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Executives

Bob Myers - President & Chief Executive Officer

Bill Walljasper - Chief Financial Officer

Analysts

Ryan Gilligan - BMO Capital Markets

Chuck Cerankosky - Northcoast Research

Kelly Bania - Bank of America- Merrill Lynch

Irene Nattel - RBC Capital Markets

Ben Brownlow - Raymond James & Associates

Anthony Lebiedzinski - Sidoti & Co.

Damian Witkowski - Gabelli & Co.

John Lawrence - Stephens Inc.

Casey’s General Stores, Inc. (CASY) F2Q 2013 Earnings Conference Call December 11, 2012 10:30 AM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2013 Casey’s General Stores earnings conference call. My name is Jasmine and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session before the end of today’s conference. (Operator Instructions).

I will now like to turn the presentation over to your host for today’s conference, to Mr. Bill Walljasper, Chief Financial Officer. Please proceed.

Bill Walljasper

Good morning and thank you for joining us to discuss Casey’s results for the quarter ended October 31. I’m Bill Walljasper, Chief Financial Officer. Bob Myers, the President and Chief Executive Officer, is also here.

Before we begin I’ll remind you that certain statements may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As discussed in the press release and in 2012’s Annual Report, such forward-looking statements involve known, unknown risks, uncertainties and other factors that may cause actual results to differ materially from future results expressed or implied by those statements. 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.

I’ll take a few minutes to summarize the quarter and then open for questions. As most of you have seen, diluted earnings per share in the second quarter was $0.85 compared to $0.98 a year ago. Year-to-date diluted earnings per share was $1.86 compared to $2.01.

Earnings shortfall in the quarter from a year ago as a result of difficult fuel margin comparison as well as a challenging cigarette [buyer] [ph]. However this impact was partially offset by a strong performance in our Prepared Food category. We’ll go over each category to give you more detail on what is driving these results.

During the second quarter we experienced a solid fuel margin environment, resulting in an average margin of $0.149 per gallon compared to $0.167 per gallon in the same period a year ago. Year-to-date the fuel margin is at $0.149 per gallon, ahead of our annual goal. Casey’s trailing four year gas margin is $0.143 per gallon.

Same store gallons sold in the quarter were down 0.4%. However total gallons sold increased nearly 3% to 386.2 million. Same store gallons sold through the mid year point were also down slightly. Total gallons sold for the year are up 3.2% to 780.3 million.

For the six months mark the average retail price was $3.49 per gallon compared to $3.53. The average retail price of gasoline for the quarter was $3.61 per gallon compared to $3.43 last year. Due to a lower fuel margin from a year ago gross profit was down 8.1% to $57.6 million in the second quarter.

Positive fuel margin environment continues in November, with an average margin in line with our annual goal of $0.14 per gallon. Same store gallons sold in November rose 1.4% with an average retail price of fuel on the month of $3.22 per gallon.

Sales in the grocery and general merchandise category continued to be adversely impacted by the cigarette environment, resulting in same store sales for the second quarter to be down 0.7%. Excluding cigarettes same store sales would have been up approximately 2%.

Total sales in the quarter were up slightly to $362.7 million with an average margin of 33.4%. Cigarettes in the quarter accounted for approximately 36% of the total revenue in the category, down from 40% a year ago. This product mix shift lifted the contribution of higher margin items, which benefited the overall grocery and other merchandise margin. Due to this, gross profit dollars rose 4.3% to $121.2 million. Year-to-date same store sales were up 0.7% with an average margin of 33.4%.

Over the course of the past several months we have made additional price adjustments in response to the more competitive cigarette landscape. We are encouraged with the recent gains we’ve been able to achieve in this area due to these initiatives. As a result same store sales in the grocery and other merchandise category in November were up 5.1%.

Prepared Food & Fountain category continued its strong performance. Total sales were up 13.7% to $146.5 million for the quarter. Same-store sales in the quarter were up 10.1% with an average margin of 62.5%, up 300 basis points from the same time a year ago. The average cost of cheese this quarter was $2.11 per pound compared to $2.14 a year ago. Apparently the average cost of cheese is approximately $2 per pound.

The margin gain was primarily due to an increase in pizza sales, mainly as a result of increased 24 hour locations, pizza delivery and major remodels. Buying pizza sales with these operational initiatives increased nearly 30% during the quarter.

Gross profit dollars were up 19.4% in the second quarter. Year-to-date same store sales were up 10% with an average margins of 62.9%, well ahead of our annual goal. We continue to benefit from the additional roll out of our operational initiatives. Same store sales for Prepared Foods accelerated in November, up 14.7%.

At the six month mark operating expenses were up 10.5%. For the quarter operating expenses increased 10.6% to $190 million. About 52% of this increase was due to a rise in wages, primarily related to an increase in the operational initiative described in the press release and operating more stores this quarter compared to the same time period a year ago.

11% or $2.7 million [increment to] [ph] by an increase in credit card fees and fuel expense. This was up due to a modest increase in fuel prices and higher credit card utilization. Credit card transactions were up 12%, accounting for approximately 60% of all the sales this quarter compared to 58% a year ago.

In addition to these items due to the increase in store placement activity, we took an additional $1.3 million in non-cash charges from the write down of assets associated with this activity in the second quarter.

On the income statement, total revenue in the quarter was up 7.2% to $1.9 billion, due to an increase in fuel price in the quarter, an increase in the number of stores in operation this quarter compared to the same time period a year ago. Year-to-date total revenue was up 3.4%, primarily due to sales increases in categories mentioned previously, offset by lower retail fuel price. Effective tax rate was up from a year ago in the same period due to lower federal tax credits from the same time period in the prior year.

Our balance sheet continues to be strong. At October 31 cash and cash equivalents were $39.3 million. Long term debt, net of current maturities decreased slightly to $660.1 million, while shareholder equity rose to $572.5 million, up $66.5 million from the fiscal year end.

We generated $158.6 million in cash flow from operations. At the six month mark capital expenditures were $163.4 million compared to $152 million a year ago in the same period. This was up due to an increase in acquisitions in construction activity. We expect capital expenditures to increase as new store construction accelerates and we continue to add kitchens to our recently acquired stores.

This quarter we opened seven new store constructions and completed three acquisitions. For the year we acquired three stores and completed eight new store constructions. We are on pace to complete a total of 30 new store constructions by the end of the fiscal year and replace 20 stores. Year-to-date we have replaced 13 stores. Our store count at the end of this quarter was 1704 corporate stores. We are optimistic about the pipeline for new store and acquisition opportunities going forward.

As of October 31 we have converted 150 more locations towards that 24 hour format, completed 51 major remodels and added 103 additional stores in the pizza delivery program. The combination of these initiatives accounts for approximately half of the same store sales increases. During the remainder of this fiscal year we plan to add 50 more stores to the pizza delivery program and complete 25 additional major remodels.

That completes our review for the quarter. We’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question will come from the line of Karen Short with BMO Capital Market. Please proceed.

Ryan Gilligan - BMO Capital Market

Hi, good morning. This is actually Ryan Gilligan on for Karen.

Bill Walljasper

Hi Ryan, how are you?

Ryan Gilligan – BMO Capital Market

Good, thanks. Can you talk us through the different factors impacting tobacco, so the MLP program versus the Illinois tax increase versus just a general more competitive environment causing you to get more aggressive on price and how all these factors are impacting comps and when they will cycle?

Bill Walljasper

Well, yes, I’ll try and make sure I get all those questions answered. This really started back early in the summer, Ryan. We started seeing the competitive landscape shift a little bit on pack pricing, primarily in the States of Illinois and Missouri, but we did have some other States that were also impacted.

Shortly after that we saw the Illinois State tax going into effect roughly about the July 1. Subsequent to that effect we saw a unit movement in the state of Illinois drop about 35%, so the combination of those two initiatives really have pulled back the cigarette category, that’s why we’ve been talking about that quite a bit. It’s been ranging anywhere from about 3% to 4% impact on the overall grocery and general merchandise category.

Now having said that Ryan, over the course of the last several months, we have become much more competitive in response to this landscape. Roughly in the last two months we have lowered the retail prices in roughly about 400 locations. Again, primarily in the States of Illinois and Missouri; those two happen to be non-fair trade states. So we believe we are starting to see the benefit of that initiative.

The same store sales in November as I mentioned were up in the grocery and general merchandise category, 5.1%. For that particular month cigarettes were actually flat as opposed to being down for the past several months, but we certainly anticipate and are hopeful that this trend is reversed and we start seeing some positive unit movement.

Ryan Gilligan - BMO Capital Market

That’s really helpful, thank you. On operating expenses, the growth in the quarter came in less than we were expecting given the addition of 25 remodels in July. Can you talk about how operating expenses performed versus your expectations, what came in better and an update on what you think the full-year growth rate will be?

Bill Walljasper

Yes, coming into the year, back in the first quarter conference call, we made a comment that we expected operating expenses for the year to be up in the mid teens. Certainly we are tracking below that.

What we are seeing Ryan is these initiatives that we are bringing on board, the 24 hour initiatives, the major remodels and the pizza delivery, albeit those are the most recent of the initiatives, we are starting to see that we are becoming much more efficient in operating those particular initiatives. So the operating expense increase is less than we anticipated coming into the year and that’s helping to drive down the overall operating expense, the numbers that we reported. Hopefully that’s helpful.

Ryan Gilligan - BMO Capital Market

Yes, definitely. And last question, what’s your expectation for how Obamacare will impact operating expenses going forward?

Bill Walljasper

That’s a great question, a very common question that we do get. I guess I’ll probably hedge that answer by saying that it depends on what happens over the course of this next calendar year, when it goes into effect in 2014, but certainly we believed it did have the potential to impact us. I guess it’s really hard to quantify at this point. That’s probably something you’ll hear me talk about after we get into the new calendar year as maybe some of the different nuances of that particular program become more and more clear.

Ryan Gilligan - BMO Capital Market

Okay, great, thank you.

Operator

Your next question will come from the line of Chuck Cerankosky with Northcoast Research. Please proceed.

Chuck Cerankosky - Northcoast Research

Good morning Bill.

Bill Walljasper

Hey Chuck, how are you?

Chuck Cerankosky - Northcoast Research

Good. Could you repeat, you talked about something regarding a non-cash charge that I didn’t quite get and before I get into my question, I would like you just to restate that item.

Bill Walljasper

Yes, that had to do with replacement store activity. We are on pace to be a little bit higher in the numbers thus far of replacement stores than we had in prior years. We’ve actually replaced 13 stores year-to-date, most of which happened through the second quarter.

What happens on a replacement store, once we know that we are going to replace a store, several things will happen Chuck. Certainly we’ll accelerate the depreciation for the new life of that asset, but then also we will look at impairing the land with respect to selling that asset.

So even though we may have not sold that particular piece of property, once we know that, for instance if it’s on the books for 200,000 and we anticipate selling it for 100,000, we will then take that charge at that point and that’s what you’re seeing. It just happens to be a little more pronounced in the second quarter due to the increased activity of replacement stores.

So along that line Chuck, when you look at the depreciation increase and in the second quarter, a good part of that has to do with acceleration in depreciation because of that activity.

Chuck Cerankosky - Northcoast Research

Bill, can you break out what those amounts were, the impairment on the real estate and what the accelerated depreciation was or year-to-date?

Bill Walljasper

The $1.3 million, nearly all of that had to do with the replacement activity. Again, that’s a non-cash charge, you’ll see that [one time] [ph].

Chuck Cerankosky - Northcoast Research

And that’s both items together?

Bill Walljasper

No, that would just be the impairment of the asset.

Chuck Cerankosky - Northcoast Research

All right.

Bill Walljasper

And as far as replacement, if you look at the change in depreciation for the quarter, roughly about 12%, 15% of that has to do with replacement activity.

Chuck Cerankosky - Northcoast Research

Okay, great. All right now, we saw this marked increase in the grocery comps in November versus the quarter and it sounds like you said the cigarette volume was flat year-over-year in November. What were sort of the dynamics that pushed the comps up in the grocery category and can you talk about the traffic trends that go with that please?

Bill Walljasper

Yes, as far as, specifically to the cigarette area, when I look back over the last several months and most of these started occurring roughly in the middle of October Chuck. We took about 400 stores in our chain, most of which were in Illinois and Missouri, we took the retail prices lower and as a consequence we started to see an up-tick in unit movement and that’s what you are seeing reflected in the November same stores.

So we are hoping, we are taking a few more in November and we are hopeful that trend continues into December and the rest of the fiscal year, but that’s something that we aggressively are monitoring and certainly we’ll make adjustments as needed going forward.

Also in November, I’d be remiss if I didn’t say the Powerball jackpot. It got to a $0.5 billon as I’m sure all of you saw. Because of that we actually saw same store lottery up 44% in the month of November; that’s obviously helping drive traffic. Our same store customer account was nearly 6% and so intuitively some that traffic we certainly had some cross sell opportunities. It’s hard to quantify, but we certainly believe that was a benefit as well.

Chuck Cerankosky - Northcoast Research

That’s interesting. Now how about what were you doing around cross promotion with the lower cigarette prices? Were you doing other things to get people into the stores, besides just lower priced cigarettes or were there promotions around Prepared Food items, how about that kind of thing.

Bill Walljasper

Yes, we always have promotions around prepared food items. Nothing that would be necessarily unusual than the normal activity that we normally do. Now I would say though in the (inaudible) category, roughly in the middle of October Chuck, we did start to be more aggressive on beer pricing in response to some competitive changes that we saw with some of the big box retailers in the regional grocery stores.

So what we saw in the latter part of October was a sequential move upward in the beer category and that continued right into November and we actually had some very strong beer numbers in the month of November as well, helping lift the overall category.

Chuck Cerankosky - Northcoast Research

All right, thank you.

Bill Walljasper

You bet.

Operator

Your next question will come from the line of Kelly Bania with Bank of America. Please proceed.

Kelly Bania - Bank of America- Merrill Lynch

Hi Bill. Just another follow up question on the cigarettes. If you look outside kind of Illinois and Missouri where it sounds like the majority of the pressure is, can you just give us some color on where cigarettes are trending now and where you see your kind of price position relative to competition and then if you could just expand a little bit more on the margin and grocery.

You talked about the positive mix shift because of the week cigarette sales, but was that really the only thing driving the strong margin there. May you can give us some color on the other categories well.

Bill Walljasper

Sure, sure. First of all your question on cigarettes, I mean most of the activity that we’ve experienced with prices adjustments did fall in the State of Illinois and Missouri. We’ve had some pockets in other states where we saw a little bit more competitive landscape, but for the most part that’s the concentration.

Now keep in mind Kelly, those two states are non fair trade states, so there’s not a state minimum in pricing and that’s probably the reason you’re seeing a little bit more competitive landscape in those two areas. But this is something that we are very much on top of in monitoring and we’ll make a needed price increase or price decrease adjustments if necessary.

And right now I will say though, as having said that, we’ve taken price deceases in about 700 to 750 locations over the course of the last two to three months. It has seemed a flat toe here and so far in the latter parts of November and December. That’s not to say though that that could change, but again we’ll continue to monitor that activity.

So the second part of your question was the mix shift in the grocery and general merchandise category and I alluded to that, and you hit right on it. It really is a lower contribution of cigarettes in the category that’s causing this mix shift and cigarettes used to represent about 40% of the total revenue in the category and now it’s about 36% and because of that you are seeing certainly a higher contribution of the higher margin items.

Now also we have seen it picked up towards the tail end of the quarter in some of those higher margin items like beer and beverages, which has continued into the month of November, so both of those things are really helping the category.

I would say the other piece that’s in the category, if you look at the 10-Q, we have moved newspapers out of the grocery and general merchandise category into the other category and that would be a lower margin item as well that’s helping. I mean, that’s roughly about a 15 basis point number right there for the newspaper shift.

Kelly Bania - Bank of America- Merrill Lynch

Great, and then just a little bit more color on your thoughts on the November comps given the acceleration. I mean you mentioned the cigarettes improving and the power low impact. But can you talk about how you think the initiatives – I think you ruled out a lot more on October and end of October and how those impacted November comps and this partnership with Hy-Vee, how important is that and is that reflected in November as well.

Bill Walljasper

To answer your question on Hy-Vee first, no that just started in December, so none of the November comps that you are seeing has anything to do with the fuel program with Hy-Vee.

We are excited about that program. I mean its really a partnership with two very local, well branded companies, trying to improve their activates and benefit the customer with lower retail prices, so we’ll report on that, probably a little bit more as we get more information in the next conference call, so stay tuned for that.

Now your other question with respect to November, we did, you’re exactly right. In the month of October we did roll out quite a few more initiatives. We completed 25 major remodels in the month of October, 100 24-hour changes and we also shifted over 50 more stores to the pizza delivery program.

So some of those were being seen in the second quarter, but now, all of a sudden now you’re seeing in November the impact of those initiatives. Those initiatives would represent half, a little bit over half of the same store sales that we reported within the month of November and I would say the more recent activity with some of these initiatives are certainly performing much better than the original batch of stores.

Kelly Bania - Bank of America- Merrill Lynch

And just can you remind us what you normally see when you roll out these initiatives. Is there usually a big lift and then it tails off or does it usually ramp the more time you’re out there with these new initiatives.

Bill Walljasper

Well, here is what we normally see and I’ll say this is no particular order Kelly, but like pizza delivery for instance, typically when we see a store covert over to pizza deliver, obviously so we see a lift in the unit sales per pizza. Now the stores that we recently did in July and October, we are seeing a unit lift of about 70% to 80% in pizza sales for those stores. That’s about double of what we’ve been experiencing in the batches in the prior fiscal years.

What that translates into is a change a little bit in the program. Before we are seeing a 15% to 20% lift in the prepared food sales, in total from pizza delivery, now we are seeing a 20% to 30% lift. Now albeit it’s new; I mean we just stated in October and July, but typically we see that type of movement throughout the first year of the program.

So we are encouraged by that. We think we are becoming more efficient in selecting these sites. The same holds true with 24-hours stores. We typically see as it is in the past and we have batches that we completed in fiscal 2011, fiscal 2012, those stores what we would see typically as a 20% to 30% lift in prepared food sales, 15% to 20% lift in the grocery and general merchandise category, we are seeing a little bit of an up-tick in the more recent ones that we’ve converted to 24-hours.

So again, we are encouraged by what we are seeing in the format. The same holds true with the major remodels. The major remodels that we completed in July and we are seeing a higher incremental lift in revenue with a lower incremental lift in operating expenses, but we believe we are becoming much more efficient in operating these stores.

Kelly Bania - Bank of America- Merrill Lynch

Thank you. It’s very helpful.

Bill Walljasper

Welcome.

Operator

Your next question comes from the line of Irene Nattel with RBC Capital Markets. Please proceed.

Irene Nattel - RBC Capital Markets

Thanks and good morning everyone

Bill Walljasper

Good morning Irene.

Irene Nattel - RBC Capital Markets

Just continuing on that discussion about OpEx and revenue lift, you mentioned that you’re becoming more efficient in opening these new stores. Could you talk a little bit about any changes that you might be making to how you are doing things? I remember Bill, you said that when you finish 24-hours you were offering the full program throughout the 24-hours. Are you still doing that or are you tailoring a little bit more in terms of which stores for example you might be offering prepared foods in all 24-hour periods?

Bill Walljasper

Yes, no we haven’t curtailed that yet. When we shifted the store to a 24-hour format and we do keep the kitchen open in the off hours and then we being to scale back in the performance.

I think the big difference Irene that we are seeing really is in the people. We have more of these types of locations out throughout our 14 state areas and so when we do convert a store to 24-hours or a major remodel or a pizza delivery program. I think we have a better of ideal of how to staff a store as effective as possible in the early months of the rollout, where if it was prior, it would take somewhere around six to nine months before we kind of get into the groove of how to run that new type of format.

I think we are accelerating that learning curve and consequently you are starting to see some of that benefit in your revenue list, as well as the OpEx decline.

Irene Nattel - RBC Capital Markets

That’s great, thank you. And could you also give us an update Bill, rather on where you stand with your cheese hedging and what we should be thinking about in terms of year-over-year effective cheese pricing for the back half.

Bill Walljasper

Yes. Well, cheese right now, cheese happens to be cyclical. It simply comes down this time of the year like it did last year and it has fallen a little bit. Right now as I mentioned, we are about $2 per pound. That’s almost in line with what was a year ago in the third quarter. Last year in the third quarter it was $1.95 on average for the quarter and as we head into the fourth quarter we’ll be comparing it against $1.73 per pound cheese cost.

Right now we are not locked in a forward buy that we are buying on the spot market. We continually look for that opportunity, but given the fact that cheese does tend to be cyclical this time of the year, we think this is probably the best program.

Now we are locked in with coffee through March and continue to look for opportunities to continue that type of forward buy beyond March as well, and we’ll report on that should that happen.

Irene Nattel - RBC Capital Markets

Okay, that’s great. So just thinking this through Bill, clearly we’ve got some tailwinds coming through because of coffee, but if we should see cheese pricing coming down, but there is a possibility that we will still yet have an offset to that tailwind in the form of the cheese pricing, correct?

Bill Walljasper

Exactly right.

Irene Nattel - RBC Capital Markets

Okay, that’s great. And could you just provide a little bit more color on the acquisition pipeline right now?

Bill Walljasper

Yes. The acquisition pipeline, I mean we believe and we typically have a very similar comment. We believe it’s relatively robust. It’s just a matter of trying to pull these into the mix. I didn’t make any comments in my narrative, but it certainly was mentioned in the press release that we did just close on the 22 common goal sites that we acquired. So those will begin to contribute to earnings here in the third quarter and that’s something everybody should factor in as well.

We continue to be very diligent about looking for acquisitions Irene, but certainly we are very disciplined in that approach. We have lost out on a few smaller opportunities, just weren’t willing to pay that type of multiple and we are just going to continue through that disciplined approach.

Now we look through next year to see an acceleration in new store construction. I would also look for a continued acceleration in the placement store activity and then we’ll fill in on that type of activity with acquisition for the next fiscal year.

Irene Nattel - RBC Capital Markets

Okay, that’s great. And then just one final question if I might. As we think about, it is fabulous that we are seeing the traction on the top line in groceries, some promotional activity on beer. Is there some vendor support in there or should we be thinking about any offset in terms of gross margin?

Bill Walljasper

I didn’t catch the last part of that; you said gender support.

Irene Nattel - RBC Capital Markets

Vendor support. I guess, are you getting some support from your suppliers on this or is it all going to come out of your gross margin?

Bill Walljasper

We are actually – I’m not aware that we are receiving any type of addition vendor support with respect to the beer category. We are always managing the category based on the market changes that we see.

Irene Nattel - RBC Capital Markets

Okay, that’s great. Thank you.

Bill Walljasper

Thank you.

Operator

Our next question will come from the line of Ben Brownlow with Raymond James. Please proceed.

Ben Brownlow - Raymond James & Associates

Hey, good morning.

Bill Walljasper

Good morning Ben.

Ben Brownlow - Raymond James & Associates

Looking at next fiscal year, are there any goals you could share on expanding those three initiatives with remodels, 24-hour and delivery?

Bill Walljasper

We haven’t put out any specific goal for the next fiscal year. I would say that based on the numbers that we’ve done to-date and the remaining store base that we have quite a bit of runway. I would look for similar increases in the major remodel program next year, maybe even slightly accelerated next year versus this year.

We are valuating key evaluated 24 hour locations. We don’t have any plans to add any more 24 hour format for this fiscal year, but we are in the process of evaluating that versus the following year. We are seeing it with pizza delivery. So I would anticipate that you will see these operational initiatives next fiscal year as well and we just don’t have any set concrete goals that we can put out at this point.

Ben Brownlow - Raymond James & Associates

Okay great. And on the cigarettes, Dollar General just announced they are expanding to all 10,000 stores over the next two quarters rolling out cigarettes. How do you view that customer and location crossover, if there is any?

Bill Walljasper

Well, we’ll defiantly have some overlap with those type of dollar stores that we sell cigarettes. It’s a very recent thing, so we have identified where we have overlapped. We will monitor those locations and I’ll come back to an earlier comment that I made about aggressively monitoring the cigarette landscape. That happens to be part of a cigarette landscape, no difference than a convenient store that we compete against.

So we will certainly keep those types of stores on the competitive list when we monitor that activity. So right now it might be a little too early to tell what’s the potential impact if any. Now keep in mind a lot of our stores are in smaller communities in where they operate, but nevertheless there are overlaps.

Ben Brownlow - Raymond James & Associates

Okay, great. Thank you.

Operator

And your next question will come from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed.

Anthony Lebiedzinski - Sidoti & Co.

Yes, good morning, a couple of questions.

Bill Walljasper

Good morning, Anthony

Anthony Lebiedzinski - Sidoti & Co.

Good morning. I may have missed this, but did you give out the quarterly gross and the other merchandise comp excluding tobacco?

Bill Walljasper

Yes, for the quarter it was abut 2%.

Anthony Lebiedzinski - Sidoti & Co.

2% increase, got it, okay. And also in your 10-Q you did say that the part of the reason for your grocery and other comp benefit, I guess offsetting some of the issues within cigarettes was because of increased popularity or demand for sports and energy drinks, and I was wondering if you could just comment on the sustainability of that and there’s been some controversy in regards to energy drinks and how do you view that?

Bill Walljasper

Yes, no, you’re right. There has been a little bit controversy on energy drinks. Really the margin increase is a combination of obviously the lower cigarette contribution and benefits in not only the sports and energy drinks, but beverages as a whole. We saw a sales lift in the mid to high single digits in the quarter and the margin expanded just slightly.

So as far as going forward, I can tell you in the month of November, we saw some very solid activity in those areas. They are high single digits, can be high single digits same store numbers in the beer and beverage category, which obviously would include the energy drinks and sports drinks. So, I anticipate – I don’t see anything at this point that would change that type of direction.

Anthony Lebiedzinski - Sidoti & Co.

Okay, that’s helpful. Thank you.

Operator

And your next question will come from the line of Damian Witkowski with Gabelli & Company. Please proceed.

Damian Witkowski - Gabelli & Co.

Hi Bill.

Bill Walljasper

Hi Damian.

Damian Witkowski - Gabelli & Co.

A quick question on the credit cards. I know utilization is up; are you getting any help from the fee settlement at all?

Bill Walljasper

No, not really. No, it’s really the modest increase in credit cards fee had to deal with this retail price differential.

Damian Witkowski - Gabelli & Co.

Okay. And then if – I know you said you can’t really quantify Obamacare and the impact. I am wondering though, if implemented in 2014, is it going to put you at a disadvantage versus other smaller players who maybe don’t have the same cost structure, won’t have the same liabilities?

Bill Walljasper

Well, I’m not anticipating it will put us in a competitive differential. Maybe for the one off store that may not be applicable for the Obamacare, but most of the small chains that we would compete against regionally would fall within this realm, so I’m not necessarily – I don’t think we’ll be at competitive disadvantage when that comes to fruition.

Damian Witkowski - Gabelli & Co.

Okay. And then lastly, you own obviously a majority of your real estate. There has been a lot going on on the REIT fronts and Lablow being the latest in Canada. I’m wondering whether you have in the past looked at the REIT structure and separating the Opco and Propco or if you actually maybe are looking at it now?

Bill Walljasper

We have looked at it, at a REIT structure in the past. You are correct, it has become a little more popular and I think it was Penn Gaming also that just recently did a REIT structure and so yes, we are valuating that as an alternative. I can’t say where that will go at this point, but certainly we look at all alternatives Damian, not only REIT structure, but ranging from that to stock buybacks and so forth. So we look at all alternatives to gain shareholder value.

Damian Witkowski - Gabelli & Co.

Okay, thanks Bill.

Operator

(Operator Instructions) And your next question will come from the line of John Lawrence with Stephens Inc. Please proceed.

John Lawrence - Stephens Inc.

Yes, good morning guys.

Bill Walljasper

Hey John, how are you?

John Lawrence - Stephens Inc.

Fine. Bill would you comment a little bit about the increase in pizza? Are you seeing anything in this last round of stores that may be basket size different, attach rates over the products that would account for any differences?

Bill Walljasper

I don’t have basket information handy. I can tell you that I’ll take the pizza delivery. The stores that we just shifted over to pizza delivery back in July and October over the second quarter, we saw almost a 90% increase in units in pizza sales. That’s over double what we saw in the batch that we did in the prior year to fiscal 2012. So that’s encouraging from our perspective. It kind of lends us to believe that we are being kind of a little more efficient in selecting those sites and more efficient in operating those types of sites.

John Lawrence - Stephens Inc.

And just not to belabor the question, but anything demographically different on density, anything like that, drive times, etc.?

Bill Walljasper

Well, we are targeting John not only in the pizza delivery but also the 24-hours and to some degree even the remodels, quite honestly. We are targeting a little bit higher population in our average store base with more competition; the thought process being is for these initiatives to really drive incremental movement we need the pull from somebody.

So to do one of these initiatives in a town of say 500, 600 people, there is only so much tie to go around in that community, and so we believe that we need to be able to take market share for somebody and it appears that we have headed in the right direction in that regard.

John Lawrence - Stephens Inc.

Yes, from some of the traditional guys in that space.

Bill Walljasper

Correct.

John Lawrence - Stephens Inc.

Secondly Bill, as you look at some of the new store performance, as you head south, what would your comments be, Arkansas, Tennessee as you move to the southern part of the footprint?

Bill Walljasper

Like I said, in Arkansas is where we had most of the data, albeit it’s a very, very new. I can tell you the Arkansas source as a whole are really firing off greater than we anticipated. There seems to be a – they are embracing I would say our prepared food concept in that area and we are very excited about that opportunity. We have quite a few more stores on the docket for Arkansas remaining as part of this year as well as next fiscal year.

We just opened the stores in Kentucky and Tennessee. I know that the one store that we had in Kentucky is very similar, it’s firing off very well. The one in Tennessee we just did, maybe three weeks ago. So we really have no data at this point to be in concrete, but we are excited about the new markets John.

John Lawrence - Stephens Inc.

Yes, and give us a longer-term perspective on when would you possibly look at adding distribution further south?

Bill Walljasper

I would say, we are currently looking at evaluating a second distribution center. I would say in the next probably two to four years you would see a second distribution center and probably towards the front part of that. But we haven’t made any type of announcement, but defiantly we are looking at that and that’s something that you will see coming forward.

John Lawrence - Stephens Inc.

Great. Thanks. Congratulations.

Bill Walljasper

Thanks John.

Operator

And your next question is a follow up from Karen Short with BMO Capital Markets. Please proceed.

Ryan Gilligan - BMO Capital Markets

Hi guys, just a quick follow-up. Can you confirm total credit card fees for the quarter? Was it just $2.7 million on top of last year’s number?

Bill Walljasper

Actually the total credit fee was about $2 million, the $2.7 million was a combination under fuel expense in the credit card fees. So that was the difference, that the increase. Do you want the total Ryan?

Ryan Gilligan - BMO Capital Markets

Yes, that would be great. Thanks.

Bill Walljasper

The total is about $23 million.

Ryan Gilligan - BMO Capital Markets

Okay, great, thanks. And then just quickly on same-store customer count. What it was in the quarter and maybe how it’s trending into the third?

Bill Walljasper

Yes, well the same store customer account for the month of November, that’s the only thing we have was up about 6%. Now keep in mind, we did have that big Powerball that was helping lift the traffic out.

When you talk about the quarter, the quarter was up, both the quarter and the year-to-date were up about 1.5%.

Ryan Gilligan - BMO Capital Markets

Great thanks.

Bill Walljasper

Yes.

Operator

And at this time there are no further questions. I would like to turn the call back to Bill Walljasper for closing remarks.

Bill Walljasper

Thanks Jasmine. Well, thank you everyone for joining us. We hope you have a very happy holiday season. Take care.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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