Caseys General Stores Inc (CASY) Q4 2023 Earnings Call Transcript

Good morning and thank you for standing by. Welcome to the Fourth Quarter Full-Year 2023 Casey’s General Stores Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead.

Good morning and thank you for joining us to discuss the results from our fourth quarter and fiscal year ended April 30, 2023. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are 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, and performance at our stores. 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 recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine 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 the detailed breakdown of the operating expense increase for the fourth quarter can be found at our website at www.caseys.com under the Investor Relations link. With that said, I'd now like to turn the call over to Darren to discuss our fourth and fiscal year results. Darren?

Thanks, Brian, and good morning, everyone. We're excited to share our results shortly. First, I want to thank our 43,000 Casey's team members for their hard work and contribution to a record fiscal year. Reflecting on the three-year strategic plan we launched in January 2020, I'm incredibly proud of our achievements. Casey's is deeply integrated into the communities we serve. Our teams dedicate themselves completely, evident through the positive feedback from our guests, the quality food we provide, and our community impact. During fiscal year '23, Casey's, along with our generous guests and dedicated supplier partners, contributed over $5 million in donations. These funds supported meals, school supplies, new playgrounds and equipment, disaster recovery needs, and services for veterans and their families. I extend my sincere gratitude to our team members, guests, and non-profit and supplier partners who make this possible. We take pride in contributing positively across so many communities. Additionally, in early May, we launched an upgrade to our rewards program, enhancing the experience for our 6.5 million loyal members. The updated Casey's Rewards includes a revamped app design that simplifies tracking points, redeeming rewards, and viewing savings through the program. Our loyalty program celebrated its three-year anniversary, with guests appreciating the flexibility in rewards, whether it's Casey's cash for pizza night or discounts for filling up their vehicles. We look forward to boosting membership and participation. Now, let’s examine the results from the past fiscal year. Fiscal '23 was a record year for diluted EPS, finishing at $11.91 a share, reflecting a 31% increase from the prior year. The company achieved a record $447 million in net income and $952 million in EBITDA, a 19% rise from the previous year. Same-store sales rose by 6.5% or 13.6% over a two-year period, with strong performances in prepared food, dispensed beverages, grocery, and general merchandise. We saw same-store sales up 7.1% and 6.3%, respectively. Margins remained stable year-over-year, a significant achievement as we managed cost increases with our merchandise partners and commodities while maintaining our value proposition for guests. We experienced strong results across the board, particularly in pizza slices and alcoholic beverages. Innovative products like Busch Light, Beer Cheese, and Breakfast Pizza positively impacted sales. Fuel gross profit increased by 16%, with total fuel gallons sold up by 4%, and the average fuel margin at 40.2 cents per gallon throughout the year. Our fuel team excelled at optimizing gross profit dollars by balancing volume and margin. The macro environment was highly favorable for fuel margins, with notable wholesale fuel cost declines occurring during the year. We also excelled in cost management, with same-store operating expenses, excluding credit card fees, rising only by 2.8%. This was positively influenced by a reduction of same-store labor hours by 2.3%. Guest satisfaction scores improved as well, highlighting the effectiveness of our store simplification and leadership teams in freeing up costly labor hours, enabling our team members to better assist guests. In fiscal year 2023, we excelled in unit growth, constructing 34 new stores and acquiring 47 more, showcasing our ability to grow both organically and through M&A. We achieved our annual and three-year growth targets despite challenges with permitting and delays in construction materials. We are successfully integrating the 228 new units from fiscal 2022 and meeting our synergy goals for those stores. All of this success is thanks to our store development, real estate, and integration teams working together seamlessly. We have strong confidence in our ability to continue building and acquiring new units. We believe consolidation will persist in the industry, especially as rising financing costs limit potential buyers. Our private-label program remains popular with guests, and we ended the fiscal year with over 9% penetration in the grocery and general merchandise categories in both units and gross profit. We currently offer more than 300 SKUs of private-label products, which we see as a significant value proposition for our guests. These exceptional financial results underscore the resilience of our business model throughout the economic cycle and highlight Casey's unique capability to offer value and quality to our guests. Now, I’ll turn the call over to Steve to discuss the fourth quarter and our outlook for fiscal '24. Steve?

Thank you, Darren, and good morning. Before I jump into the financials, I'd also like to acknowledge the entire Casey's team for the excellent financial results for the quarter, the year, and the three-year strategic plan, our significant accomplishments for the entire organization, and it would not have been possible without the hard work and dedication of all of our team members. Total inside sales for the quarter rose 8.4% from the prior year to over $1.1 billion with an average margin of 39.6%. For the quarter, total grocery and general merchandise sales increased by $66 million to $810 million, which is an increase of 8.8%, and total prepared food and dispensed beverage sales rose by $21 million to $314 million, an increase of 7.1%. Same-store grocery and general merchandise sales were up 7.1% and the average margin was 33%, an increase of 50 basis points from the same period a year ago. Sales were particularly strong in our non-alcoholic and alcoholic beverages and we experienced a favorable mix shift in these categories as single-serve grab-and-go items outperformed. Energy drinks sold exceptionally well driving non-alcoholic beverages, up over 13% in the quarter. Ongoing private-label growth also assisted this category. Same-store prepared food and dispensed beverage sales were up 4.9% for the quarter. The average margin for the quarter was 56.8%, down 10 basis points from a year ago. Bakery, as well as hot food performed well in the quarter. Margin was adversely affected by a higher LIFO charge than prior year, which had an impact of roughly 50 basis points. And while we did experience some cost pressure in bakery and proteins, cheese costs were down $0.06 per pound from the prior year of $2.20, this had an approximately 20 basis point benefit to margin. During the fourth quarter, same-store fuel gallons sold were flat with a fuel margin of 34.6 cents per gallon, down approximately 1.6 cents per gallon, compared to the same period last year. Fuel margins varied widely in the quarter. For example, we experienced low-30s cents per gallon in both February and March, but in April, CPGs were closer to 40 cents a gallon. Our flat same-store sales outperformed our relevant OPIS geographic data by over 200 basis points. Retail fuel sales were down $207 million in the fourth quarter, due primarily to an 11% decrease in the average retail price from $3.77 last year to $3.36 a gallon. This was partially offset by a 2.4% increase in total gallons sold to $636 million. Total operating expenses were up 6.3% to $31 million in the fourth quarter, approximately 1.5% of the increase is due to operating 69 more stores than a year ago. Approximately 2% of the increase was related to same-store operations. Finally, approximately 1% of the change is related to an increase in the accrued costs for variable incentive compensation due to strong financial performance. Same-store employee expense was flat as the increase in employee wage rate was offset by a 3.3% reduction in same-store labor hours. The company also benefited from a $2 million reduction in credit card fees due to lower retail prices of fuel. Depreciation in the quarter was up modestly as we put a large number of stores in service late in the quarter. Net interest expense was $12.8 million in the quarter, and that's down $2.5 million versus the prior year. This reduction was aided by rising interest rates on our cash balances. And as a reminder, only 15% of our debt is floating-rate. The effective tax rate for the quarter was 22.7%, compared to 17.8% in the prior year. The increase was primarily driven by a one-time benefit in the prior year from adjusting our deferred tax liabilities for a corporate rate drop that was enacted by the State of Nebraska. Net income was down slightly versus the prior year to $56.1 million, a decrease of 6%, and EBITDA for the quarter was $166 million and that's essentially flat with the prior year. During the quarter, we refinanced our credit facility with an unsecured $1.1 billion facility, that includes an $850 million revolving line of credit, and a $250 million term loan each of which have a five-year maturity. It's an excellent outcome for us in what was a challenging banking environment during the quarter, and that speaks to the quality of Casey's as a credit risk and to the strength of our balance sheet. At April 30th, we had $379 million in cash and cash equivalents on hand and with the recent refinancing, we now have an additional $875 million in undrawn borrowing capacity on existing lines of credit, giving us ample liquidity of $1.3 billion. Furthermore, we have no significant maturities coming due until our fiscal 2026. Our leverage ratio as calculated in accordance with our Senior Notes is 1.8 times EBITDA, and we continue to have ample capacity to make good strategic investments as they present themselves. For the quarter, net cash generated by operating activities of $245 million, less purchases of property and equipment of $175 million resulted in the company generating $70 million in free cash flow. We continue to see delays in the delivery of vehicles and construction time to remain elongated thus deferring some of our planned capital spend into fiscal '24. At the June meeting, the Board of Directors voted to increase the dividend of $0.43 per share per quarter and that's a 13% increase, marking the 24th consecutive year that the dividend has been increased. We will continue to remain balanced in our capital allocation going forward focusing on driving EBITDA growth with ROIC accretive investment opportunities in front of us. The company is providing the following fiscal 2024 outlook. Casey's expects the following performance during fiscal '24. We currently expect inside same-store sales to increase 3% to 5%. We expect inside margin improvement to approximately 40% to 41%. The company expects same-store fuel gallons sold to be between negative 1% to positive 1%. Total operating expenses are expected to increase approximately 5% to 7% and that's inclusive of adding 110 stores in fiscal '24. As a reminder, this is inclusive of non-recurring operating expense benefits from FY '23 regarding a legal settlement. Net interest expense is expected to be approximately $55 million. Depreciation and amortization is expected to be approximately $340 million and the purchase of property and equipment is expected to be approximately $500 million to $550 million. The tax rate is expected to be approximately 24% to 26% for the year. Consistent with our past practice, we're not guiding to CPG figures nor are we providing EPS or EBITDA. But for modeling calibration purposes, fuel margin in the mid-30s, along with flat retail prices of fuel, compared to fiscal '23 would result in a flat EBITDA year-over-year. Our first quarter to-date experience is as follows: Inside same-store sales are consistent with achieving the midpoint of our fiscal '24 guidance; same-store gallons sold are near the low-end of our fiscal '24 outlook: fuel CPG margin for May was in the low 40s, however, we're currently in the low 30s.

Thanks, Steve. I'd like to again say thank you and congratulations to the entire Casey’s team for delivering another record year. The results speak for themselves and are a reflection of the hard work of the team and their dedication to executing our three-year strategic plan. In January of 2020, we laid out a plan to reinvent the guest experience, create capacity through efficiencies, be where the guest is all while investing in our talent. As this plan is now ready for renewal, I'd like to share some of our accomplishments. Our team had to navigate through a global pandemic and the effects therein, including restricted traffic, labor shortages in an inflationary environment. We adapted to the situation and thrived in it as you can see with our results. We reinvented the guest experience in several ways, but we really shined with our Casey's rewards program. We made a commitment to enhance our brand and drive digital engagement and we did just that with over 6.5 million members through May of 2023. And this helped drive results, as our same-store inside sales were at the high-end of our guidance. We wanted to make sure that we create capacity to invest in the business by capturing efficiencies while we grew. The team worked exceptionally hard to make the stores work harder for us, culminating in reducing same-store labor hours in fiscal '23 by over 2% while keeping team members engaged and guests satisfied. As shown in the financial results too is our operating expense CAGR of 12% was lower than our EBITDA CAGR of 14%. We also made a commitment to be where the guest is through accelerated unit growth. We came into the plan with an expectation that we would build more than we bought, but as the M&A environment changed, we were able to remain flexible with our two-pronged approach in over 70% of our new units from fiscal '21 to '23 were via acquisition. We made a bold commitment to accelerate our growth and we exceeded our own high standard of 345 new units ending the three-year period with 354 new stores. As you can see, our business has performed exceptionally well in a challenging macroeconomic environment. Casey's has shown tremendous resiliency and we're positioned especially well to deliver future value to our shareholders through our strategic plan, which is being enhanced with our commitment to technology. This was all made possible by making investments in the talent at Casey's. Our investment in a standalone M&A team drove record growth, centralized procurement helped keep our shelves stocked at lower costs, despite supply chain challenges, centralized fuel operations allowed us to balance fuel volume and margin and countless other teams within the organization helped make these last three years some of the most successful in the history of the company. We did all of this and generated cash flow from operations of approximately $2.5 billion, which was considerably higher than our capital expenditures of approximately $1.2 billion. As we reflect on our last strategic plan and our fiscal '23 and beyond, I'm thrilled in Casey's ability to succeed in any macro-economic condition. We're excited to share our next three-year strategic plan on June 27th as we host our Investor Day in New York. We'll lay out our plans to continue to grow the business and deliver value to our shareholders. Finally, I'd also like to thank Board Directors, Diane Bridgewater and Lynn Horak for their amazing contributions to the company over the last decade plus. Their guidance helped fuel Casey's growth and success during their tenures. Lynn has been an invaluable resource to me as the Board Chair being a great mentor and advisor since I came on in the summer of 2019. I wish Lynn and Diane all the best in their retirement from the Casey's Board in September. We will now take your questions.

The first question comes from Karen Short with Credit Suisse. Your line is open.

Hi, thanks very much, and congratulations on a good year. I look forward to seeing you in June. I wanted to ask about your guidance regarding in-store margins, specifically differentiating between grocery and prepared food. Prepared food continues to face challenges. Can you discuss price increases or branded pass-through on grocery? Additionally, what are your thoughts on the pressures from commodity costs in prepared food? I have one more quick question.

Yes, Karen, this is Darren, and thank you. Yes, I'll go ahead and start and let Steve fill in some of the detail. Yes, we expect to see a bit of recovery in overall inside margin and we would see that primarily in prepared foods, and we think that's for a couple of reasons. We're expecting the inflationary pressure that we've experienced over the last year and a half to settle down a bit. We're currently experiencing some favorability on cheese costs as an example, which as you know is a big input to our prepared food and dispensed beverage margin. So that we expect to continue to improve throughout the year. On the grocery and general merchandise side, we started to see some of that inflation subside. There are still some categories like chips and candy, where we're experiencing some inflation. But outside of that, there has been some moderation. And so we'll still remain diligent in terms of passing on pricing that's appropriate. And on the prepared food side, we'll be a little more cautious on that effort on the commodity side, because we don't want to whipsaw the guest and we want to make sure we maintain a relative value proposition. Steve, any color to that?

Yes, for modeling purposes, I would suggest that grocery and general merchandise margins are likely to be relatively flat year-over-year for various reasons. Most of the improvement will come from prepared foods, particularly in the cheese segment. We are currently about 43% hedged for our fiscal '24 requirements, and with the current cheese prices, we anticipate a decline of about 10% year-over-year for the first quarter. This will provide some tailwind. Additionally, we will be comparing against significant price increases from this year; for instance, donuts experienced a 40% inflation rate in the bakery category, which we will account for in the early part of fiscal '24. Thus, most of the improvement will be driven by prepared foods.

Okay. And then my second question is, obviously you're managing OpEx growth extremely well. One of your more rural comparisons had a significant number of hours to the stores, just from a labor perspective. And I'm wondering how you think about that in terms of where you're at in terms of being able to actually meet the guests’ needs and whether or not you need to add more labor to the stores because that seems to be more of a theme even for rural operators.

Yes, Karen. I think whether you add labor or take away labor depends largely on where you're starting. And for us, we felt like we were always staffing our stores appropriately to meet the guests' needs, and we continue to believe that. But what we were able to identify is that we had some unproductive hours in the stores and we had some labor activities rather that we were doing in the stores that just didn't need to occur in the store anymore. We could pull that activity out of the stores and move it upstream where we can do it more efficiently. And so, we've been on a concerted effort over the last year to do exactly that. We've been able to reduce the number of unproductive hours, as we would call it, and take those out. In fact, our overall satisfaction scores as we measure them through a third-party have actually improved. While we've done that, we've not only freed up those hours and taken some of that to the bank, but we've also given some of those hours back to the store so they can focus more on the guest experience. So we feel very comfortable with where we're at now. And again for this next fiscal year, we still have our continuous improvement team in place who are going to continue to pursue finding more opportunities to operate our stores more efficiently.

The next question comes from Anthony Bonadio with Wells Fargo. Your line is open.

Yes, hey. Good morning, guys. So just wanted to ask about the gallon guidance, you're guiding to a flattish same-store gallon growth, despite what optically looks like a pretty easy compare and you're lapping what I would assume some demand elasticity last year on higher gas prices, plus you've got the loyalty program. Can you just talk about your assumptions there and maybe why you're not more constructive?

Well, Anthony. Yes, regarding the gallon guidance, there's a lot happening in the world right now. You're correct that we experienced some demand destruction last year when gas prices exceeded $5 a gallon in the first quarter, but things normalized afterward, although it was a bit uneven. As we move into this year, there are significant macroeconomic challenges that might negatively affect gallon sales. However, we believe that since we've surpassed our relevant benchmarks in our area, there is potential for gallon growth as well, and we're trying to be cautiously optimistic. Our guidance includes some room for growth in gallon sales but also takes into account the possibility of economic downturns that could lead to a decrease in sales. It's still too early to draw any definitive conclusions. That's how we arrived at the guidance we provided.

Got it. And then on the 3% to 5% inside same-store sales guidance as we continue to see disinflation and now deflation in some categories, can you just dig in a little more on the underlying components of that growth and specifically how you're thinking about contributions from price and unit growth within that forecast?

Yes, for the inside of the store. We're expecting to see still good growth on the grocery and general merchandise side, probably a little bit softer on the prepared food and dispensed beverage, simply because of what we're cycling. So we've been up over 13% on a two-year comp. So this would be the third year in a row that we're cycling really aggressive costs. We're not expecting a lot on the pricing side from inflation, particularly in prepared foods; we took a lot of price last year to cover commodity costs. And so we're trying to maintain more of a relevant value proposition for our guests, especially as the economy starts to tighten. On the grocery and general merch side, we're still going to see some inflationary impact from tobacco, and that's just kind of normal course. And like I said, we are seeing some inflation in some categories, but we're also seeing that moderate. In fact, when we look at alcohol and the beer category in particular, we're expecting that to be a little more price-competitive this summer with some temporary price reductions from the manufacturers. So that could be actually a little bit deflationary.

The next question comes from Ben Bienvenu with Stephens. Your line is now open.

Hey, thanks very much. Good morning, everybody.

Good morning.

I wanted to ask first on the unit growth, 110 units that you're citing for the year. Is that all organic within the inorganic augmenting agents to that assumption? And then I guess along those lines, could you talk a little bit about kind of the phasing of the unit growth and the pipeline visibility that you have there?

Yes, Ben. We anticipate unit growth of 110 units this year, and we believe that's fairly evenly split between organic growth and acquisitions. However, a lot can change in the M&A landscape over 12 months, so I'll leave some flexibility for potential transactions that may alter that mix. Nonetheless, we are confident in achieving the 110 units regardless of how we reach that goal. On the organic side, we have a solid pipeline with sites identified, and we're currently focused on the building process. This year, we are experiencing better momentum compared to last year, with improvements in the supply chain and more consistency in the permitting process. We feel optimistic about the organic growth cadence throughout the year. Regarding M&A, we are confident in our pipeline and are engaged in positive discussions with potential sellers. However, the timing of these transactions can be unpredictable, making it difficult to align them with a specific quarterly schedule. Overall, we are confident in our organic and inorganic growth pipelines and believe we can successfully achieve the 110-unit target.

Okay, great. Revisiting operating expense growth, the 5% to 7% range is much better than what you have delivered over the last several years, acknowledging the external challenges in returning to this more normalized growth. When considering the factors that impact either the 5% or the 7%, what are the variables that influence that guidance range?

Yes, Ben, I guess, the first thing I'd tell you is, we have made an organization-wide commitment to controlling operating expenses and being very disciplined about that. And so that is, as I said, that's an organization-wide effort, and I think you saw the results of that effort in this past fiscal year. So you can expect that kind of effort from us moving forward. Having said that, I think in terms of the components, when we look at our G&A, we're essentially keeping G&A flat for the year. And so that's a big step in the right direction. And from a store standpoint, we have our continuous improvement team like I've mentioned before that is doing a lot of great work. And so we expect to continue to see a reduction in same-store labor hours this year as we did in the previous year. And on the rest of the equation, we expect to be able to continue to pursue opportunities to leverage our scale and our purchasing power to drive more efficiencies in the business. Steve, anything else you want to add?

Regarding employee wage rates, we will continue to pay people competitively and even above market levels. Currently, our average wage rate in our stores, excluding managers, is just over $14 an hour. We believe this is competitive across our footprint, and we will maintain our position in this area. As Darren mentioned, while we may not directly control store rates, we will focus more on efficiency.

Yes, Ben. I'd just add one other thing, and we've mentioned it before on previous calls. We've also made a concerted effort around controlling our turnover and reducing our turnover, and we've had really good success in that over the year end. This past quarter was no different, and in the quarter, we saw a 20% reduction in overtime hours, 20% reduction in training hours. And so we expect to continue to work that turnover down. And as a result of that, we'll lower some of those training costs and overtime hours as well.

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

Hi, thank you, good morning.

Good morning.

I had a quick follow-up question on fuel gallons, which trended negative in May, you guys called that out. So just hoping for I guess a little more color on what you're seeing from the consumer in terms of I guess traffic, fill-outs, et cetera? And I guess really what the key drivers of the recent pressured volume growth have been? And how does that compare to the industry and the broader Midwest, are you taking share, for instance?

Yes, Bonnie. On gallons, I guess, I would start with the fourth quarter. Our gallons were flat in the quarter by the mid-continent OPIS data that we saw; gallons were down about 2.5% for that same three-month period. So from that perspective, I would say that even though we were flat, we're probably taking share versus some others in our geography. One of the dynamics that we're seeing that's impacting gallon volume is the softness in diesel fuel volume, and that's really a result of what we've seen happen in the economy over the last few months with softening retail sales, construction starts, kind of slowing down. And so you're just seeing less trucks on the road. So we saw a reduction in our diesel volume low-single-digits. And now, that's only 14% of our fuel mix. But when it's down it does have an impact. Now on the gasoline side, we are seeing a bit of an increase. So when you mix all that out, it came out flat in the quarter, but that's what's driving some of the softness right now that we're seeing.

Thank you for the information. I wanted to ask about your private-label business. You mentioned that over 9% of your gross profits in units come from private-label, which is impressive. Could you provide some context on how that compares to the industry average? What do you see as the real opportunity there and how does it fit into your guidance for this year? Additionally, are there any key categories where consumers are trading down, aside from beverages? I'm also interested in your thoughts on the changes to SNAP benefits and the impact they may have had on your business or the consumers in your stores. Thank you.

Yes. The private brand growth has been phenomenal, really, and we're still very bullish on that. Over the course of the year, we saw about 31% growth. Actually, in the quarter, 31% growth in private-label over last year. And as you mentioned, our unit share is just under 10% and our gross profit dollars share is just over 10%. So we really feel good about the contribution that's had and that mix has grown about 100 basis points from the same period last year. So everything's kind of working in the right direction on private label. The categories is probably been the best; our chips, frankly, in fact, we saw over 80% growth in chips and took about 500 basis points of share in the most recent quarter in our chip category, and we're also seeing a lot of good success in bottled water. But what I would tell you is that I think the price increases that we've taken from the national brands over the past year have really put a spotlight on the value proposition for private brands, has really widened that price delta between the two. And so as consumers get a little more penny-pinched, they're starting to look for those private brands. And so that's why you saw the mix increase. We expect to add another 40 items into the assortment over the course of the next calendar year and we will continue to grow that business. Steve, I don't know if you have any breakdown of private-label contributions.

Yes. I mean, listen, we consistently see private label contribution of many multiples of improvement from a margin standpoint. I think we're running if our category nationally is running in the low-30%, private label will be closer to 50% contribution on a lot of those items varies by overall category profitability. But it certainly is quite an accretive category in general for us to continue to push.

The next question comes from Bobby Griffin with Raymond James. Your line is open.

Good morning, everybody. Thanks for taking my questions. I guess first guys, it's more of a high-level question, but over the last couple of years, there's clearly been a lot of changes that happened in the industry. You've had a period of rising wholesale prices, a period of big falls in wholesale, COVID, et cetera. I guess, when you and the team look, is there a fiscal year or a period of operations that you feel is kind of close to what a normal EBITDA of this business should be where we could benchmark or where you guys benchmark the next two or three or four years of EBITDA CAGRs off of?

Well, Bobby, that's a tricky question. I'm not sure what normal looks like anymore if you put it in the context of the last four years. I don't know. To a certain extent, I would just fall back on what we've done historically and say we've grown EBITDA at an 8% to 10% CAGR pretty consistently over a long period of time, and that's been through a lot of different economic cycles. So if I were going to anchor on anything, I would say I think that's a long track record of performance where we've been able to stay in that type of range. Really regardless of how the economy is performing. Now quarter-to-quarter or year-to-year, that may fluctuate a bit. But over a longer period of time, I think that's a pretty safe place to anchor yourself on. And so I don't see anything on the horizon that will prevent us from continuing to do that. We'll talk about this more on our Investor Day, but no, we feel very good about the future and so. I guess that's the best answer I think I can come up with, Bobby, is that what you're kind of looking for?

Yes, I understand. It's challenging to predict what normal looks like. It might be better to consider a rolling three-year perspective and review historical performance due to significant fluctuations in the fuel side of the business. Regarding private label, its performance has been impressive and is becoming a meaningful part of the business. With some minor breaks in inflation, how are national brands responding now? Are they coming back with more attractive offerings in terms of pricing or promotions, or are they simply accepting the changes occurring in your grocery business?

I believe the price increases they're passing on to us have started to moderate, reflecting the overall subsiding inflation. Additionally, our private brand mix has consistently grown. We maintain strong relationships with our major suppliers, and we have productive discussions about this topic. In some instances, they produce private label products for us, while in others, they might prefer we didn’t have them. Nevertheless, as we continue to succeed with our private label, we push each other to find ways to expand the market. Our aim with private label is not to decrease national brand sales but to provide consumers with more affordable and high-quality options. We strive to meet the needs of our guests while also collaborating effectively with our national brand suppliers to satisfy their preferences. Our discussions are an integral part of our joint business planning process that we've been developing over the past few years, and as evidenced by our inside sales figures, it's been quite successful.

The next question comes from Kelly Bania with BMO Capital Markets. Your line is open.

Good morning. Thanks for taking our questions. And sorry if I missed this, but I was wondering if you could just comment on traffic versus ticket within the in-store comps? And just any color on units versus inflation and mix within the two in-store categories?

Yes, Kelly, if you examine our same-store sales from last quarter, we saw an increase of 6.5% in inside same-store sales. About 6% of this growth was driven by pricing, while approximately 0.5% came from increased traffic. We are pleased to note that we are generating slightly positive traffic, and this trend is continuing into the first quarter as well. As pricing begins to stabilize following some inflationary pressures, we have shifted our emphasis towards driving traffic, and we are starting to see positive results from that effort.

Okay. That's helpful. And I think there was a comment about an expectation to continue seeing a reduction in same-store labor hours. But I was wondering if you could be more specific in terms of the magnitude of further labor hour reductions that are embedded into your 5% to 7% OpEx growth outlook for this coming fiscal year?

Sure, Kelly. Good morning. This is Steve. Our 5% to 7% plans at the moment for another 1% year-over-year reduction in same-store labor hours. So that would be on top of it; it is something that we realized this year. And then obviously, we'd have wage offsetting that, but a 1% same-store labor hour reduction is baked into that 5% to 7% OpEx guidance.

The next question comes from Irene Nattel with RBC Capital Markets. Your line is open.

Thanks and good morning, gentlemen.

Good morning.

Just listening to your commentary, it sounds as though you are sort of marginally more cautious on sort of consumer and spending trends and marginally more bullish on the M&A outlook. So I'm wondering if you could just talk a little bit in both those categories about what you're seeing in the stores; a little bit more around trade down behavior other than private label and the initiatives that you have underway for providing value. And then on the other side, just on the M&A, what you're seeing in terms of valuation expectations and, I guess, your volume in the pipeline?

Sure. I'll start with the consumer. We have noticed a slight softening in the economy, which is reflected in some consumer behavior. It's important to remember that about three-quarters of our consumers have annual incomes over $50,000, which is significant considering the cost of living in our operating regions. The most expensive state where we operate is ranked 22nd in cost of living, and seven of the ten least expensive states are in our market. This means that $50,000 has a greater purchasing power in our areas compared to many other parts of the country. In our stores, we're observing consistent buying behavior from the group earning $50,000 or more, with no notable changes. However, among the 25% making less than $50,000, we are seeing some shifts towards private label products and a reduction in discretionary spending on items like lottery tickets and indulgent treats. They are also opting for more affordable options, such as candy, and increasingly purchasing individual meals from the freezer section, possibly as a substitute for dining out at quick-service restaurants. While we've noticed this shift in buying patterns, our customer traffic remains positive, indicating that consumers are still shopping. The advantage of our business model is that we provide essential items that people need, ensuring ongoing customer visits, albeit with some changes in their shopping behavior. So far, it appears that low-income consumers have been the most affected.

Irene, regarding M&A, our pipeline appears quite strong as we look at potential opportunities. We feel optimistic about it. There are a couple of factors at play. The cost of financing has definitely increased for anyone looking to make a deal, which we see as a positive aspect. This higher cost tends to push marginal buyers out faster, and many non-strategic buyers have already stepped back from processes we're considering, especially where financing advantages don't exist and they lack synergies. Therefore, the number of potential buyers is generally smaller. The operating environment for sellers remains challenging, particularly for smaller operators facing rising costs and the need for reinvestment in their businesses, along with labor issues, which ultimately benefits us. The industry is still navigating valuation expectations. Sellers typically aim to start with peak fuel margins and historical multiples based on 0% financing, which does not reflect our current reality. Initially, this leads to some negotiation standoffs, but we are seeing some progress in breaking these valuation disconnects in many of the processes we are pursuing.

That's really helpful. Thank you. And then just one other question, please, around cheese pricing. You said that you have 43% of this year's needs locked in. Can you tell us at what price? And can you also give us an idea of whether sort of that 43% is time-based or sort of prorated across the year? And what are your plans in terms of locking in pricing given where we are today versus where we were three months ago on pricing?

Well, we watch the prices every day. So this is a big deal to us, obviously. And so if we feel like we can lock in year-over-year deflation as a general matter, that's a pretty attractive entry point for us to be able to do that. The 43%, it is across the whole fiscal year. It's a little bit higher in the first quarter. We're kind of two-thirds or so locked in the third quarter or in the first quarter, I'm sorry, and then it progressively goes down from there. And again, I think, I said we're about low-double-digits, 10% to 15% deflationary in the first quarter based on the amount that we've locked, and it probably would be consistent as you go into the later quarters too. But where this trip ultimately settles is still remains to be seen. And so that number can change. But we're certainly in a much better spot coming out of the gate on cheese than we were entering fiscal '23.

The next question comes from Chuck Cerankosky with Northcoast Research. Your line is open.

Good morning, everyone. Darren and Steve, can you address shrink in the quarter and the year and whether that's a component of concern in operating the stores?

Yes, Chuck. Shrink is always a concern in our stores and our business. I would say that so far, we have not seen any real shift in shrink versus where we've been historically. And I know there's a lot of talk out in the industry about shrink, but we just have not experienced that yet in our stores at this point.

Okay, that's great. In the tobacco category, as we look ahead to fiscal 2024, the volume continues to decline. What impact is that having on the gross profit margin?

Well, Chuck, what we've experienced is essentially, kind of, flat sales from a dollar perspective and kind of mid-single-digit erosion in unit volume. And so the pricing that we've been able to pass on has essentially covered the cost increases plus maybe $0.01 or $0.02 a pack. So from a dollar standpoint, it's holding steady, but from a margin rate perspective, it does put a little bit of pressure on the grocery and general merch category. I don't know exactly what that impact is, Steve, I don't know if we actually.

We have the math on that. However, what we've also observed overall in the grocery and general merchandise category is some margin expansion. I believe we've been able to offset any pressure from tobacco by accelerating our private label initiatives and collaborating more closely with our supplier partners on activities that enhance margins, effectively mitigating the drag caused by tobacco.

The next question comes from John Royall with JPMorgan. Your line is open.

Hi, good morning. Thanks for taking my question. So can you talk about the recent volatility on the fuel margin side going from the mid-30s in 4Q? And I think Steve said it jumped to the low-40s in May and then snap back to the low-30s. Can you talk about the drivers of that volatility? It doesn't feel like price has been quite that volatile since the end of April. So any color there would be helpful. Thanks.

Yes, John, we experienced some fluctuations in wholesale costs that have been quite volatile. We're not alone in this situation; it's a competitive market. Therefore, we need to remain competitive with other players, and sometimes this interplay between rising costs and competitive pricing can lead to varying margins. Overall, this month's variation has been a bit more pronounced than what we typically see. Looking at the last four months, two months were in the low-30s and two in the low-40s. Normally, the difference isn't as significant, but there’s nothing particularly unusual driving this aside from ongoing competitive pressures and changes in wholesale costs.

Okay, that's helpful. Thanks, Darren. And then I noticed you had a pretty sizable working capital draw in 4Q. Any color around that and any portion of that that might be reversible in 1Q or later on in the year?

Yes. John, this is Steve. I think from a working capital perspective relative to where we were in the prior year. So a lot of our working capital change is just going to be driven by the price of fuel. So right, as the wholesale value of fuel goes up, and a particular period that's going to show up as an increase in inventories for us and it's going to show up as an increase in payables, and then it's going to go the opposite direction. And so the single biggest impact on our working capital change, both in the prior year 12-month period was a big change in the wholesale cost of fuel, and it was the same this year; it just happened to be going in the other direction. There is nothing substantially different happening in the business. We generally, as we add units, our working capital positive, just based on the timing with which we procure fuel and have to pay for fuel and receive credit card payments. And so adding a bunch of units at the very end of the period this year will have a differentiating impact on working capital if we add units at a different pace in the prior year as well.

The next question comes from Krisztina Katai with Deutsche Bank. Your line is open.

Good morning. This is Jessica Taylor on behalf of Krisztina. I wanted to revisit the topic of vendors and pricing and get your opinion on the competitive landscape regarding pricing. Are your competitors taking more pricing actions? Additionally, from a vendor standpoint, are you noticing anything in your negotiations and joint planning that suggests your vendors are trying to push for more units and adjust their pricing accordingly?

Yes, Jessica. From a competitive standpoint, we do see some competitors still continuing to take price. And I would say particularly among the smaller operators, that dynamic is not all that different than fuel, where they don't have a lot of levers to pull, so they're pulling the price lever to try to offset higher costs across the board. So we are seeing some of that. From a supplier perspective, it really depends on the type of supplier in the industry and the categories that they're in. I think we're seeing an interesting mix of some suppliers that still believe they have the ability to pass on more price. And so we are seeing a little bit of that. That has certainly moderated from where it was a year ago. We see others, like I mentioned before, in the beer category who are looking to be a little more aggressive this year, and we expect them to be battling over share. And so we're expecting some price off on that category. So a little bit of a mixed bag from that perspective.

As a follow-up to our last call, we discussed pizza briefly. I'm curious if you're noticing any decline in sales of slices or whole pizzas and what the promotional landscape looks like. Are competitors still offering many promotions?

In Pizza, we've seen decent performance. The units for slices have been increasing. Whole pies, however, have shown some weakness in terms of units, although we've implemented significant price increases in that category. Overall, we're experiencing flat to slightly negative results in this area, which is actually better compared to our pizza competitors. We've begun to notice increased promotional efforts from major pizza rivals who are trying to boost their unit sales; we are taking a more cautious approach to this. While we are participating in some promotional activities, we believe our pricing is competitive enough that we don't need to offer significant discounts. Our strategy focuses on maintaining an everyday low-price, which has been effective for us.

I show no further questions at this time. I would now like to turn the call back over to Darren for closing remarks.

All right. Thank you, and thanks for taking the time today to join us on the call. I'd also like to thank our team members once again for their contributions and delivering another record year. And we look forward to seeing everybody on Investor Day on June 27.

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