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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.
Why is it a good business?
As the third largest c-store operator in the U.S., Casey’s benefits from scale advantages. Compared to smaller c-store operators, Casey’s has more negotiating power with suppliers for both fuel and goods sold inside the store. Fuel margins have improved over the past decade due to pricing optimization, procurement and controlling more of the distribution. The company delivers 55% of its fuel supply with its own fleet of tankers.
However, the instore margins have remained relatively stable over the same time period, which is odd considering the company has more than doubled its instore revenues. As mentioned above, it seems like Casey’s is still in the early stages of optimizing its operations. The company has only just instituted a centralized procurement strategy in the beginning of fiscal 2021. Prior to this, the company didn’t try to influence price with its scale when making purchasing decisions. With its three distribution centers and fleet of trucks, the company should be able to gain efficiencies when centralizing procurement going forward.
Casey’s has also only recently instituted a rewards program through its digital app. Customers earn points when making purchases instore or at the pump and can redeem these points for fuel discounts or instore purchases. Rewards members also get special offers, which include a free large pizza after 10 purchases. The company reached 3.3M members in its first year and 6.1M by the third quarter of fiscal 2023. While it’s still early, Casey’s has seen better engagement from members with 15% increase in visits and 6% in average ticket size. The company has also been able to personalize most of its offers (75% by 2022) for members based on their purchasing patterns.
Towards the end of 2019, Casey’s launched a fleet card program to increase commercial traffic to their fuel stations and into the store. This only works if there is enough density around a local market for commercial customers to be incented to adopt the card. The initial uptake was slower than expected but it has grown to a meaningful size. By 2021, the program had over 8k accounts and 21k active cards. Fleet card purchases represented 11% of total gallons at Casey’s.
Scale also allows the company to offer private label goods, which command higher margins than branded goods. Casey’s launched its private label program in fiscal 2021. The company’s requirements for a private label product are that they must (1) have a retail price lower than the competing branded product, (2) command higher margins than the branded product, and (3) be in-line or higher quality than the branded product.
The company has seen a 2%-10% margin increase for the private label product depending on the category. Casey’s started with 150 SKUs in categories like jerky, nuts and water. Private label products represented 4% of instore sales by the end of the fiscal 2021. By the end of fiscal 2022, the company had almost 5% penetration of private label and offered over 250 SKUs. And by the middle of fiscal 2023, the company achieved 5.4% penetration of private label goods and 10% if you carve out tobacco and alcohol. The long-term goal is to increase private label penetration to 10% of instore sales.
Returns on incremental capital?
Over the past 10 years, Casey’s has spent 77% of its capital on capex and 23% on acquisitions. The company spends most of its capex on new stores and remodels of existing stores. In recent years, some of the capex went into developing the company’s digital capabilities (~5% in 2019). Looking at the fiscal 2020 budget, new stores represented 57%, remodels 11%, distribution capabilities 8%, technology 5%, and maintenance capex 18%.
In terms of unit economics (using 2020 numbers), a new store costs $3.3M to $3.7M to construct, depending on whether it’s a rural or urban location. This is less than the average cost of the industry of $4.0M and $4.7M. This is due to Casey’s lower cost of instore equipment ($300/sq ft vs. $500/sq ft is the industry average) and its inhouse construction team. New stores typically take about a year to construct after all the contracts are signed and take about 5 to 6 years to reach maturity.
New units typically generate $1.4M in instore sales and sell 1.2M gallons of fuel in the first year. This ramps up to $2M in instore sales and 1.7M gallons of fuel at steady state. This implies about a 7.4% in annual same store sales growth from year 1 to year 5 and 6.1% same store sales growth from year 1 to year 6. On the fuel side, it’s difficult to determine how much sales growth there will be because it’s dependent on where fuel prices go, but the increases in fuel gallons sold annually are 7.2% and 6% (depending on time to reach maturity). New store growth is very impactful to maintaining same store sales growth. Newly built or acquired stores typically average between 4%-6% of existing stores in a given year.
For steady state, if we add instore sales of $2M to $3.3M in fuel sales (assuming instore sales as a % of total sales ~40%), we get to total revenues of $5.3M. Average store level operating income was 7% for fiscal 2022. Adding 2% for D&A, we get to a store level EBITDA margin of 9%. This may be underestimating store level EBITDA because a mature store should have higher operating margins than the company average of 7%. This implies a $480k of EBITDA. With initial investments of $3.3M to $3.7M, that’s a return of 14.5% and 13% respectively. That’s close to the 15.5% ROIC calculation that the company gave at its 2020 analyst day.
For acquisitions, the company targets single store and smaller operators. Casey’s pays 6x-9x EBITDA before any margin or operational improvements to the target. This implies a pre-tax return of 11%-16%. The company usually has merchandise margins that are 2%-9% better than smaller operators, so there is room for improving all-in returns. When targets are acquired, they are rebranded to Casey’s or GoodStop locations, which does come at a onetime cost.
Casey’s largest acquisition was in 2021 of Buchanan Energy for $580M ($500M net of tax benefits). Buchanan owned a network of 94 stores, mostly in Illinois and Nebraska. With the acquisition, the company also acquired a wholesale dealer network of 79 locations for fuel distribution. Buchanan generated $47M in ETBIDA in 2020 and Casey’s is expecting synergies of $23M over three years plus an additional $3M in EBITDA from newly opened stores that hadn’t contributed to the financials at the time of acquisition. Some synergies will come from cost cutting and better fuel procurement, but most will come from the uplift in prepared foods in the stores. Buchanan’s prepared foods were 7% of instore sales vs. 30% for Casey’s. With these additions, Casey’s paid ~7x EBITDA for Buchanan Energy, implying a ROIC of 14%.
We estimate that Casey’s generated returns on incremental capital between 10%-20% over the past 5 years. The surge in fuel margins in 2021 and 2022 skewed returns higher for those years, which may be difficult to repeat going forward. However, given that the new store and M&A returns are very attractive (as long as the company remains disciplined), the company should be able to maintain these types of returns going forward. Also, keep in mind that the efficiency optimization efforts at Casey’s is still underway, which could lead to further margin upside.
The c-store industry still has ample room for consolidation with over 63% of c-store locations owned by operators with less than 10 locations. This fits right into Casey’s acquisition strategy. The company typically adds between 20-40 stores through acquisition per year (except for fiscal 2022) targeting these types of sellers. Furthermore, the company can then reinvest more capital to increase the prepared food and beverages portion of the stores to increase margins of the acquired target.
At the company’s 2020 Analyst Day, the company put out a goal of 350 new stores by fiscal year 2023. An additional 350 stores compared to fiscal 2020 implies 15.8% increase in store count over 3 years. If we project these growth rates out, the company should be able to reach almost 3.5k stores by fiscal 2030.
The company has identified over 4.7k cities within 400 miles of its distribution centers that don’t have a Casey’s store. And many of these locations have low population density, areas where Casey’s specializes. That doesn’t necessarily mean that there aren’t existing c-store locations in those regions, which implies the opportunity set should also include future M&A. At the company’s 2020 Analyst Day, Casey’s stated that there were 400 single store operators and 2,500 stores in chains of 100 stores or less that fit Casey’s acquisition criteria.
The company does have to consider that there may be more competition in states where Casey’s is a relatively new player. While the company does have high store density in states like Iowa, Illinois and Missouri, other states like Arkansas, Oklahoma and Kentucky have more competition from other retailers like dollar stores, supermarkets, and quick service restaurants.
Casey’s also has ample opportunity to reinvest in the existing business to improve store efficiency. One of the areas that should move the needle quickly is private label. As of the 2nd quarter of fiscal 2023, the company has almost a 5.5% penetration rate for private label goods. While this is good progress so far, it’s still under the industry average of 10% and other retail concepts that like grocery (21%), drug stores (19%) and dollar stores (16%). By comparison, Dollar General has more than 20% of its revenues coming from private label goods. An increase in private label should come with better margins and more engagement from customers, especially coupled with Casey’s rewards program.
With a reinvestment rate between 60%-80% and a return on incremental capital between 10%-20%, we estimate that Casey’s has increased its intrinsic value between 8%-12% annually over the past 5 years. Casey’s still has ample opportunity to grow its store count, especially through M&A, as long as its distribution network can support the incremental stores.
What else is important?
What else can Casey’s do to further optimize operations?
Casey’s is still in the early to middle stages of optimizing its operations. The company has achieved enough scale to implement growth and margin enhancing actions like the rewards program, digital offerings, private label goods, and fleet cards. Casey’s still stands to benefit from these actions as they continue to increase adoption from their customers. The company has also just recently implemented price optimization and a centralized procurement system.
As the company grows, Casey’s can follow the path of larger retailers that are further along the optimization path. Some of these retailers like (1) Dollar General have improved their distribution capabilities (this does come with heavy investments), (2) O’Reilly Auto have optimized inventory management and working capital, and (3) Five Below, Tractor Supply and others have seen much better marketing ROI with regional/national advertising.
What happens with EV adoption?
There are some concerns around what happens to the industry when EVs gain more adoption in the U.S. While this would lower the number of fuel trips to the store, the company points out that 75% of transactions are non-fuel related today. Admittedly losing the fuel business would be meaningful, considering that fuel margins are increasing as Casey’s benefits from scale advantages and that fuel accounts for almost 2/3 of revenues.
Casey’s and other c-store operators are preparing for this future by installing charging stations at the stores. This is still a small effort for the company with just a handful of stores having Tesla and Electrify America chargers. This is partly because Casey’s primarily services rural markets where EV adoption is much lower than in urban and suburban areas. The good thing is that Casey’s owns almost all of its real estate, which means the company can have a good handle on costs when/if that transition ever happens.
Casey’s has done well to combat inflation pressures instore by taking price increases throughout 2022. The company has tried to maintain 40% gross margins instore, which is in-line with prior years. The grocery and general merchandise goods have mostly been price adjusted.
Prepared foods margins are a bit more volatile due to the various input costs (especially cheese). The cost of ingredients had increased 14% through the first quarter of fiscal 2023. Casey’s has done 4 different price increases for prepared food through the second quarter of fiscal 2023 to maintain margins. Volumes have kept up which imply that the price increases are competitive with other prepared food offerings in regions where Casey’s competes.
M&A is the most obvious way to see outsized growth in a short period of time. After the Buchanan Energy acquisition in 2021, the company has more experience acquiring and integrating a larger chain of c-stores. Compared to Alimentation Couche-Tard, Casey’s is much less aggressive when it comes to acquisitions. Part of that could be the fact the company is reluctant to overpay (even Buchanan Energy was 7x EBITDA after synergies) and the fact that there may not be many large c-store operators within their regions. However, if the company were to be more acquisitive, the reinvestment rate would increase. If the returns on capital were to remain steady (meaning Casey’s wasn’t overpaying), the growth in intrinsic value would be higher than it has been over the past 5 years.
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Thank you so much for writing and sharing this!
This business has not relied on M&A in the past before the new management team came in. Casey's stores are different compared to mom + pop gas stations, Casey's needs extra sqftage for kitchen equipment. Is the Couche Tard or 7-11 playbook feasible for Caseys?