Earnings Call Transcript - CASY Q3 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the Casey’s General Store Third Quarter Fiscal Year 2022 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 our speaker today, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead.

Brian Johnson, Senior Vice President, Investor Relations and Business Development

Good morning and thank you for joining us to discuss the results from our third quarter ended January 31, 2022. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today is Darren Rebelez, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer. Before we begin, I’ll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the 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 recent acquisitions, 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 third quarter, can be found on our website at www.caseys.com under the investor relations link. With that said, I would now like to turn the call over to Darren to discuss our third quarter results.

Darren Rebelez, President and Chief Executive Officer

Thanks, Brian, and good morning, everyone. We’re looking forward to sharing our results in a moment, but I’d like to start by thanking our 43,000 Casey’s team members for their tireless efforts as we continue to overcome the ongoing challenges with COVID-19 and the resulting supply chain issues as well as weather conditions in our geography. Our team members have done an outstanding job navigating through these difficult situations and the team's ability to perform under the circumstances is something I'm especially proud of and grateful for. At Casey's, our purpose is to make life better for our communities and guests every day. As a rural Midwestern operator, we play a significant role in the towns we operate in; it is a privilege and a responsibility we take to heart. In February, we once again activated our hunger campaign in partnership with Feeding America. This partnership raises funds that support 52 local food banks in the communities where we operate. Hunger continues to be a real issue in our communities. We appreciate Monster Energy's partnership in this year's campaign and all our team members and guests who supported the effort. The campaign raised over $500,000 and will fund over 5 million meals. In the third quarter, we closed our third strategic acquisition of the year with the 40 pilot stores in the Knoxville, Tennessee market, underscoring our commitment to accelerating unit growth. These stores will help us further build out our footprint in Tennessee and will be supplied from our existing distribution center in Terre Haute, Indiana. I’d like to personally welcome those employees to the Casey's family. We're excited to become a part of the Knoxville community and appreciate your partnership as we integrate those stores into our network. We're also excited about the strong progress we've made integrating our two previous strategic acquisitions of Buches and Circle-K, which are on track to realize expected synergies. Overall, we're highly confident in our ability to deliver on our strategic commitments and manage through the near-term challenges presented by the current environment, as evidenced by our third quarter results. As you've seen in the press release, we delivered an outstanding third quarter. Diluted earnings per share were a record breaking $1.71, up 64% from the prior year. Total gross profit dollars increased $124 million to $664 million compared to the prior year. Net income was $64 million, up 66% from the prior year. Same-store sales were strong for both inside sales and fuel as guest traffic continued to improve. Inside same-store sales were up 7.6%, and fuel gallons increased 5.7%. Our inside margin remained relatively flat versus the prior year, despite supply chain and price inflation issues. In fuel, margin increased over $0.38 per gallon, despite a volatile cost environment during the quarter. I’d now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 7.6% for the third quarter compared to the prior year with an average margin of 39.4%. Same-store grocery and general merchandise sales were up 7.7%, and the average margin was 32%, an increase of 130 basis points from the prior year. We've been able to expand margin due to the great work our team has done navigating supply chain and inflation challenges by making price adjustments and leveraging strong supplier partner collaboration. We performed well across all categories with non-alcoholic beverages and salty snacks continuing to perform exceptionally well. Non-alcoholic beverages in total were up over 24% on a two-year stack basis. Alcohol same-store sales were mid-single digits despite challenging comparisons and remain up over 23% on a two-year stack basis. This growth is being driven by approximately 1,500 stores that sell hard alcohol. We've significantly broadened our assortment of spirits in these stores, and it shows in our results. This scale and liquor licenses is a unique competitive advantage to Casey’s relative to the rest of the industry. Same-store prepared food and dispensed beverage sales were up 7.4% in the quarter. The average margin for the quarter was 58%, down 260 basis points from a year ago. Pizza slices continue to perform well, up 24% for the quarter, while hot breakfast sandwiches were up close to 49% as part of the company's breakfast menu relaunch that began in September. Margin has been adversely impacted by supply chain challenges and inflation, partially offset by menu price increases. During the third quarter, same-store fuel gallons sold increased by around 5.7% with a fuel margin of 38.3 cents per gallon, up approximately $5.4 per gallon compared to the same period last year. The fuel team continues to do a tremendous job balancing fuel volume and margin to optimize the profitability of the category. Fuel margins remain strong, which we view as a long-term favorable trend, as the industry remains reliant upon fuel margins to offset higher operating costs. I’d now like to turn the call over to Steve to go into some detail on the financials.

Steve Bramlage, Chief Financial Officer

Thank you, Darren, and good morning. Before I jump into the financials, I'd also like to take a minute to acknowledge the team given the strong performance throughout the entire business this quarter. The company fired on all cylinders from operating the stores to managing fuel, merchandising the floor, generating momentum and guest engagement with our various marketing initiatives. All the while strongly collaborating with our partners to manage the inflationary and supply chain challenged environment. Total revenue for the quarter was approximately $3 billion, which is an increase of $1 billion, or 52% from the prior year. Total inside sales rose 15.4% from the prior year to $1 billion. For the quarter, grocery and general merchandise sales increased by $108 million to $733 million, an increase of 17.3%, and prepared food and dispensed beverage sales rose by $29 million to $293 million, an increase of 10.9%. Please note the reported figures are favorably impacted by 9% more stores operated on a year-over-year basis. Though I'll point out prepared food and dispensed beverage was less favorably impacted due to the timing of kitchen installations that are recent acquisitions. We won't start selling our prepared food menu in these new acquisitions until we finished remodeling the stores. Retail fuel sales were up $851 million in the third quarter, driven by a 19.9% increase in total gallons sold to 622 million gallons, as well as a 48% increase in the average retail price per gallon. The average retail price of fuel during this period was $3.14 a gallon compared to $2.12 a year ago. As a reminder, reported fuel results do not include the Buchanan Energy wholesale fuel business, which is included in the other revenue category and is responsible for the vast majority of the $53 million increase we saw this quarter in this line item. We define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey's had gross profit of $664 million in the third quarter, an increase of $124 million or nearly 23% from the prior year. This is driven by higher inside gross profit of $52.3 million, or 14.9%, as well as an increase of $67.4 million, or 39.6%, in fuel gross profit. Inside gross profit margin was 39.4%, down 20 basis points from a year ago. The merchandise team did a tremendous job offsetting cost increases across all categories. Inside gross profit margin was also negatively impacted by 70 basis points from a higher than normal LIFO charge. This non-cash charge is a function of the higher costs of existing inventory, and was particularly impactful to our prepared food and dispensed beverage margins. The grocery and general merchandise margin was up 130 basis points to 32% from a year ago. The increase was driven by an improved product mix of single-serve non-alcoholic beverages and snack items, as well as a favorable comparison to the merchandise discounts that were taken last year during our store resets. Those resets have made a positive impact to inside sales and margin throughout the last 12 months. Prepared food and dispensed beverage margin was 58%, down 260 basis points from the prior year. The decline was due to significant cost increases that occurred in our prepared food and dispensed beverage ingredients and pizza toppings, as well as an approximately 100 basis point impact from the higher than normal LIFO charge I previously mentioned. The merchandise team was able to partially offset the cost increases with around of proactive menu price increases and a more significant round of increases is scheduled for mid-March. These increases should more than offset the adverse impact of higher cost of goods. Cheese costs did not have a meaningful impact on margin this quarter. The quarterly costs were $1.99 per pound, compared to $2 per pound last year. While supply chain challenges have improved since the second quarter, notably in cups, the company still experienced disruption within prepared food and dispensed beverage. Bakery items specifically, popular glazed doughnuts, continue to be in acute short supply as our vendor partners experience COVID-related disruptions. Fuel gross profit benefited by over $10 million from the sale of RINs. All RINs generated were sold in the quarter and there was no carryover from previous quarters. Our grocery and general merchandise gross profit increased by $42.6 million and our prepared food and dispensed beverage gross profit increased by $9.8 million. We also saw a $4.5 million lift in other gross profit. This is primarily due to the dealer network activities and car washes that we acquired from the Buchanan Energy acquisition. Total operating expenses, excluding credit card fees, were up 16.6% to $443 million in the third quarter. Total reported operating expenses were up 18.5%, or $77 million, which is consistent with our expectations and a reduction from our second quarter growth rate by several hundred basis points. Approximately 9% of the operating expense increase is due to unit growth because we operated 202 more stores than in the prior year. Approximately 4% of the OPEX increase is due to same-store employee expenses, offset by a 2% reduction in store hours worked. Our store operations team has done a great job reacting to the challenge to operate our stores more efficiently, given the wage pressure impacting the industry. Store-level wage rates were up 10.5% from the prior year. Finally, due to the higher retail fuel prices mentioned earlier, same-store credit card fees also rose to account for another 2% of the operating expense increase in the quarter, and finally, 2% of the increase is due to higher incentive compensation. Depreciation in the quarter was up 15.9%, driven primarily by the store growth along with a new distribution center placed in service at the start of our fiscal year. Net interest expense was $14.4 million in the quarter, compared to $11.5 million in the prior year. The increase is due to the additional debt taken on to fund the Buches and the pilot acquisitions. The effective tax rate for the quarter was 23.4%, compared to 21.3% in the prior year, driven primarily by timing associated with the recognition of tax credits in the prior year. Net income was up in the prior year to $64 million, and EBITDA for the quarter was $173.5 million, compared to $125.7 million a year ago, an increase of 38%. The Buchanan Energy, Circle-K and pilot acquisitions were all accretive to EBITDA in the third quarter as we expected. Our balance sheet remains strong. As of January 31, cash and cash equivalents were $187 million, and we have full capacity of our $475 million in lines of credit available, giving us ample liquidity of $662 million. Our leverage ratio remained at 2.4 times post the closing of the acquisitions, which is consistent with the first and second quarters. For the quarter, net cash generated by operating activities of $81 million, less purchases of property and equipment of $105 million, resulted in the company using $24 million in cash flow. This compares to generating $7 million in the prior year. The slight decline in free cash flow for the quarter, which is seasonally our lowest, was primarily attributable to the payment of payroll taxes we made this quarter that were temporarily deferred last year as part of the federal Cares Act. At the March meeting, the Board of Directors voted to maintain a dividend of $0.35 per share, unchanged from the second quarter. We will continue to remain balanced in our capital allocation going forward, leaning into the many EBITDA and ROIC accretive growth-related investment opportunities that we have while continuing to repay that gradually towards two times and consistently returning cash to shareholders through our dividend. The Board recently approved an increased share repurchase authorization of $400 million and we will remain opportunistic in this regard. So far this year, the company has opened 11 new stores and has acquired 191 stores. The company is maintaining its fiscal 2022 outlook that was previously disclosed. The fourth quarter is off to a good start, and we expect that to continue through the end of the fiscal year. Casey’s expects the fourth-quarter same-store sales, below single digits for fuel and up mid-single digits for inside the store. Fuel margins are currently trending in the low to mid 30s cents per gallon quarter to date. We continue to expect fourth quarter operating expenses to improve from prior quarters and increase between 11% to 13% versus the prior year. There have been no changes in our expectations for operating expense items that we control. However, given current retail fuel prices, we are going to be at the high end of that range. The recent rise in retail prices of fuel due to the conflicts in Ukraine should they continue at current levels could potentially push us above the range as credit card fees would continue to rise. Regardless, we expect net earnings in the fourth quarter to be higher than the prior year.

Darren Rebelez, President and Chief Executive Officer

Thanks, Steve. As you can see, our business is really starting to take off as the country gets closer to normal in the wake of the pandemic. Casey’s has shown tremendous resiliency throughout COVID, and we're positioned especially well to deliver future value to our shareholders through our strategic plan. As a reminder, the three pillars of our strategic plan are to reinvent the guest experience, create capacity through efficiencies, and be where the guest is to be disciplined to growth. All three pillars are supported by investing in and growing our talented team. Our industry-leading prepared food program is poised to outperform. This category was more heavily impacted by COVID due to the disruption in daily commuter traffic patterns compared to the traditional convenience store items like beer and tobacco. We believe the resurgence we've begun to experience this quarter is likely a sign of things to come. Casey's rolled out a successful breakfast relaunch with innovative new items such as our Toast which signature handheld loaded breakfast burrito and bean-to-cup coffee. The result was a mid-teen percentage lift in morning daypart traffic and same store sales. This is a great example of the kind of culinary innovation you can expect from Casey’s moving forward. In addition to our new products, core menu items such as pizza slices were up 25% for the year and are not showing any signs of slowing down. Overall, as guest traffic improves, we're well positioned with our prepared food program to disproportionately benefit. The progress we've made in reinventing the guest experience with our digital engagement will further bolster our business. Digital sales were up 11% in the third quarter, on top of a 95% increase in the same quarter last year. Our Casey's Rewards enrollment continues to grow and now sits at 4.6 million members. We have never had a more accurate and efficient means of communicating personalized offers to our guests than we have right now. Finally, with curbside pickup in all of our stores, in addition to our partnerships with third-party aggregators, it's never been more convenient for our guests to try our made-from-scratch pizza and other items. We now have over 1,400 stores that offer some sort of delivery service for our guests. Our private label program continues to grow and take market share. Not only are the products high quality, but they are also a more affordable alternative for our guests seeking value. This is particularly relevant in the current inflationary environment that our guests are experiencing today. We currently offer over 250 items and are confident in our ability to achieve our longer-term goal of 10% penetration of the grocery and general merchandise category. We're currently trending at our exit rate goal for the year of 5% mix in Casey’s branded products with new items on the way. Our efficient self-distribution system has been instrumental in helping us navigate through one of the most difficult supply chain environments the country is experienced in decades. Our new distribution center in Joplin, Missouri allows us to more efficiently support stores, and our existing network will also enable us to expand our reach into new markets within our geography. We believe that, coupled with our proprietary prepared food program, will help deliver best-in-class margins inside of the store. Considering almost 65% of the convenience stores in America are operated by owners of 10 stores or less, the capabilities I just mentioned provide Casey’s with a significant competitive advantage, particularly in the rural communities we call home. Larger operators with less efficient prepared food programs, the smaller operators often don't have the scale to make investments in digital customer engagement, omnichannel retail, self-distribution, or private label brands. Casey’s is in the fortunate position to leverage this advantage to be where the guest is and grow units organically via new store construction or, as you've witnessed more recently, through acquisitions. Our dedicated M&A team has been busy executing on three significant acquisitions and is ready for more. Income tax uncertainty, labor shortages, supply chain challenges, and inflationary pressures have brought about significant consolidation in our industry, and Casey’s is poised with an incredibly healthy balance sheet to take on many more deals to come. Given that roughly 2,000 of our stores are only in 9 of our 16 states we operate in, we have tremendous white space to grow our business, both within our current footprint and in contiguous markets. Now none of this would have been possible without the incredibly talented leadership team we've assembled here at Casey’s. The team has a strategic plan of long-term Casey's leadership and outside talent with a fresh perspective on the business. Centralized procurement, loss prevention, and consumer insights are just some of the new capabilities we've recently added to the business. So as we begin to finally emerge from the pandemic and embrace the new normal, I think you'll find that the strength of our business model will really come to the forefront. We are incredibly excited about the future ahead and firmly believe we have the right strategy and team in place to achieve long-term sustainable shareholder value while also making a positive impact on the communities we serve. We're now prepared to answer your questions.

Operator, Operator

Thank you. Please limit yourself to one question and one follow-up. Our first question comes from Karen Short with Barclays. Your line is open.

Karen Short, Analyst

Hi, thanks very much. Sorry for this short-term question. But I'm wondering if you could just first start off by giving a little color on the price, the actual percent price increase that you took in this quarter, and then the impact the comp this quarter, and then the anticipated price increase that you will take in March, and how that will impact the comp and then I had one or two other bigger picture?

Steve Bramlage, Chief Financial Officer

Yeah. Good morning, Karen. This is Steve, I'll start with that. We incurred about a 4% cost increase across the board if you think of our goods for resale and so over the course of the quarter, we took about a comparable percentage increase in price. They didn't all occur on the first day of the quarter to be fair, and it was kind of layered in over the course of the quarter. So the net was a little bit less than that. But we will roll into a 4% increase, and then the price increases that I mentioned coming in March are going to be somewhere in the neighborhood of 5% to 6% on average, across most of our prepared food SKUs and again, those we won't absorb all of that in the current quarter. But annualized, that's what that number will be.

Karen Short, Analyst

Okay, so when we think about the gross margin decline in prepared foods, so that would be a function, obviously, a lag in taking place, but within grocery, you would say that was much more aligned to the cost increase? Or maybe I'm just trying to understand how to think about gross margin beyond Q4?

Steve Bramlage, Chief Financial Officer

Yeah, I think your assumption is correct. We were lined up — the price increase in the cost increase was more closely aligned in the grocery business, because that business primarily is contractual for us, and so as we worked through annual contract renegotiations over the last couple of months with our supplier partners, we had a pretty good sense of where those were going to land and were able to act on retail adjustments really about the same time that the cost started coming through. The prepared food business is much less contractual and much more commodity-oriented in nature and so it's a little bit tougher for us to line that up exactly, and it tends to lag. But I would point out on the prepared food side, the LIFO charge just mechanically was a much heavier impact in the quarter on that particular side of the business, just by the nature of how it works for us.

Operator, Operator

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

Ben Bienvenu, Analyst

Hey, thanks. Good morning. Just following up on Karen's question there as it relates to the prepared food margins. Two-part question: one, was the LIFO charge that you saw in the quarter isolated to that quarter? Would you expect to take any subsequent charges associated with LIFO expense? And then, typically, the prepared food margin, I don't know that there's so much seasonality, but it does have a pattern of declining sequentially from Q3 to Q4. I'm wondering if that would be the case again this year, just given that LIFO dynamic and the commodity backdrop?

Steve Bramlage, Chief Financial Officer

Yes. This is Steve, I'll start with that on the mechanics of LIFO. We actually take LIFO charges almost every quarter, just the way that the accounting works, in a non-inflationary environment, they tend to be de minimis, and we don't obviously talk about them very often. The prepared food business is much less contractual and much more commodity-oriented in nature and so it’s a little bit tougher for us to line that up exactly, and it tends to lag. But I would point out on the prepared food side, the LIFO charge just mechanically was a much heavier impact in the quarter on that particular side of the business, just by the nature of how it works for us.

Ben Bienvenu, Analyst

Okay, great. Thank you. And then my second question is just related to your taking pricing relative to any elasticity you're seeing from your customer set. I know the backdrop is changing rapidly, day by day, and it's increasingly dynamic. What are you seeing, if anything, with respect to price sensitivities from your customers, migration across categories in the store, trading down, etc.? That'd be helpful to hear. Thank you.

Darren Rebelez, President and Chief Executive Officer

Yes, and this is Darren, and I would say, generally speaking, we've seen good momentum in the business. As you can see from the inside sales, that is a blend of both increased velocity from a unit standpoint as well as price. So, we're pretty balanced at this point in that respect. But one thing I would say is, we have seen a ramp more recently with the private brand products and you can see that mix start to shift a bit. And so we probably are experiencing some trade down. But that really accrues to our benefit because the penny profit in those private brand items is actually higher than in the national brand. So, we actually, we don't mind seeing that and like I mentioned earlier in the narrative that we've hit around that 5% exit rate goals. So we’re a couple of months ahead of schedule on that, and that I think is important from that mix shift.

Operator, Operator

Thank you. Our next question comes from Kelly Bania with BMO Capital Markets. Your line is open.

Benjamin Wood, Analyst

Hi, guys. This is Ben Wood on for Kelly Bania. Thank you for taking our question. I first wanted to dig in on store growth. By our math, you'll need to add about 80 stores in 2023 to hit your 2023 goal, which is down significantly from the 225 stores this year. So does the lumpiness of acquisitions this year limit your ability to grow next year? If not, wondering how you're thinking about potential upside to that target store number in 2023. Is another 200 stores possible in this environment?

Darren Rebelez, President and Chief Executive Officer

Ben, this is Darren. I'll start by addressing your second question. The acquisitions we made this year will not hinder our ability to pursue more deals or expand our store base next year. While we haven't provided guidance for fiscal 2023 yet, we are very confident in our commitment to achieving 345 stores over the next three years, so we have no concerns about that. Regarding the possibility of adding another 200 stores, much of that depends on acquisitions and their timing. We don't control when businesses are available for sale or at what price, but we are actively participating in the market with a dedicated M&A team that's engaged in numerous discussions. Currently, it's becoming increasingly challenging for smaller operators to remain viable, much less compete effectively. We see an active M&A market but will maintain discipline regarding the types of assets we acquire and their costs. This is why we value organic growth alongside our M&A efforts, so we won't feel pressured to acquire assets that aren't a good fit or to overpay just to maintain a favorable growth rate.

Ben Bienvenu, Analyst

Thank you for the information. I have a quick question about the breakfast segment. Could you provide some insights on how the breakfast sales are performing compared to 2019? I'm trying to understand the 17% increase in same store sales and how much of that is attributable to the new menu items versus changes in customer traffic patterns.

Darren Rebelez, President and Chief Executive Officer

Well, what I would tell you is I think the guest traffic is a result of the menu launch we've got. We have new product news, we did put some media behind it, and we have some unique items. The Toast which item leverages our made-from-scratch pizza dough, it's highly craveable, it's highly affordable, it's value priced, and it's something unique that you can't get anywhere else. And we upgraded our coffee program at the same time. So we put that combination together, and we started to see some improved traffic in the morning day part, and then that benefited the entire store because not everybody gets a prepared food item. But we sold the Toast which sandwiches, we sold the loaded breakfast burritos, and people will buy other items across the store to complement those food products. So I think that really accrued our benefit. Like I said, we saw mid-teens increases in both traffic and sales during the morning day part.

Operator, Operator

Thank you. Our next question comes from Chuck Cerankosky with Northcoast Research. Your line is open.

Chuck Cerankosky, Analyst

Good morning, everyone, great quarter. I want to talk a little bit about kitchens. Do you have a schedule you can provide with us as you add kitchens to the acquired properties?

Darren Rebelez, President and Chief Executive Officer

You know, Chuck, I don't have a schedule in front of me right now that I could share with you. And we can follow up on that. But suffice it to say where we put those kitchens in as soon as we can get permitting available and in contractors lined up. Now we've done roughly 40 of the Buchanan Energy stores so far, and I'll tell you, we're really happy with what we're seeing in the performance of those kitchens. If you look at the Omaha market, in particular, where we had Buches, I would tell you at what I would consider an above-average prepared food program relative to the industry, and we've already seen that we've more than doubled the prepared food volume in those stores in Omaha where our brand is more known. Now, if you go out into the Chicago suburbs, where we're a little less known, we also have nearly doubled the prepared food volume in those stores, just at a lower rate than what I would expect our normal run rate to be, and so that continues to grow. So we're having great success in those conversions. But it'll probably be the bulk of this next calendar year. There will be remodeling kitchens in the Circle-K and in the pilot acquisition, in particular, to get all those stores converted.

Operator, Operator

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

Bonnie Herzog, Analyst

Alright, thank you. Good morning, everyone. I wanted to ask you guys, certainly about fuel margins, which have remained elevated. And I think you mentioned they are trending in the mid-30 cents per gallon range quarter-to-date. But as we look at the past few days, crude has gone up very sharply and the outlook suggests it's going to keep going. So just curious, could you give us a sense of where fuel margins are trending? Honestly, just even in the last few days or a couple of weeks? And if, in fact, they've turned negative, which I've seen in a few places, so I'd be curious to hear that. And then on fuel gallons, given record levels of prices at the pump, have you guys seen any evidence of consumers simply not filling up their tanks, and then and/or decrease conversion into your stores in the last couple of weeks?

Darren Rebelez, President and Chief Executive Officer

Hey, Bonnie. This is Darren, and I'll try to explain that. I'm interested to know where you're hearing about negative fuel margins because we aren’t experiencing that here. In the last few days, we've seen the cost of fuel rise sharply, but we've also been able to raise prices significantly. This has helped us maintain our margins. It may seem counterintuitive, but when prices go up quickly, consumers tend to buy more because they fear prices will rise even higher. As a result, our fuel sales have increased more than our previous trend line. However, when prices peak, people will fill their gas tanks, and we may see a temporary drop in fuel volume before it normalizes again. I also want to provide a broader perspective on the situation because the headlines seem overly dramatic. It's been a long time since we reached $4 per gallon gasoline in the US, the last time being in July 2008 during the financial crisis when it peaked at $4.06, which would be equivalent to $5.30 today when adjusted for inflation. Thus, $4 per gallon doesn't carry the same weight as it used to. In 2008, we did witness some demand reduction, but that was also during a significant recession with unemployment rising from 6% to 10%. Comparing that to today—with unemployment at 3.8%, a labor shortage, and companies bringing employees back—there aren’t any substantial barriers to increasing fuel volume. While there is a price point where consumers might change their behavior, we believe that point is closer to $5 than $4 right now. Lastly, national average fuel prices don't accurately reflect what's happening in the Midwest. National prices are significantly affected by the Northeast and West Coast, both over $4 per gallon. In our 16-state market in the Midwest, prices are just under $4, primarily because we use a lot of ethanol, which is trading much lower than gasoline. This structural difference allows us to keep retail prices lower while maintaining our margins.

Bonnie Herzog, Analyst

Thank you for that. That's super helpful and great color. A lot of that makes sense. I guess the only other consideration is the low-income consumer this year to see how that trends as the year progresses. Maybe one final question for me just maybe a high-level question on your next fiscal year. I know you're not yet giving guidance. But, given the expectations for crude to stay at elevated levels this year, how do you guys feel about your ability to deliver top quintile EBITDA growth for your fiscal year ‘23?

Darren Rebelez, President and Chief Executive Officer

Yeah, Bonnie, as I mentioned, we haven't provided any guidance yet. However, we are still very confident in our ability to fulfill that commitment. We have a lot happening from a merchandising perspective. I believe that the current situation is more of a short-term issue, especially considering how crude oil is trading right now in the futures market. The market is heavily backward-dated, suggesting that traders anticipate crude prices will decrease in the coming months rather than increase. We'll have to wait and see how that unfolds. Nevertheless, the industry is still facing structurally higher operating costs. Due to the fragmented nature of the industry, there is a need to achieve higher margins to compensate for these increased costs, which will likely occur through retail fuel pricing. We've observed this trend over the past few years, especially during COVID, where we saw fuel margins rise significantly during periods of lost demand. We believe that these margins will continue, and when combined with our merchandising initiatives, we are very confident in our ability to achieve that level of growth and EBITDA over the next few years.

Operator, Operator

Thank you. Our next question comes from Anthony with a company, your line is open.

Unidentified Analyst, Analyst

Good morning and thank you for taking the question. So in terms of the operating expense guidance, it was certainly encouraging to see that you guys were able to reaffirm that guidance, even with the retail fuel prices going up and likely to hurt the credit card fees. So what's driving that? I know in the quarter you just reported you had a 2% reduction in store hours. Is that expected to continue? Or are there any other factors at play as far as operating expense management?

Steve Bramlage, Chief Financial Officer

Hey, Anthony. Good morning. This is Steve. I'll start with that. Nothing has changed on our end concerning our OpEx expectations for things we control in the quarter. So we did a really good job managing the hours within the stores. I'm confident we will continue to do a really good job managing hours in the store. There’s a lot of focus on efficiency within the operating organization today. We naturally will expand some hours seasonally, but we've incorporated that already. We know the wage rates that are prevailing in our markets, and we're competitive in those markets. I think we have a good handle on what we're going to need to pay in that regard. I'd remind you, in the prior year, we did take some one-off impairment charges associated with putting new equipment into the store, etc. That's part of the reason our percentage will tick down in the fourth quarter. So that sort of thing will not recur. I don't think there's significant dollar risk associated with it as we sit here today at this point in the quarter.

Darren Rebelez, President and Chief Executive Officer

And Anthony, I just build on one of the things that Steve mentioned about the operations team. Their labor productivity has increased a lot; from a gross profit dollar per labor hour perspective, we increased productivity by 14% in the quarter, and so that team has really done a nice job. And at the same time, you saw the sales growth in the traffic growth. They were able to manage the controllables and be very efficient and still deliver a great guest experience and deliver on the sales expectations. So very happy with that team.

Unidentified Analyst, Analyst

Got it. Yeah, but thanks for that color. And then switching over, it's just to the prepared food side. So, given how successful you have been with the breakfast menu changes, are you planning to do any notable changes to the rest of your menu?

Darren Rebelez, President and Chief Executive Officer

Yeah, Anthony. We've got a lot of different things in the works. We're not prepared to talk about any of those today in sort of detail. But absolutely, the prepared food team and the culinary team in particular are always looking at innovation and optimization as part of their mandate. And so yes, we definitely have some things coming, but not ready to talk about that at this point.

Operator, Operator

Thank you. Our next question comes from Krisztina Katai with Deutsche Bank, your line is open.

Krisztina Katai, Analyst

Hey, good morning, guys. And congrats on a good quarter. I just wanted to start on fuel. When we're looking at your price gaps versus peers and just thinking about the smaller operators that do have to raise their prices to offset the rising cost of their operations. Are you finding that your price gaps are stable? Are they widening in the current environment? And could that be a net benefit for you, especially when we're thinking about you layering in your loyalty program to really communicate with the customer and stay top of mind?

Steve Bramlage, Chief Financial Officer

Yes, Christina, when we look at that we look at our prices as our differential to the low price in the market and to the high price and then the average price. What we're seeing is we're maintaining our delta versus the low price in the market. So we maintain our competitive position; we are starting to see that differential versus the high price in the market starting to widen out a bit, and that really typically is a reflection of the smaller operators because they need to extract more margin. So from that perspective, we would be able to gain some share. Based on the opus data and from our public company peers that we’ve normalized our fourth quarter to a calendar quarter and look at our public company peers, the other two they've reported we're down in same store gallons versus the prior year, and we were up nearly 5%. So we believe that even among some of the larger operators we are taking share in fuel, certainly, versus some of the smaller operators we are as well.

Krisztina Katai, Analyst

Got it. That's really helpful. It sounds like you feel really good about your business, but maybe just tackling if you could talk a little bit about the health of your core customer. You implemented some price increases in January, you said another 5% to 6% coming in March. Just how are they feeling financially, and how are you planning your business for any kind of a potential pullback in spending from the customer in response to some of the high inflation that we're seeing?

Steve Bramlage, Chief Financial Officer

Yes, right now, we think the consumer is in pretty good shape. About 60% of our guests make over $50,000 a year, and a lot of those have seen some of the most accelerated wage increases. So they're actually making a lot more than they have historically now; they're also having to spend more in an inflationary environment. But so far, we haven't seen any dramatic shifts in behavior among our core guests. So we think we're okay there. From a future-looking perspective, there are a couple things to keep in mind. One is that we do have our private label portfolio, which is really starting to take off and really provides a more affordable alternative for people seeking deeper value. The other thing that tends to happen in our industry in times like this is that we are the beneficiary of trade downs from higher or more expensive forms of retail. So in particular, in prepared foods. If you think about our prepared food offering today, it is already just naturally more value-oriented relative to QSR, fast casual, and certainly to full-service dining, when you think about a specialty pizza being at around $16 to $17 a pie, which can feed 3 to 4 people, that's a really great value for a family. In our breakfast menu, you can get a breakfast very easily for under $5, and so when you compare that to QSR and other restaurant concepts, we are very much an affordable trade down option. So we have historically seen that our prepared food platform benefits disproportionately in this kind of environment as consumers start to seek more value.

Operator, Operator

Thank you. Our next question comes from John Royall with JPMorgan. Your line is open.

John Royall, Analyst

Hey, guys, thanks for taking my question. So I had a couple of questions. I'm kind of downside risks in the economy and things like that, which I think you've mostly addressed. I guess the only remaining thing is there are some out there, a lot of commodity and with better forecasting, these $120 oil levels to persist for some time, or even worse than you depending on the geopolitics. So just go through how you would expect, I think it's relatively unprecedented types of levels that we haven't seen in the past. How would you expect a still business to perform? Obviously, we'd have adhesive demand; what would you expect on the margin side? Would margin kind of start to come in a bit in that scenario where you start to see demand come off from the consumer?

Steve Bramlage, Chief Financial Officer

John, again, I'll try to put the crude oil price in perspective like I did with the gasoline business. Back in 2008, when we hit that $4.06 peak and gasoline crude oil was actually at $140 a barrel. And in those dollars, that’s about $183 today. Again, if we persist at $120, that's expensive, but not nearly towards a peak from a historic perspective. The structural situation we have in this industry isn't changing. Underlying costs to operate this business are still going up; it's still getting more expensive for smaller operators to continue to survive. Retail prices are going to support expanded fuel margin to compensate for those costs. Until the point in time where we actually see some demand destruction, I think that dynamic is not going to change. Like I said before, I believe we’re not going to get any sort of meaningful demand destruction vis-à-vis retail prices until we get closer to $5 a gallon and maybe even then we have to take over that before we start to see any meaningful impact.

John Royall, Analyst

Understood. Thanks very much.

Steve Bramlage, Chief Financial Officer

Thank you.

Operator, Operator

Thank you. I’m currently showing no further questions. I’d like to turn the call back over to Darren Rebelez for closing remarks.

Darren Rebelez, President and Chief Executive Officer

Alright, 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 efforts this quarter. So we've had a great year so far, and we look to close out fiscal '22 on a high note. Fortunately, we demonstrate our ability to deliver results on our long-term strategic plan and fiscal year outlook in both normal times and during a global pandemic. And I'm confident we will continue to drive long-term shareholder value. Thank you, everyone, and have a great morning.

Operator, Operator

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