AGB 2023.3 - Casey's General Stores (CASY)
Scaling Up and Optimizing Operations
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Casey’s General Stores
Casey’s is the 3rd largest convenience store (c-store) operator in the U.S. with over 2.4k locations under the Casey’s, GoodStop and Bucky’s brands. Almost all of these locations are Casey’s, which is known for freshly prepared foods like pizza, donuts and hot breakfast items. GoodStop locations are typically smaller and don’t offer prepared food. The company has 43 GoodStop locations. Bucky’s stores came with the Buchanan Energy acquisition in 2021 and are all in the process of being converted into Casey’s or GoodStop locations. The company operates in 16 states, primarily in the Midwest around Iowa, Illinois and Missouri.
In 1968, Casey’s started as a single store in Boone, Iowa (population of less than 12.5k in 2021) and has expanded into other small towns across the Midwest. Casey’s stores are mainly located in rural towns and cities with 50% of stores operating in areas with populations less than 5k and 75% in areas with less than 20k. Among other c-store and dollar store operators, Casey’s ranks first in the least number of households and ranks third in the least amount of household income after Dollar General and Dollar Tree. And because of the company’s presence in the Midwest, Casey’s stores have the highest exposure to the agriculture economy.
C-stores are typically attached to a fuel station, usually with the exception of dense urban areas. Fuel margins are low (11% for Casey’s), but drive incremental traffic to the stores, which have much higher margins. Overall instore margins depend on the mix of goods sold, with prepared foods and dispensed beverages at higher margins (59% for Casey’s) than grocery and general merchandise (33%). Cigarettes, Beer and other age restricted products have the lowest margins, but these also drive incremental traffic into the store. Some of the highest margins are ice, hot dispensed beverages like coffee, and prepared foods and ice cream.
Because c-stores are selling convenience, packaging of goods are usually smaller, meant for a single person to consume immediately. It’s easy for customers to make a trip since 93% of the U.S. population lives 10 miles from a c-store and many are open 24/7. Customers typically visit a c-store when they’re fueling their car or for a quick fix of food, alcohol, tobacco, etc. Casey’s states that 75% of the transactions at Casey’s are instore only (non-fuel related).
C-stores as an industry have been very resilient over the years, with total store count increasing even as other retail concepts have experienced a decline. In 2001, there were 124k c-stores operating in the U.S. and that number has grown to almost 150k in 2022. Part of the reason is that many c-stores are owned by a single store operator. Over 63% of c-stores are owned by operators that have less than 10 stores. Even as the industry is consolidating, most of the M&A activity (Casey’s included) is still around buying out smaller operators.
Casey’s is different from others in the industry because of its prepared foods offerings. The company is known for its handmade pizza, which the company started selling in 1984. Casey’s recently expanded the food offering to include cheesy breadsticks, sandwiches, wraps, chicken wings, croissants, hash browns and burgers. As a result, the company has a higher mix of revenues coming from food and beverages vs. the industry, which results in higher gross margins for inside the store (40% vs. 34%).
What’s interesting about Casey’s is that it feels like the company is still on the cusp of professionalizing the business as it’s achieved scale. Casey’s is still undergoing many initiatives to improve operating efficiencies. In 2014, the company started offering 24 hour stores and pizza delivery. Then in 2018, Casey’s announced the Value Creation Plan, which introduced digital engagement (new website, mobile app, loyalty program, etc.), a fleet card program and price optimization.
Having a pricing strategy has been helpful for Casey’s to improve margins for both fuel and instore. In 2019, pricing initiatives backed by data allowed the company to drive 20bps of improvement. And while this is almost par for the course for many retailers of this size, most of the competition, especially in rural areas where Casey’s competes doesn’t have the benefit of this type of technology. Price optimization has also helped fuel margins in recent years. The company now has a centralized fuel pricing and procurement strategy, which helps in negotiations with suppliers. Scale has also resulted in more efficient distribution and better contracting terms.
Over the past 10 years, Casey’s has opened 481 stores, closed 121 and acquired 397 (more than half of which was in fiscal 2022 with the acquisitions of 89 stores from Buchanan Energy, 40 stores from Alimentation Couche-Tard and 40 stores from Pilot). Casey’s has averaged roughly 20 stores per year in acquisitions prior to 2022. This compares to 50 new store constructions per year. Because the company still has many greenfield opportunities, new store construction has driven most of the growth. This is favorable because Casey’s has more control over its future growth and return profile vs. being heavily acquisition dependent.
The company’s long-term plan is to grow EBITDA by 8%+. Of that, 3%-4% will come from the existing business through same-store sales growth, gross margin expansion and improving operational efficiencies. Over the past 10 years, same-store sales growth for fuel gallons has only increased 0.3% but same-store sales growth for inside the store has increased by 4.8%. The remaining 4%-5% will come from unit growth through new construction and M&A.