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Midwestern convenience store chain Casey's General (NASDAQ:CASY) reported strong results for its 2013 first quarter Monday afternoon. Revenue was roughly flat year-over-year at $1.9 billion, in-line with consensus expectations. Earnings per share fell 2% year-over-year to $1.01, several cents stronger than expected. Going forward, Casey's expects to increase its store base 4-6% annually.

With respect to gasoline, which drives the bulk of the firm's revenue, same-store gallons sold fell 0.2% year-over-year. However, the firm achieved a per-gallon margin of $0.149, higher than its quarterly goal of $0.14. The company cited unseasonably warm weather as a drag on demand, a trend we think could change with a relatively quick transition to fall in the Midwest. Casey's grocery and other merchandise segment same-store sales increased 2.6%, short of the quarterly 6.2% target. However, margins exceeded internal goals, growing 90 basis points year-over-year to 33.4%. According to the company, margins reflected a one-time gain of $3.5 million due to changes in the Illinois cigarette tax laws, yet cigarette sales fell during the quarter. We believe cigarette demand is nearing a bottom; however, we wouldn't be surprised if increased taxes in Illinois coupled with higher gasoline prices may have negatively impacted consumption. Consequently, demand could rebound as consumers become comfortable with higher prices or if gas prices fall precipitously.

Prepared food & fountain, the firm's smallest segment, reported fantastic same-store sales growth of 10.6%, which was just shy of internal goals of 11%. Margins in the segment were 240 basis points higher than last year, coming in at 63.5%--above the firm's internal goal of 61.1%. We expect the segment to continue to become a bigger portion of Casey's overall sales, especially since fast-food consumption is in a long-term growth tailwind, in our view. Though margins might face some pressure due to higher input costs in the back half of the year, sales growth will continue to be accretive to profitability.

Though profit fell year-over-year, we thought the firm's quarter was very strong. Shares trade near the bottom of our fair value range and score a 6 on the Valuentum Buying Index, so it wouldn't take much of a pull back for us to become interested in the convenience store chain for our Best Ideas Newsletter portfolio.

Source: Casey's General Store Reports A Strong First Quarter