penetration rate for the grocery and general merchandise category. Same-store prepared food and dispensed beverage sales were up 10.8%. The average margin for the quarter was 61% versus 59.7% from a year ago. Sales were up double digits in bakery items and dispensed beverages. Pizza slices were the star of the show, up close to 29% in the quarter. During the first quarter, same-store fuel gallons sold were up 9% with the fuel margin up 35.1 cents per gallon, as Casey's continued to achieve strong fuel margins. The company took advantage of a favorable renewable fuel credit environment and sold $18.7 million in RINs. The fuel team has done a tremendous job balancing fuel volume and margin to optimize the profitability of the category. I would now like to turn the call over to Steve to go into some detail on the financial statements. Steve?

Thank you, Darren, and good morning. Total revenue for the quarter was nearly $3.2 billion, an increase of $1.1 billion or 51% from the prior year. This was primarily due to an increase of retail sales of fuel of $881 million driven by a 21.5% increase of total gallons sold to 667.5 million gallons, as well as a 49% increase in the average retail price per gallon. The average retail price of fuel during the period was $2.95 a gallon compared to $1.98 a year ago. Reported fuel results do not include the recently acquired Buchanan Energy wholesale fuel business, which is included in the other revenue category. Total inside sales rose 14% to $1.1 billion. Grocery and general merchandise sales increased by $104 million to $835.5 million, an increase of 14%. And prepared food and dispensed beverage sales rose approximately $38 million to $308.4 million, also an increase of 14%. Please note the reported figures are favorably impacted by approximately 7.5% more stores being operated on a year-over-year basis. As a reminder, we define gross profit as revenue less cost of goods sold but excluding depreciation and amortization. Casey's had gross profit of $723.9 million in the first quarter. That's an increase of over $100 million from the prior year. This represents the highest quarterly gross profit in Casey's history. It is primarily attributable to higher inside gross profit of $66.3 million, or nearly 17%, as well as an increase of $24.4 million, or 11.6% in fuel gross profit. Fuel gross profit benefited by nearly $19 million from the sale of a larger quantity of RINs than in a typical quarter. Our grocery and general merchandise gross profit increased $39.8 million, while prepared food and dispensed beverage gross profit increased $26.5 million. We also saw a $9.7 million lift in other gross profit. This is primarily due to the dealer network activities and car washes acquired from the Buchanan Energy acquisition that we now record in the other category. In addition to higher revenues and gross profit, it was encouraging to see inside gross profit margin expansion as well. Our merchandising and logistics teams are performing exceptionally well in the face of a broader inflationary and supply chain challenged environment. Inside gross profit margin was 40.5%, which is an increase of 90 bips from the prior year quarter. The grocery and general merchandise margin was 33%, up 80 basis points. Prepared food and dispensed beverage margin was 61%, up 130 basis points from the prior year. Casey's enjoyed favorable sales mix shifts, both within and across the categories, as packaged beverages along with the chips, meat, snacks, and candy performed well in addition to the resurgence of grab-and-go items within the prepared food and dispensed beverage category. Finally, the company enjoyed a favorable wholesale cheese costs comparison. Cheese costs were $1.97 per pound this quarter compared to $2.12 for the same quarter a year ago. This positively impacted segment margins by approximately 50 basis points and offset inflationary pressures we received in other commodity products. Total operating expenses were up 24% or $92.8 million in the first quarter, and that's consistent with our expectations. Approximately 11% of the increase is due to same-store employee and store operating expenses increasing. We added 2 million labor hours back or approximately 14% into the system on a year-over-year basis as stores returned to near pre-COVID operating hours. These additional hours accounted for more than half of the same-store increase, followed by wage rate increases and store operating expenses, which are also due to higher hours, such as repairs and maintenance and higher utility costs. On a two-year stack basis, we continue to mind our labor utilization as same-store labor hours remained down approximately 4% versus pre-COVID levels. Approximately 8% of the operating expense increase is due to growth in units as we operated 166 more stores than the prior year. This also includes approximately $8 million in one-time deal and integration costs, which was several million dollars lower than we originally anticipated. With the large rise in retail fuel prices, same-store credit card fees also rose, and that's accounted for another 3% of the operating expense increase in the quarter. As mentioned earlier, the operating expense increase was in line with internal expectations as the company anticipated that the most significant quarterly increase for fiscal '22 would occur this quarter given the increase in store count and operating hours relative to last year. Importantly, I'd like to reemphasize that the company still expects the full year operating expense increase to finish within our previous outlook, which is a mid-teens percentage increase. Depreciation in the quarter was up 15% driven primarily by the store growth along with placing our third warehouse into service. The effective tax rate for the quarter was 23.3% compared to 23.8% in the prior year. This includes an approximately $3 million one-time charge associated with revaluing our deferred tax liabilities as part of the Buchanan Energy closing, and that was several million dollars lower than we initially expected. Adjusted EBITDA for the quarter was $243.2 million compared to $237.8 million a year ago. That's an increase of 2.3%. This also represents the highest quarterly EBITDA in the company's history. Net income was down very slightly versus the prior year record to $119.2 million. The acquisitions that we completed in the first quarter were dilutive to earnings as we expected. We remain confident that we will achieve the synergies anticipated with these transactions and that they will be accretive for the remainder of the year. Our balance sheet remains strong. At July 31, cash and cash equivalents were $199 million. And we have the full capacity of our $475 million lines of credit, giving us ample available liquidity of $674 million. Our leverage ratio ticked up as we had expected upon the closing of the two transactions to 2.4x. For the quarter, the company generated $197 million of free cash flow, which we define as cash flow from operating activities less purchases of property and equipment. This compares to $307 million in the prior year. The primary difference versus prior year was lower contribution from working capital as the prior year benefited from a favorable fuel price impact on accounts payable as well as the deferral of FICA contributions under the CARES Act. At the September meeting, the Board of Directors increased the dividend to $0.35 per share, which represents the 22nd year in a row of raising the dividend. We will remain balanced in our capital allocation going forward, leaning into the many growth-related investment opportunities that we have but continuing to repay that gradually and tending to the dividend. The company has opened 142 stores so far this year, which includes three new store openings, the 137 stores from the Buchanan Energy and Circle K acquisitions, and two independent acquisitions. Obviously, there continues to be a growing uncertainty around consumer behavior and traffic volumes as the Delta variant continues to spread throughout the country. The industry is also dealing with product outages and supply chain challenges, both with respect to fuel and merchandise. However, we feel confident in our previously disclosed fiscal '22 outlook and do not believe it's necessary to make any adjustments other than that we now expect the effective tax rate for the year to land between 24% and 26%. As previously mentioned, we expect total operating expenses to finish the year up mid-teens percentages and that the quarterly year-over-year increases will gradually decline as the year progresses, with a small improvement in the second quarter and more substantial changes in the second half. The company will continue to endeavor to offset labor inflation with gross profit adjustments, and Darren will talk about what we're doing to address the tight labor market shortly. Looking ahead to the very near term, we expect second-quarter earnings to be lower than the prior year due to higher operating expenses and depreciation, which will be partially offset by higher gross profit, primarily from inside the stores. I'll now turn the call back over to Darren.

Thanks, Steve. First, I'd like to congratulate the entire Casey’s team for delivering impressive results in the first quarter. We couldn't have done it without their hard work and dedication. And given the resurgence of the Delta variant, we will continue to need their perseverance to perform at a high level. Total inside sales were trending up low to mid single digits through August. For fuel, we've experienced low single-digit positive gallon growth while fuel margins remain over $0.30 per gallon. The team has done a great job executing the strategic plan. If you recall, the pillars of the strategic plan to deliver top quintile EBITDA growth are reinventing the guest experience, creating capacities through efficiencies and being where the guest is, all driven by disciplined unit growth. All of this is going to be driven by an investment in talent to strengthen the team and add capabilities to the business. Given the inflationary pressures most retail industries are currently experiencing, I think it's appropriate to start with creating capacity through efficiencies as it is top of mind for the team right now at Casey’s. Our distribution center in Joplin, Missouri is fully functional. This will help reduce over 1.8 million miles annually from our supply chain and will enable us to keep total G&A and distribution expenses flat for the fiscal year. This has also brought about more operational flexibility as we manage through broader supply chain challenges with our vendor partners and adapt real-time to keep stores stocked. Our centralized procurement team is up and running with new software that's enabling better vendor management and strategic sourcing initiatives. Our fuel team continues to drive profitability through retail price optimization and procurement efforts. Our merchandising team has proven they are capable of navigating through this inflationary environment by effectively managing cost of goods negotiations and making retail price point adjustments as needed. They've also successfully driven sales to more profitable categories from the store resets completed last fiscal year. And finally, private label products continue to grow market share inside our stores. Not only is this a better value option for our guests, but it also improves gross profit margin for the category. With respect to being where the guest is, we're off to a great start integrating the two highly strategic acquisitions that we completed in the first quarter. Specifically regarding the Buchanan Energy transaction, we began to move their merchandise and fuel onto our contracts. We've also started to realize some operating expense savings and just last week rebranded four stores to Casey's that include our pizza program. Synergy expectations remain on track for both deals and our dedicated M&A team is actively pursuing more opportunities. We continue to make great strides as we reinvent the guest experience at Casey’s. Expanding our digital guest engagement remains a high priority as digital sales were up 14% in the first quarter, cycling a 162% increase last year. We recently expanded our delivery business to include Uber Eats marketplace at 750 stores. DoorDash marketplace is up to 890 stores. We've also implemented DoorDash white-label delivery, a third-party service that takes orders through our systems at 830 stores. This enables our Casey’s rewards members to fully participate with their member benefits on our own app and receive delivery services throughout the entire day. We still utilize our own delivery drivers at 400 stores and still offer in-store pickup and curbside pickup at over 2,200 stores. Our Casey's reward enrollment continues to grow, and we just eclipsed 4 million members in August. We have also begun to utilize segmented marketing campaigns where we offer personalization and daypart content on both the Web and app. We believe we can effectively optimize guest behavior with this type of targeted promotional activity. With respect to investing in our talent, the company has held several mass hiring events to address our staffing challenges and continue to offer retention and referral bonuses. We believe these efforts are working. Application rates per store rose over 60% from April 30 to the end of the first quarter. As the special federal unemployment benefits expire this month, we expect this trend to continue. We will remain competitive in the market concerning pay to adequately staff our stores. We can continue to deliver the outstanding experience our guests have come to expect from Casey’s. We're also incentivizing our team with a $50 bonus to get vaccinated as the health and safety of our team members and our guests is our top priority. Before I open up the call to questions, I'd like to take a moment to recognize Julie Jackowski, our General Counsel. Julie is a 27-year Casey’s team member and has been a key member of our senior leadership team since 2010. She plans to retire later this quarter after a long and distinguished career. In addition to serving Casey’s, she's been a tremendous advocate for the convenience store industry, serving on various committees and volunteer roles with the National Association of Convenience Stores, including Chairperson of the Board. I'm going to personally miss her advice and counsel, and I wish her and her husband Tom the best. Congratulations, Julie, on a well-deserved retirement. We will now take your questions.

Thank you. We ask that you please limit yourself to one question and one follow-up. Our first question comes from Bobby Griffin with Raymond James. Your line is open.

Good morning. This is Bobby Griffin. Thanks for taking my questions and congrats on a good quarter.

Bobby, good morning.

I just wanted to follow up on the comments around OpEx. Really great to see you guys reaffirm the target, despite probably or not probably a tougher labor environment than when we originally talked last. But can you maybe just give some detail on what the drivers are for the back half of the year on OpEx slowdown from a year-over-year growth perspective? Is there some internal initiatives going on? Is it just a function of the year-over-year comparisons with the hours, anything there to help us think about what would slow down the growth as we move through the year in OpEx?

Yes, Bobby, this is Darren. I'll start off and then Steve can fill in the blanks for me. As you recall, last year we kind of pulled back hard on operating hours in our stores and in our kitchens as kitchens were restricted or even required to shut down early on. As things wore on through the pandemic and things started to open up gradually, we started to add back some of those hours. So the biggest year-over-year delta really took place in the first quarter. And as things progressed throughout the year, we started adding more operating hours back. And so those year-over-year comparisons start to soften a little bit from an absolute growth standpoint. And so that's why you see that start to get a little bit better in the back half of the year. Steve, anything you want to add?

Yes. I think some of it is just the math to Darren's point. So we won't have the add back of hours that we had in the first quarter and the last three quarters. But we will start to feel a little bit more of the wage pressure year-over-year delta last year in the first quarter, we were still paying some special COVID pay to people that gradually worked its way out of the system. And so the change in hours is going to be less impactful to us, but the change in rate will become more impactful as we move forward in the remainder of the year. We've added most of the new units. We're targeting 200 units into the system this year; obviously more than half of those have already come into the system. So that will become a little bit less impactful incrementally going forward. And then the credit card fees; that's going to follow the price of fuel to a large extent, but the math simply helps us with hours, and the actual wage rates as we go forward. And so the second quarter should be a little bit better year-over-year than what we saw in the first quarter. But we'll start to see significant improvement in terms of the year-over-year increases as we get into the second half of the year.

Half of that is in the first quarter. We have a one-time deal in integration costs for the two acquisitions that obviously don't repeat themselves in the back half of the year. So you’d see some softening there as well.

I appreciate the detail provided. As a follow-up, I wanted to ask about the store hours. You mentioned that same-store hours have decreased slightly compared to the pre-COVID period. Is this related to your ongoing efforts to improve labor efficiency? Additionally, is the business mix and demand during breakfast, lunch, and dinner affecting this change? Is that mix nearing normal levels, or is it still not quite there? Lastly, how do you plan to restore hours? I recognize that year-over-year comparisons differ, but do you believe there are chances to maintain lower pre-COVID hours even if we return to a typical mix environment in your stores?

What I would say Bobby is that we were doing a lot of work around labor management really pre-COVID and then throughout COVID in terms of time motion studies, standing up a new labor management tool, implementing that. So I think we were getting more efficient with the deployment of our labor hours in the base case. And then what we've got going on right now is just difficult comparisons as we cycle unusual circumstances year-over-year with COVID. With respect to the breakfast business, we are not all the way back to where we expect to be. I think we're going to learn a lot here in the next several weeks post-Labor Day with school fully back in session, people going back to work or not, depending on the Delta variant. But we just announced today we've launched a new breakfast lineup and new coffee program, so we're encouraged by the potential that that program has to offer. And so, hopefully, we'll get back, but we're not anticipating having to significantly invest more in labor to meet that need.

Thank you. I appreciate the details, very helpful. Best of luck going forward here.

Thanks, Bobby.

Thank you. Our next question comes from Ben Bienvenu with Stephens Inc. Your line is open.

Hi. Thanks. Good morning, guys.

Good morning.

Good morning, Ben.

So I want to start on the prepared foods business. Obviously, we're seeing the comps come back. You talked about the improvement in slices. If I look at the margin profile of the business, it's on a recovery track for sure. But it's still below kind of where we were pre-COVID. And I'm wondering if that's the function of mix that we maybe are a little bit lighter on the dispensed beverage side of the equation. As we talk about mobility improving, as the morning daypart potentially starts to improve, as dispensed beverage improves with mobility, and the slice mix improves, would you expect that margin to start to grind its way back to that pre-COVID level or is there anything else that we should be mindful of there?

Yes, I think it's going to take some time, Ben, to get back to pre-COVID levels. But certainly with the morning dayparts still under pressure, while we're seeing better bakery and coffee sales than we were a year ago, we're still not all the way back to where we were before. And then the same applies to the other dispensed beverages found in frozen while improving over prior years, still not all the way there. And so we're still working our way towards getting back to that margin rate. The other thing is that we have seen some inflation in some of the ingredients that we use in our prepared foods. So while we've been able to mitigate that to a certain extent through our cheese lock or through pricing, we have seen inflation in a lot of the other ingredients and toppings for our various food products which has put a little pressure on those margins.

Okay, that makes sense. And then you noted that you sold some additional RINs this quarter. It doesn't look like it was a huge amount, but it's tough to tell with specificity. I'm curious if you could offer any color on what the kind of surplus balance of RINs is that you're carrying forward? And maybe not when you expect to sell them, but just give us some sense of what's remaining out there so we can think about appropriately modeling fuel margins?

We carried over slightly more than 4 million physical RINs from the fourth quarter into the first quarter of this year, which is not unusual. Historically, we would have sold those RINs in the fourth quarter, representing about $5 million in value at average prices during that time. We sold all of them in the first quarter, and due to rising market prices, we realized around $7 million to $8 million from those RINs. We are now balanced with our bank and do not plan to carry anything significant from the first quarter into the second quarter. I expect that we will sell whatever we generate, depending on the type of fuel we produce and our blending practices. I don't anticipate any carryover affecting RIN monetization in the future, as this was an isolated incident based on the pricing conditions at that time.

Okay, very helpful. Thanks very much.

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

Hi. Good morning.

Hi, Bonnie.

Good morning, Bonnie.

I was just hoping for a little more color on the integration process. It sounds like it's been going well so far, and you mentioned synergies on track, but maybe you could highlight a few of these synergies and where you might have more upside than you thought previously, now that you guys have had more time to analyze the business? And then as we look forward, do you have a better sense yet of the upside potential to Bucky's margins and thinking about food, grocery or even fuel and the timing of that as you start to layer in some of your capabilities? Thanks.

Yes, Bonnie, like I mentioned in my opening remarks, we feel really good about the integration process so far. And this is a little more complex because this was a stock deal. So we have the entire G&A infrastructure of the company and we're still in very early days. We've only had it about 90 days at this point. So the process is working according to plan. We have started to wind down some of the operations in their office. Part of what we acquired there was a small distribution center that they have, and we're starting to wind down those operations and expect to be out of that by the end of the year. We are in the process of converting stores over to Casey's from Bucky's, and we've got the first four open and operating. We're seeing encouraging results there, but obviously very early days. I would say probably from an upside perspective, there's a couple of areas that we feel good about. One is on fuel and fuel margins. We've really seen an uptick in the fuel margins in that business, particularly in the Illinois stores versus what we had originally anticipated. So that's been a positive upside. We also have a reverse synergy opportunity with the car wash. They really put a lot of focus and emphasis on their car wash business, which is something that we've been getting into, but frankly haven't done a great job of. And so we've been able to take some of their folks that are experts in that area and help us apply some best practices. So we think there's some upside there. We're not really changing any of our modeling expectations from this; I think it'd be a little bit too premature to do that. But suffice it to say, we're encouraged with what we've experienced so far. We're confident this is going to work out according to plan.

Okay. I appreciate that color. Thank you.

Thank you.

We have a question from Kelly Bania with BMO Capital. Your line is open.

Hi. Good morning. Thanks for taking our questions.

Good morning.

Good morning, Kelly.

Wondering if you could talk a little bit more about the new breakfast line? Maybe just kind of walk us through some of the potential math there? And what does breakfast account for today in terms of that daypart of within prepared foods? And where do you think this could go over time? And just any impacts to margins or your labor model from this initiative?

Yes, Kelly, we're really excited about the breakfast launch. We've focused on enhancing some of our existing products by using higher quality ingredients in various recipes. This includes improvements to our breakfast sandwiches, biscuits, and croissant sandwiches. We also streamlined some of the less popular items to make kitchen operations more efficient. Additionally, our culinary team has created a new breakfast handheld product that uses our made-from-scratch dough with unique combinations of sausage, egg, and cheese or bacon, egg, and cheese. This product is portable and convenient for customers on the go. As we approach fall, we've noticed many quick-service restaurant concepts increasing their breakfast offerings as they aim to regain their breakfast business. However, I believe there's been a lack of true innovation in this area, with most options remaining the same. Our handheld product stands out in the marketplace and cannot be replicated since it is made from scratch in our kitchens daily. We're also reworked our breakfast burrito, which has become a favorite based on consumer testing, giving us high hopes for it. The most significant change we've made is upgrading our coffee platform. Over the summer, we installed new equipment at all 2,300 of our locations, transitioning to a bean-to-cup coffee program. This technology grinds the beans and brews each cup fresh, reducing waste, simplifying execution from a labor perspective, and ensuring fresh coffee is available around the clock. We’re very optimistic about these changes. While we anticipate some labor efficiency improvements in the coffee area and a slight increase in complexity on the food side, we believe this ultimately balances out labor-wise and significantly enhances the customer experience.

I think we lost Kelly.

Did we lose you, Kelly?

Sorry, just following up on that. As you consider your guidance for the year regarding mid-single digit comparisons, are you including any impact from this new initiative? Also, if you could provide more details, I recall you mentioned low single digits through August. Is that consistent with your expectations?

Yes, we are seeing low to mid single-digit growth in inside sales, which aligns with our current experience and expectations. We were aware that the new breakfast lineup was on its way, and we've factored that into our forecasts for the year. The breakfast market is going to be quite competitive this fall, with nearly all quick-service restaurant concepts re-entering that space. Therefore, we anticipate the need to be competitive. We believe we have a unique offering that will allow us to excel, and we've incorporated that confidence into our projections for the year.

Thank you.

Thank you. Our next question comes from Matthew Fishbein with Jefferies. Your line is open.

Hi. Good morning, guys. Thanks for the questions.

Good morning.

Good morning.

So some of the company's gallons per store uptick in the quarter was likely due to that addition of Buchanan stores to the mix. But I think same-store gallons still improved a bit on a per store basis relative to calendar '19 that is. While fuel margins even excluding call it 2.5 cent per gallon impact from a larger RIN contribution still sequentially increased quarter-over-quarter. And you did highlight your expectation to lift inside store gross margins and help offset that OpEx headwind. But given cost inflation facing the entire industry and given most of the industry doesn't have that strong inside store lever that Casey's does to offset OpEx increases, from your perspective, where do you see industry fuel margins and their ability to remain stable or expand further from here as gallons continue to come back? Or maybe asked a different way, if the industry cost outlook were to increase in the near term, do you believe there's still room on the fuel margin side for the industry to offset it?

Yes, Matthew, I would say that at this point, we'd have to say that these margins are sustainable, at least in the near term. And it's for the reasons that you mentioned, the underlying cost to operate this business are going up, everything from labor which is well documented and everybody is dealing with that. There is some inflation we're seeing; some probably experiencing it more than we are, but they're experiencing it nonetheless. EMV compliance, which just kicked in, in April is another piece of the equation. And then, of course, credit card fees that we're experiencing right now. So all of those things are making it a more OpEx-heavy environment. And to your point earlier, most of the retailers in the industry don't have the levers we have to offset that. So that's most likely going to find its way into the fuel price. So I would say these margins are somewhat sustainable. Whether they last at $0.30 a gallon or north of $0.30 a gallon longer-term is anybody's guess, but I would certainly expect that they're going to remain elevated from where they were historically because there's no other place for most of these folks to go to recapture this OpEx. It's got to go somewhere, and I think that's where it's most likely to end up.

Yes, makes sense. Thanks for that. And just a follow-up on inside gross margin. Some of your peers are having higher than normal out of stocks in stores, mostly driven by their collection of distributors having their own labor and fill rate issues. And I know category and subcategory mix, the procurement opportunity, private brand products, that's already lifting inside gross margins for you, but I'm presuming there's still room for improvement just off industry supply chain headwinds hopefully softening at some point going forward. So I guess just to clarify, given your self-distribution model in grocery, is that additional control of the supply chain helping this environment or would you say you're still having some of that transitory supply chain headwind from fill rates from your suppliers and out-of-stocks in the store?

I can tell you that owning our supply chain has been a significant advantage for us during this entire period. Admittedly, we have faced our own supply chain challenges as manufacturers wrestle with production issues. However, controlling the supply chain has provided us with considerable flexibility. For instance, some suppliers have been unable to deliver products due to driver shortages. We have our own fleet of drivers and trucks, allowing us to transport trailers directly from manufacturers to our distribution centers, ensuring continuous product distribution. There are also products we manage ourselves that would normally be supplied by direct store delivery, and when we visit competitor stores, it's clear they are out of stock on many of these items that we can self-distribute. Additionally, having private label products has allowed us to step in with our own offerings when we run low on national brand supplies in certain categories. This capability has improved our in-stock position compared to many competitors. That said, it's still a challenge we face daily, with issues ranging from labor shortages to driver shortages and, in some cases, raw material shortages. It's a widespread challenge. Nevertheless, I value our position of having control over the supply chain, which enables us to adapt and maintain stock levels in our stores.

Awesome. Thank you very much.

We have a question from Chuck Cerankosky with Northcoast Research. Your line is open.

Good morning, everyone. Great quarter. I have a question about the pizza business. You mentioned there is a resurgence in the single slice business. How does that relate to the whole pie business? Is that segment declining or have you managed to maintain it? Can you discuss the financial impact as these segments of the pizza business change?

Yes, Chuck, the slice business has definitely come back. We're up about 29% year-over-year in slices. But the whole pizza business and the slice business really don't compete much with each other. The slice business is primarily a morning and afternoon dayparts of breakfast and lunch daypart occasion. As you get more into the evening time and dinner, that's when we shift over to the whole pie business. So they really kind of complement each other more than they conflict with each other. Now that being said, our whole pie business has softened a little bit versus prior year. Obviously, when everything was shut down, the whole pie business really surged. But on a two-year stack basis, we're up double digits in whole pie. So we feel like we've held on to a lot of that incremental growth that we experienced during the height of the pandemic, but we gave a little bit back. But overall, we're really happy with where the pizza business is right now and it's continuing to grow.

All right. Thank you. That's very helpful.

Our next question comes from Anthony Lebiedzinski from Sidoti & Company. Your line is open.

Yes. Good morning and thank you for taking the questions. So in terms of the procurement initiatives, how far along are you with that process? Or maybe in baseball terms, can you give us a sense as to what inning are you in now? Just wanted to get a sense as to the opportunity that you have in front of you?

Yes, I'll start with that, Anthony. We're certainly in the early stages of our strategic sourcing initiatives, which vary somewhat by category. We are addressing multiple areas, including existing supply agreements that we need to work through with many of our suppliers. Historically, we had informal relationships that lacked the legal binding you might expect from a company of our size, and we are currently navigating those agreements. In the grocery sector, we've experienced significant success over the last year by renegotiating and establishing favorable supply contracts with many of our consumer packaged goods and direct store delivery suppliers. This progress is reflected in the margin improvement in that category, where inflation pressures have been minimal due to our procurement advancements. On the prepared food side, we have fewer long-term contracts under renegotiation at the moment, which is our main focus now, especially with commodity suppliers for items like cheese and proteins. I anticipate that by the end of the year, we will have made substantial progress in securing long-term agreements and reducing our reliance on single-source suppliers in certain categories. Given Darren's earlier mention of supply chain challenges, I believe it would benefit us to have more redundancy in specific areas of our supply chain. Additionally, in indirect spending areas like construction, we allocate significant capital and have implemented new systems that will help us create more competitive scenarios for future capital expenditures, which will yield benefits over time. We have a long journey ahead, but I expect all of these efforts to positively impact our margin improvement opportunities over the next several years.

Got it. Thanks for that detailed answer. So just to follow up on a part of that. So as far as cheese costs are concerned, obviously, it's a big component of your prepared food category. Where are you now as far as cheese costs near term? And how does that compare versus a year ago?

We're currently about halfway through securing our second quarter requirements. Based on today’s spot curve, we expect the cheese cost impact in the second quarter to be similar to that in the first quarter, which saw approximately an 8% decline in commodity costs. We anticipate a comparable situation in the second quarter. However, our commitments are not secured beyond that, and we will keep an eye on the market to take advantage of any opportunities. I believe the second quarter will provide some benefits, although current spot prices indicate there could be slight cost challenges in the latter half of the year, but they should not be significant.

Got it. Thank you and best of luck.

Thanks.

We have a question from John Royall with JPMorgan. Your line is open.

Hi. Good morning, guys. Thanks for taking my question. Is there anything you could share on the pro forma year-over-year performance of the Buchanan assets this quarter, any major differences to point out between legacy Casey's and the acquisition? We feel that Casey's numbers vary in the same-store metrics, but anything you could share on Buchanan itself which is not evident in the GAAP numbers would be helpful?

Maybe I'll just start. Obviously, we didn't own the assets for the entire quarter. So the comp is a little bit challenging if you're just looking at it. I would say, generally speaking to Darren's earlier comments, I think we're about where we thought we would be. I think at the highest level, we spent a little bit less in terms of kind of closing integration-related costs than we had thought we were going to, which helped us a little bit. We had a lower tax charge. Just once we went through all of the numbers than we thought. So I think we'll spend a little bit less upfront for sure. They are as a business dealing with the same kind of dynamics we are. Their fuel profitability is higher than what we had originally expected it to be, which is consistent with obviously what people are seeing overall in the industry. But we feel good about it being a net contributor of about $45 million of EBITDA to us in this fiscal year by the time the dust settles there, that will include some synergy capture, as Darren referenced, starting in the second quarter. I think we'll start with G&A and fuel, and as construction progresses, we'll start to see some inside the store realization there. But most of that in fairness will probably be in the following fiscal year.

Great. Thank you. And then second one is just a little more housekeeping. Can you talk about the cadence of CapEx and new build activity? I know 1Q was pretty light, which I think is pretty typical historically when you look back at historical years. But in this case, it's under 10% of the full year guide. So if you could just talk about kind of the cadence of new build activity and how you expect it to progress through the rest of the year, that would be helpful? Thanks.

Yes, 1Q was light for sure. I think second Q will also be light. We're going to spend most of our time in the second quarter working on integrating the acquisitions, remodels, et cetera. I don't think we'll have a significant number of new to industry builds come up in the second quarter. So it will be backend loaded, and we're somewhat dependent on making sure we successfully manage through supply chain challenges on the construction side. Getting pieces of equipment in is not any easier than stocking the warehouses for goods for resale. So it will be a backend loaded schedule. And most of the new units that we will end up building will come up in the second half of the year.

Great. Thank you very much.

Thank you. We have a question from Krisztina Katai with Deutsche Bank. Your line is open.

Hi. Good morning and congrats on a great quarter. You maintained your mid-single digit inside sales store guidance for the year, but I was wondering if maybe you could parse out just at a higher level, how you're thinking about performance at grocery versus prepared foods now that we're a quarter and a little over a month into the year? And from a consumer behavior perspective, with the spread of Delta, the kids going back into school, what are you seeing in terms of store traffic and conversion trends really going back to your stores?

Yes, Krisztina, with respect to traffic, I think it's a little bit early to tell with the back-to-school. We've kind of been back-to-school for a few days in most of our geography and that was a holiday week, and now we're just coming back. So I would say yesterday was probably our first fully back-to-school day. So we're anticipating that our traffic will improve, but we've got to get a couple more days into it before we have a real sense. I think the wildcard on traffic to a certain extent is people returning to work. And I think a couple of months ago, pre the Delta variant really getting some momentum, I think most companies were planning on returning back to work after Labor Day. And a lot of those companies have sort of pushed those plans a month or two, in some cases have pushed all the way to the end of the calendar year. So we're just going to have to see how that progresses with the Delta variant and how we do that. All that being said, we expect to continue some momentum with the grocery category, but we will be cycling over the store resets here substantially in the third and fourth quarter. So those comps will probably soften, and then we'll continue to pick up some momentum on prepared food and dispensed beverages as those traffic patterns start to return to normal. So I would say grocery probably softening in the back half, prepared food maybe accelerating a bit. Steve, any color to that?

Yes. I think the math is going to be grocery will be below prepared food for the rest of the year, and that's just a function of the math, right, with what we're lapping from the prior year.

Right. That's great. And I just wanted to follow up about how you're positioning your business going forward now that we're more out and about getting vaccinated. How do you plan on really holding on to some of the new customers that you have acquired? How you're thinking about layering in the loyalty program potentially in a more personalized way and promotions to drive engagement and traffic back to the stores, even as people still continue to work from home?

We're going to make the most of our investment in the rewards program and our digital technology. When it comes to our digital marketing strategy, we currently employ a blended approach. About 55% of our marketing is a broad message aimed at a large audience. Approximately 30% focuses on segmentation, where we target specific groups of guests with tailored promotional messages. The remaining 15% is individualized messaging that is customized for individual consumers based on predicted behavior. As we progress through this year, we plan to adjust this mix, aiming for 60% of our digital efforts to be individualized by the end of the year, with around 20% dedicated to segmentation or broad messaging. This fundamental shift will make our approach more targeted to meet individual needs based on their purchasing behavior. We believe this will enhance the guest experience, making it more engaging and appealing moving forward.

Great. Thank you very much.

Thank you. Our next question comes from Brian McNamara with Berenberg Capital. Your line is open.

Good morning. Thank you for squeezing me in here. You exited the quarter with private label representing about 4.4% of your grocery and general merchandise sales. Where do you see that penetration landing this fiscal year and over the medium term? And are new stores and acquired stores starting with a higher private brand penetration relative to the rest of the fleet? Thanks.

Yes, Brian. You're right. The private label exited August was 4.4% penetration rate. Our goal for the year is 5.25%. So we expect to continue that migration. And then over time, we expect to get to 10%, but that's going to be a multiyear exercise. We've already launched 209 private label products since we've launched the program, and we have another 60 products in the pipeline that will be launching between now and the third quarter. So we feel confident in getting to that level of penetration. On the new stores, I'm not sure that we're seeing any significant difference between new stores and existing stores. The acquisition stores, it's very early stages. We'll bring in those products as we convert those stores to Casey's. So very early days on those, but I would anticipate that they would reach the same mix as our more traditional stores.

Great. And then just a quick follow-up. Do fuel margins excluding RINs remain high? Are they still impacting the M&A environment, or are potential targets now more inclined to sell compared to the past, considering the possible changes to capital gains tax treatment? Thanks.

Yes, you are correct. It’s currently less about fuel margins and more about the overall costs and complexities associated with running the business today, especially in the context of COVID. Additionally, the potential changes to capital gains tax are contributing to this situation, and discussions are happening around that now. We are noticing an increase in deal flow, and we are exploring other opportunities. We expect this to drive further M&A activity in the near future. Did we lose you, Brian?

I think we're ready for the next question.

Sorry. Thank you, guys. I appreciate it.

Thank you. Our next question comes from Karen Short with Barclays. Your line is open.

Hi. Good morning, guys. This is actually Renato Basanta on for Karen. Thanks for fitting us into the call. Just one quick one for me. Can you just talk a little bit more about the competitive landscape from a breakfast daypart perspective? And then if you could just remind us what breakfast is as a percent of prepared food sales that would be great?

Yes, Renato. Regarding the landscape, a year ago, when businesses were shutting down, offices were closing, and people were sheltering in place, the breakfast segment was disproportionately affected. This impact was felt by everyone in the morning segment, including Starbucks, McDonald's, and us. Fast forward a year, and there's optimism about returning that business to normal as schools resume in-person sessions and more people return to work. McDonald's has ramped up its promotional activities, Wendy's has been quite active, and Taco Bell recently announced it is bringing back breakfast after having suspended it. There's a lot of increased activity in this area. We believe we are well-positioned, as we have genuine innovation that sets us apart from others who are recycling their previous offerings. Breakfast accounts for about a third of our prepared foods business, largely from our breakfast pizza, but also including items like donuts, baked goods, coffee, and sandwiches. We have innovated in the coffee segment and within our breakfast lineup. While we will continue to rely on our breakfast pizza, we have additional innovations that we think will help us drive growth in the breakfast category.

Perfect. That's great color. Thanks and best of luck.

Thanks.

Thank you. And there's no other questions in the queue. I'd like to turn the call back to Darren Rebelez for closing remarks.

All right. Thank you for taking the time today to join us on the call. I'd also like to thank our team members one more time for their efforts this quarter. We're off to a great start to fiscal '22 and will continue to be nimble as we navigate through the recent Delta variant resurgence. Fortunately, we demonstrated our ability to deliver results on our long-term strategic plan to both normal times and during our global pandemic that I'm confident will continue to drive shareholder value. So thank you and have a great day.

This concludes today’s conference call. Thank you for participating. You may now disconnect.