Casey’s General Stores, Inc.

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 4/5

Casey’s General Stores, Inc. is a convenience store chain in the Midwestern United States, offering a mix of grocery items, prepared food, and fuel, making it primarily a retailer rather than a high-tech company.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Casey’s is often referred to as a convenience store and gas station chain, but this only tells a part of the story, and does not tell you about the economic moat that Casey’s possess

Business Overview

Casey’s General Stores (CASY) operates a chain of convenience stores primarily in the Midwestern and Southern United States. The company’s business model is centered around providing a convenient shopping experience to its customers, offering a mix of products and services including:

Fuel: Casey’s is one of the largest sellers of fuel in the area they operate, making up over 50% of their revenue. They have locations on highways and at more rural areas, making it an easy stop for travelers that might need to fill up, or for locals that might need gas and other items. They offer gasoline and diesel fuel. They also see a growing push from consumers for alternative fuel options, such as E15.
Grocery Items: These consist of everyday essentials such as beverages, snacks, candy, tobacco products, and a selection of other grocery items. The product categories that make up this division include alcoholic beverages, tobacco, groceries, and general merchandise.
Prepared Food: This is a distinctive feature of Casey’s, with fresh food prepared in the store, such as pizza, sandwiches, donuts, and other bakery items. They have a unique program called “Made-Fresh-Daily”, in which every pizza is freshly baked in-store. They also offer a variety of grab-and-go options.
Other Services: Casey’s provides services like lottery sales, money orders, ATM services, and car washes at certain locations.

The company has a unique strategy that focuses on offering a range of essential services along with prepared foods, appealing to both travelers and local customers. Their stores tend to be located in rural areas, small towns, and small to mid-sized cities, which often have fewer options for food and fuel.

The company’s primary goal is to offer value to their customers. They are expanding on their products and are increasing their food services to satisfy consumer demand. They are also making investments in technology and digital marketing to be more efficient and reach a larger audience.

Industry Trends The convenience store industry is highly competitive, with various types of competitors, such as larger supermarket chains, fast-food restaurants, and other convenience stores. A few key trends shaping the industry include:

Emphasis on Foodservice: There’s a growing trend toward retailers focusing on prepared foods, as this often has higher margins and higher customer demand.
Technological Adoption: Companies are investing more heavily in technology, such as mobile apps, self-checkout, and digital payment options, to improve the customer experience and increase efficiency.
Data Analytics: Companies are increasingly focused on using data to make better decisions, such as which products to stock in which areas, or what deals should be offered to customers.
Focus on Value: Consumers are looking for good value for money, and are willing to shop at stores that offer reasonable prices and good-quality products, which has led to the success of big-box retailers, in the past, such as Walmart.

Competitive Landscape

The competitive environment for Casey’s is made up of:

Other Convenience Stores: These are the most obvious rivals, such as 7-Eleven, Wawa, and Circle K, all have similar business models.
Grocery Stores: These are becoming more competitive in convenience goods, such as Walmart and Kroger.
Quick-Service Restaurants: These offer prepared foods, taking sales from Casey’s. These include companies such as McDonald’s and Taco Bell.
Fast Food: Companies such as Dunkin Donuts and Starbucks offer alternatives to the prepared food sold in Casey’s.

What Makes Casey’s Different?

Casey’s differentiates itself through the following:

Location Strategy: They primarily operate in smaller markets and towns, where there is less competition from big supermarket chains and other big businesses.
Prepared Food Offerings: They have a strong focus on freshly prepared food, which is a popular draw for customers, and differentiates them from many other gas stations, and convenience stores.
Focus on Community: They often create a loyal customer base by supporting local communities through various initiatives and partnering with local businesses.
Loyalty Program: Casey’s has a points-based loyalty system that can encourage repeat business from customers.

Casey’s main differentiating advantage is their strategic positioning, where there are few other options, and people are loyal to their locations

Financial Analysis

Looking at Casey’s financial performance provides some important insights. It should be noted that since their recent acquisitions, numbers may not be fully comparable with previous years.

Please note that the financial analysis will not fully take into account the new acquisitions that have been made by Casey’s, but the trends should be indicative

Revenue Trends: Revenues for Casey’s have been seeing steady growth in recent years, in both store count, and in same-store sales. This growth is not always consistent and can sometimes vary wildly. Most of Casey’s revenue, over 50%, comes from the sale of fuel, and grocery items and prepared foods make up around 25% each. The company has been increasing their food offerings and has been seeing good results from them.
Profit Margins: The net profit margins are reasonable but tend to fluctuate based on gas prices, and operating leverage. They have shown a slow and steady decline for the past few years. They have also implemented a number of cost-cutting measures in recent years to increase efficiency and profitability.
Return on Invested Capital (ROIC): Casey’s returns on invested capital are good, ranging from 10% to 20% on average for the last 5 years, without any major growth in it.
Capital Expenditure: Because much of its growth is done through new stores, they often have high capital expenditures, which can hamper free cash flow.
Share Repurchases: Because they have been spending a lot on new stores, they have had very limited share repurchases.
Debt: They are increasing their debt levels and have a high debt-to-equity ratio. They are using the money to finance acquisitions and to improve their current stores.
Cash Flow: Free cash flow has seen a positive change, but because of debt and capital expenditures, it has not increased as much as their revenue and operating profits have.
Earnings Growth: Their revenue has grown significantly over the past five years, but earnings have not followed as much, as their profitability has decreased. This is due to higher gas prices and expansion costs, and also the impact of the acquisitions they have made.
Recent Financial Data: Based on the last 10-Q filing, their current assets are $1.81 billion, and their total assets are $6.24 billion. Total liabilities are $4.13 billion, and their net income was $81.6 million for the three months ending July 31, 2023.
Guidance: Based on their financial reports, they expect to grow through increasing same-store sales by 3% to 5% and total revenue growth between 7% and 10%. They intend to open 200 to 250 stores every year and their capital expenditures should amount to around $800 million per year.

Casey’s current revenue, profits, and free cash flow are not consistent year to year, therefore making consistent yearly projections difficult and can be heavily affected by the volatility of the cost of fuel

Moat Analysis

Brand: Casey’s does have some brand strength in the Midwestern area of the U.S., but there are a lot of strong competitors, and it may not have as much recognition in other parts of the country.
Switching Costs: There are some switching costs as customers who frequent Casey’s may not want to switch to another retailer, however, it is not significant or very high.
Network Effect: This is absent, they are just providing products and services for customers and not connecting or providing a platform.
Cost Advantage: They might have a slight cost advantage, as they have located their stores in places where it would not be as profitable for their competitor.
Overall Moat: Therefore, we will rate their moat as a 2, the moat is there, but it is not strong and could easily be eroded by other competitors.

Risks to the Moat and Business Resilience

Fluctuating Fuel Prices: The company’s reliance on fuel sales makes it very sensitive to fluctuations in gas and oil prices. They can see margins fluctuate as gas price increases and decreases dramatically year over year.
Increased Competition: Increased competition from other convenience stores, retail chains, and quick-service restaurants could squeeze profit margins and reduce market share.
Labor and Input Cost Inflation: Rising labor costs or higher input prices could directly impact profitability and potentially reduce operating margins
Geographic Concentration: Being primarily present in the Midwest and Southern United States means their profits are sensitive to the local economy. A strong economic downturn could dramatically affect their profitability and revenue.
Technological Disruption: Failure to invest in technology and adapt to changing consumer preferences could create a weakness in their business model.
Acquisition Integration: If future acquisitions are not fully integrated successfully, they may produce subpar returns and also increase debt.
Acquisition Prices: If their current pace of growth through acquisitions continues, prices of companies they might want to acquire might increase, making their strategy less profitable.
High Debt Levels: The company has high debt levels, making it less flexible in times of distress.
Brand Image: Poor experiences or bad management may hurt their overall brand perception.

It is very common for companies to overestimate their ability to keep control of their market share or revenue. They might underestimate the effort by their competitors. It is crucial to follow this aspect for any investment you might want to make

Understandability Casey’s is a very easy business to understand, operating convenience stores and gas stations with a focus on prepared food. Therefore, we will rate this at a 1.

Balance Sheet Health

They have a large level of assets and a decent amount of cash flow.
They have an increasing amount of debt, which could prove to be problematic.
Overall, we will rate their balance sheet health as a 4

The management has said that they expect the company’s debt levels to decrease in the coming years as their cash flow increases from operations, so, we will need to monitor their cash levels in the coming years.

Recent News & Concerns

Acquisitions: Casey’s has recently made significant acquisitions, including Buchanan Energy and Pilot Company. While these acquisitions have increased their scale, and revenue, they have also increased their debt. Management will have to show that these acquisitions will increase their ROIC and not make their growth less profitable.
Inflation: In the latest earnings calls, the company has stated that their main problems are fuel price fluctuations and inflation.

The price of the stock has seen a rise, but their fundamentals have been eroding recently. It is crucial to remember to buy companies at the right price, otherwise, a great company might be a terrible investment.

Final Summary

Casey’s is a well-established chain of convenience stores that has been consistently growing its business. While they do offer a unique combination of goods and services, they operate in an intensely competitive market. They are also sensitive to changing economies and rising debt levels could impact their balance sheet. Despite their strengths, the lack of moat makes them a more speculative investment. The future will depend on how well they manage their debt, navigate competitive pressures, and expand their growth. Management must execute perfectly to provide adequate returns for investors.