Casey's General Stores: Small Towns, Big Business

| About: Casey's General (CASY)

Summary

CASY shields itself against competition by operating in small town markets.

364% share price appreciation over ten years bolstered by 25 consecutive years of dividend payments.

Average store productivity has doubled since 2006.

Expansion opportunities in 36 states that are not yet in its current operating region.

Casey's General Stores (NASDAQ:CASY) occupies a competitive sweet spot through a small town focus and offers a major value proposition to residents of rural communities. The company combines features of general and convenience stores, while doubling as a restaurant in locations where residents have little or no dining alternatives. This strategy enables it to create a local monopoly, of sorts, in the small town markets where it operates despite the ultra-competitive nature of the broader industry. That's because national chains have traditionally avoided these areas, considering them too small to support a strong business.

But that mindset hasn't hindered the leadership of Casey's which actively targets these regions. In fact, 57% of its stores are located in communities with populations below 5,000 people; 82% are in towns smaller than 20,000 according to its 10-K Annual Report filings. Management has determined that the concept is capable of profitable operations in communities as small as 400, as long as they can identify an attractive highway location.

Past Performance

CASY stock sold for $25 ten years ago; $43 five years ago. Shares currently go for $116, a return of 169% in the last five years and 364% in the last ten. The annualized return of 16% during the last ten years significantly outpaces the market's average return. And those figures don't take into account the dividend that CASY's has paid for 25 consecutive years, with numerous dividend raises during that time.

Unit Economics

How has management achieved these results? Well, imagine if you will the process of squeezing juice from an orange. After finishing the job in a diligent, very thorough manner, all that's left of the original fruit is its skin, dried up flesh, and pulp. Nothing else. And so it is with the average Casey's store. Management has focused its energies on extracting every last ounce of productivity it can possibly muster from each unit.

The company's past innovations have included made-from scratch pizzas, pizza delivery, 24-hour operations, and snack centers featuring prepared food items, which are now in a majority of its stores. While pizza was introduced in the 1980s, pizza delivery is a new innovation and, along with 24-hour conversions and snack centers, has helped Casey's produce same-store sales growth typically ranging from 5% to 12% since 2011 in its grocery and prepared food categories.

CASY Historical Same Store Sales (Source: 10-K Annual Reports)

Source: Casey's SEC 10-K Annual Reports

Those types of results have a double benefit, because not only do sales grow but so does the gross profit margin. That's because the biggest gains are coming from the highest margin categories. That's a welcome change for a business that derives 74% of gross profits from nonfuel items, which represent just 30% of total sales. Small incremental changes can make a big difference in a business with narrow net profit margins ranging from 1.5% to 2.5%.

The culmination of new innovations, rapid same-store sales growth, and the shift in volume to higher-margin items have provided a big payoff. Sales of nonfuel items have increased 87% at the average Casey's store since 2006, while total gross profit on these items has followed suit with 95% gains. Average operating income on a per-store basis has accelerated 139% in the same time frame. All told, CASY stock is riding the success of vastly improved unit economics to a cumulative stock return of 400% during a time when its store base has grown just 3% per year on average. This is not how most retail operations attempt to advance their businesses. But Casey's has turned it into an extremely high-quality growth vehicle.

Source: Casey's SEC 10-K Annual Reports

Growth Opportunities

Couple its tantalizing unit economics with the ability to expand its store base in the 36 states where Casey's doesn't yet operate, and you can begin to see the potential for a major long-term growth story. Once it's finished wringing out all the remaining productivity from its existing store base, management's next option may well be to take its new and improved store model into a more aggressive expansion mode.

With a concept that works so well in rural communities, there's no shortage of possible towns the company could move into―the small state of Iowa alone supports over 500 Casey's locations, more than 25% of the 1,931 total as of May 2016. And more opportunities are being created by the completion of a new distribution facility in Terre Haute, IN in February 2016, which will allow for efficient distribution over a much wider geographic area than was provided by its Ankeny, IA facility.

Although 24-hour conversions are slowing, management can still benefit from other past initiatives. Store remodels and addition of pizza delivery are expected to continue in earnest this year and beyond. The company has just begun to roll out online ordering as well. So, improved productivity on a per-unit basis continues to be an opportunity for future growth despite the substantial progress so far.

Catalysts

Casey's doesn't have any near-term catalysts, per se. However, it has thrived in a catalyzed state for several months on lower fuel costs. In short, the less customers pay for fuel, the more they will have available to spend on in-store products. While that may result in a net drop in revenue, higher-margin items can more than make up for the loss. If you review the most recent full-year income statement, you may notice a peculiar relationship: 1% revenue decline and 42% earnings growth last year. While revenue growth usually drives EPS growth, the industry dynamics can cause the relationship to work in reverse. If you're a holder of CASY stock, you should welcome lower fuel costs with open arms.

Conclusion

Management has made significant progress in improving its business at the store level over the past several years. Now, with new infrastructure in place for efficient distribution, the company has encouraging prospects for taking its improved store concept on the road into untapped markets. And with lots of room for growth in its current states plus 36 more that are completely unserved, it has potential to become a very long growth story, indeed.

Disclosure: I am/we are long CASY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All investments involve risks. Investors are encouraged to do their own due diligence prior to making buy/sell decisions.