Q2 2020 Earnings Call
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Good morning, Thank you for showing US just got chases results for the quarter ended October 31st I'm, Bill Walljasper Chief Financial Officer.
They're rebel the Chief Executive Officer is also here before we begin I remind you that certain statements made by us during this investor call.
It may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act at 1995.
These forward looking statements include any statements related to our possible or assumed future results of operations.
Business strategies growth opportunities and performance improvements at our stores.
There are a number of known and unknown risks uncertainties and other factors that may cause our actual result to differ materially.
From any future results expressed or implied by these forward looking statements, including our ability to execute on the valuation plan works realize benefits from the value creation plant as well and other risks uncertainties and factor, which are described in our most recent and report on Form 10-K cool reports on Form 10-Q as filed with the FCC.
Not available on our website.
Any forward looking statements made during this call reflect our current views as of today with respect to future events and 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.
This morning ticket few minutes to summarize the results of the second quarter and then open for questions about those results I'd now like to turn the call over to down to discuss the result of before.
Thanks, Bill good morning, everyone.
As you've seen in the press release diluted earnings per share from second quarter were up 23% to $2.21 compared to $1.80 a year ago.
The results were driven primarily by a stronger fuel margin versus second quarter last year continued operating expense control in sales gains inside the store.
Year to date diluted earnings per share or $4.52 up over 22% from the same period a year ago.
Excluding the onetime impact from tax reform this quarter marks the sixth consecutive quarter of double digit earnings growth per share compared to prior year quarters.
We continue to execute on key elements of our long term plan this past quarter positioning us well for future growth I'd now like to go over our results in some of the details and each of the categories.
During the quarter in the fuel category, we experienced a favorable fuel margin environment combined with our ability to leverage the implementation of price advantage, which is our fuel price optimization tool.
These factors enable us to achieve an average fuel margin of 22.9 cents per gallon up nearly three cents per gallon from the same period last year.
As a result gross profit dollars increased nearly 19% in the quarter in the fuel category.
Same store gallons sold were down 1.8% in the quarter. This is primarily due to our efforts to optimize gross profit dollars in the category by striking the appropriate balance between gallon growth in fuel margin.
The average retail price a fuel during this period was $2.47 a gallon compared to $2.73 a year ago.
Despite the decline in same store gallons total gallons sold for the quarter were up 3.4% to 614 billion gallons due to the strong contribution from new stores opened in the last 12 months.
Same store gallons sold year to date were down 2% with an average fuel margin of 23.7 cents per gallon.
Through the first six months gross profit dollars in fuel category are up 20.5% compared to the same period a year ago.
Our effort and price optimization continues to have a positive effect on our fuel margin gains.
By the end of this quarter, we anticipate to have all of our stores fully integrated at the point of sale with the price advantage tool.
We also currently have approximately 400 stores without a digital price side.
We are on schedule to have these converted to a digital format by the end of the fiscal year.
This integration and find conversion will allow us to increase flexibility in adjusting retail prices to react more quickly to the changing fuel environment.
We're also pleased with the progress we've been able to make in fuel procurement and second quarter.
Certainly our contracted fuel volume represents about 37% of our total fuel volume.
As we continue to build out this team we expect to have approximately half of our overall fuel volume under contract by the end of the fiscal year.
Lastly in the fuel category, we continue to gain traction in our fleet card program.
Over the course of the second quarter, we added over 3000, new cardholders to date, we now have 2500 accounts in 15500 cardholders.
This combined with our additional efforts and other types of fleet cards have driven the Universal fleet program, 8% in the second quarter.
We remain optimistic about the potential of all these initiatives going forward.
As a result of our efforts with price optimization and the expected opportunity to fuel procurement, we adjusted our fiscal year same store gallon guidance range downward to minus 1% to a positive 0.5% and moved our annual fuel margin guidance range up to 21 to 23 cents per game.
Same store gallons are currently trending below our current annual guidance well the average fuel margin is trending toward the upper end of our current annual guidance range.
Moving to inside the store total sales in the grocery and other merchandise category were up 6.8% to $660.6 million in the second quarter.
Same store sales were up 3.2% during the quarter inline with our annual guidance, excluding cigarettes same store sales were up 5.8%.
The average margin in the quarter was 33.3% of 90 basis points due primarily to a favorable product mix shift to higher margin items.
Gross profit dollars for the quarter in the category were up nearly 10% to $220.1 million.
For the first six months same store sales were up 3.1% with an average margin of 32.3%.
As you may recall the year to date margin was adversely impacted by 6.6 million dollar onetime adjustment that occurred in the first quarter.
Without that adjustment the margin would've been 32.8% gross profit dollars for the first six months would have been up over 8% to $442 million.
Same store sales are currently trending ahead of our annual guidance.
During the second quarter, we continue to integrate our price optimization platform inside our store.
We completed the rollout of the center store products and are currently in the final stages of adding the beer and alcohol categories.
As we move into the back half of the fiscal year, we will look to integrate cigarettes in prepared foods onto this platform as well as promotion analytics.
With a limited amount of data at this point from the early rollout we did not have any results to share the should be in a position to update you at our next earnings call.
In the prepared food and fountain category total sales were up 5.2% to $297.8 million for the quarter.
Same store sales were up 1.9%.
Even though this was below our annual guidance, we're pleased with the acceleration in our comps towards the back half of a quarter, resulting in strong circuit sequential increase in our two year stack comps for the month of October and for the quarter.
We continue to gain traction in our digital engagement with our guess.
As part of this digital engagement, we completed an employee pilot in Reais recently rolled out a soft launch of our loyalty program at the beginning of this month.
We currently have a plan global launch of the program at the start of the new calendar year.
We believe the cases is at the heart of every community we serve with our purpose being to make life better for communities and guess every day.
With that spirit in mind, we wanted to create a partnership opportunity with our guests through the loyalty program.
The program will allow members to accumulate points for their purchases that cases that can be redeem for in store purchases or fuel discounts.
Unique to Casey's our rewards program also allows our guests to convert their points into cash that they can donate to their local schools.
This content this concept test it extremely well with our guests. We believe this will differentiate a rewards program from our competitors.
We're excited about the opportunity to learn more about our guest preferences, which will allow us to serve them even better we believed that the combination of the new suite of digital platforms will increase our basket size and drive additional traffic.
The average margin for prepared food in the quarter was down 150 basis points to 60.9% versus the second quarter year ago, primarily due to the rise and cheese costs. The average cost of cheese for the second quarter was $2.18 per pound compared to $1.86 in the same quarter last year.
These costs is currently trending up.
We are currently purchasing on spot market in mind to monitor this closely for buying opportunities.
In the quarter prepared food gross profit dollars rose, 2.7% to $181.5 million.
As you've seen in the press release, we adjusted our annual same store sales guidance range for prepared foods downwards to 1.5% to 4%.
Same store sales are currently trending within our annual guidance.
As many of you seen already we recently Onboarded, Tom Brennan as our new Chief Merchandising officer, who brings the cases, a wealth of experience in the convenience store in restaurant industries.
His leadership roles and merchandising category management software development and operations and I know there with his broad background and track record of success.
To help us accelerate our prepared food program and overall merchandising strategy.
We're also currently searching for a new head of foodservice to help with that acceleration.
With the addition of these new leaders the continued traction in our digital platform, including the upcoming launch of our loyalty program. We're optimistic about this category moving forward.
I would now like to turn the call over to build to discuss operating expenses and the financial statements Bill. Thanks Darren.
We continue to stay focused on controlling operating expenses for the quarter total operating expenses increased 8.5% to 373.4 million.
Increase was mainly driven by operating 84 more stores this quarter than a year ago.
Same store operating expenses were up 2.6% year to date, our operating expenses were up 7.1%, which includes the impact of senior leadership transition costs as we bring on new talent.
For the fiscal year, we anticipate these costs and had an adverse impact approximately $6 million or 12 cents on earnings per share.
On the income statement total revenue in the quarter was down slightly to 2.5 billion, primarily due to lower retail fuel prices from year ago, offset by operating more stores compared to the same period, a year ago and sales gains inside the store.
Depreciation in the quarter was up 2.5%.
The change in the annual guidance range is primarily due to the positive impact the depreciation from the onetime adjustment related to the useful lives the underground storage tanks and the deferral of some store replacement activity.
The effective tax rate for the quarter was 24.2% down permit a year ago, primarily due to a reduction in unfavorable permanent differences.
We expect our effective tax rate for the fiscal 2020 year to be between 23, and a half and 24.5%.
Our balance sheet continues to be strong at October 30, Onest cash and cash equivalents were $44 million long term debt net of current maturities was down to 715 million as our $569 million bullet payment due next August move toward current liability.
As interest rates move down we'll be looking to refinance all worked fortune of this debt, we do not anticipate a risk in our ability to refinance this debt.
Our trailing 12 month net debt to EBITDA ratio was 2.1 times, we anticipate us moving downwards as we continue to execute on our fiscal 2020 operating plan.
For the six months, we generated $312 million in cash from operations and capital expenditures were 248.7 million compared to 201 million a year ago and the same period.
Adjusted EBITDA grew 10.5% in a quarter compared to the same period a year ago.
Our capital expenditure estimate for fiscal 2020 remains at $560 million.
I'd now like to turn the call back to Darrens update you on our unit growth.
Thanks Bill.
Our target this fiscal years to build 60 stores and acquire approximately 25 additional stores.
Through the second quarter, we have opened 36, new stores acquired five stores UNEV 12 additional stores under agreement to purchase.
Currently we have 97 sites in our pipeline, including 31 under construction, which positions us well for future growth.
As mentioned in an earlier press release, we're excited to announce our third distribution center to be located and Joplin, Missouri.
We plan on breaking ground later this month with an estimated completion date in the spring of 2021.
Upon completion, we plan to immediately serve approximately 500 stores from this center, which will allow our network to operate more efficiently and alleviate pressure of of our current distribution centers.
It will also give us the ability to efficiently expand into new markets.
In closing, we've recently completed a comprehensive strategic planning process to more clearly defined the direction of the business over the next three years.
We will continue to execute on our current initiatives we have underway at the same time, we believe we have a tremendous opportunity to enhance current capabilities instead of new capabilities that will accelerate business performance.
We'll be hosting an investor day in January to announce and discuss the strategic plan in more detail.
We continue to take transformational steps to enhance store performance and deliver long term profitable growth.
We will continue to review and add skill sets to net to successfully execute on driving significant long term shareholder value.
With that we will now take your questions.
As a reminder to ask a question you wanting to press star one on your telephone to withdraw your question press the pound Kane. Please standby, while we compile the culinary roster.
And our first question is from Casey short from Barclays. Your line is now open.
Hi, Karen short.
Paul.
Are you Karen.
Good.
Just wanted to talk about prepared for a second so.
I appreciate the last call you talked about the fact that the trends accelerated kind of sequentially to end.
Pretty.
And you didn't quantify that but I guess I would characterize prepared to be lower than expected. So.
Maybe a little color there in terms of what you think the real.
Points are.
Yeah, Karen this is there and I think.
If you look through the quarter, we had a.
A couple of good month from one bad one I guess is high.
Characterize second quarter, we did and the quarter strong.
Some nice momentum and then moving into this quarter, we're we're seeing that momentum carry forward. So.
Again I think.
The the sequence of or the cadence of the months through second quarter Didnt quite work out as well as we had hoped although we did accelerate and then.
As we move forward, we're expecting the.
The launch of the rewards program to have an impact on prepared foods. If you recall, we had originally planned to launch that program.
Earlier in the year and then we ended up pushing that out so.
We expected that to the somewhat soften the prepared food comps as we move through the year.
But any color specifically also the impact of the App because I think you thought that the App would also help accelerate the prepared.
Yes. The App is is having an impact and actually about 27% of our.
Our whole piece orders are coming in through the App at this point and so that is having a positive impact.
We are seeing a little bit of softness inside the store that's somewhat offsetting that so.
We're still optimistic that the app along with the loyalty program will continue to help build them momentum.
Okay and then.
The price zones in general I think.
The last call you said it was more of a margin lift.
First as a sales lift.
Maybe clarify that a little bit is that just a function of the fact that you have for every item.
Thank you can raise prices similar number that can lower so.
It's less of a lift to sales.
Clarification on that and how that impacted the quarter this quarter.
Yes.
Yes, when we think about price optimization, it's not about price increases necessarily it's about optimizing the right retail price to strike the right balance between volume and margins so depending on the category and depending on the geography that may.
Cause us to move up or down on those prices, but we're trying to strike that right balance and so.
Price optimization won't always translate into.
Increased retail prices ill just ill be more of a rightsizing of the prices to optimize gross profit dollars.
Yes, Kevin This is bill just maybe just adequate coupled pit to color on such a couple of those questions. Here first of all your first question just to understand mixture of understands the cadence of the digital transformation that were undergoing so theres twoq just two pieces to the platform that we have currently underway with a third being that the loyalty from that Darren spoke about the E com.
This platform just kicked off in the beginning of the fiscal year. The mobile App that you reference we actually integrated roughly it towards the end of the first quarter. So we really only have that up and operational for one quarter at this point and so what we have seen thus far. It's certainly continued traction on a number of fronts, which were encouraged by I think thats reflected in Darrens comments relative.
To that the sequential movement of constant prepared food.
We considered can we continue to see our basket rings move forward conversion rates to move forward inside customer traffic continuing to to get better and better over each month, and then as Darren mentioned into this so far at least quarter to date, we're seeing a continual can due to continued improvement so.
I think we're encouraged by the by that traction.
Don't let add little more color.
Thanks, That's helpful. And then just last question tobacco. So you gave the grocery comp X tobacco.
I've gotten a lot of questions on Joel's, specifically can you maybe.
So what exactly the impact would be on or is from Joel.
A more broad based.
Due to the comp.
Well.
We haven't seen.
A lot of erosion then in jewel with the recent changes its and what have everybody keep in mind is it jewel wallet. It as it has been a growth category for us. It's a relatively small part of our overall mix, it's about a 1.8% of our grocery number.
Urgent dies sales about 1.2% of our overall merchandise sales so while it it has shown positive growth. It's it's really not as large and category or large an impact as one might expect bill on a few one yes I yeah. The only other color I'd add to that as to maybe more direct.
To your question you if you look at our comps that we've been able to put up here in the second quarter in first quarter, you're roughly between 100 150 basis points of that due to the acceleration that you will product we have cycle over the the rollout of that product and it continues to be very popular product, but to darrens comment I want to reiterate that.
It's a very small overall piece to the to the equation with respect to growth in general merchandise.
Okay.
Thanks.
Thank you. Our next question from Chris Mandeville from Jefferies. Your line is now fan.
Hey, good morning.
Bill rescue pack that 150 basis points of prep food margin erosion, a little bit more sure thats based on that to 18 and pricing for cheese.
Im not quite getting to that magnitude of compression. So is there anything else that that we should be aware of whether it be increased shrink or greater promo is there something provide color on.
Yes, so there's really two major components that would make up that differential obviously the biggest one at the cheese cost differential and so if you just by way of reminder, about every 10 cents per pound swing in the cost to achieve is roughly about 35 basis point adverse impact. The overall prepared food found margin remaining piece of that to get to your question is going to be from additional promotion.
Activity that we're dealing with our.
Our digital team.
So obviously as you know it's been a competitive landscape over the last 12 to 18 months, albeit we haven't seen any increased acceleration in a competitive landscape here in a quarter.
We continue to be more promotional and trying to the.
Obviously provide value opportunities for our guests and the rest of that would be centered around that.
Okay.
He is anything on the coffee front I suppose I guess, it's much more moderated input, but nonetheless pricing has risen to some extend recently so just trying to thank you.
Well, yes, not in the second quarter, but as we head into first quarter, we didnt launch a new coffee program.
Obviously, new flavor profiles, new packaging and we did have some special pricing promotions in the month of November to introduce that net new product to our gas.
And so that will be plant and we'll talk more about that into Q3 results.
Okay.
And then maybe turning to the Opex.
You just reference what credit card fees were in the quarter and just based on year to date performance.
I mean is there any reason to believe that you can't necessarily managed at the low end of your guidance or is there anything that we should be thinking about.
You provide any real update on just that time in motion study.
Yes so.
Answer your first part $39 million was the credit card fee cost in the second quarter.
With respect to the the second quarter up eight eight and half percent you notice we did not change obviously the the range for operating expenses. So we anticipate an acceleration.
We were slightly behind in Q1 with respect to new store openings and so we are catching up on that so intuitively, we will have more operating expenses.
In the back half your relative to that activity. So a couple other call outs I would say from that from the Q2 Opex.
We mentioned little bit on the senior leadership transition cost for the year. This is spread out throughout the course of the year. So roughly about a million dollars came in to the second quarter for that would you have store manager bonus that was a little higher than we had in previous quarters, that's due to the performance.
The company on a new bonus program, just a couple of call outs there so.
We continue to move forward on the time in motion study that you mentioned right now looking at Q3 Q4 to how that completed rolling out so I would not necessarily see a tremendous impact from that into this next quarter you might seasoned tailing impact in this in the fourth quarter. This fiscal year, they'll probably more so have a next fiscal year impact.
Right right on track with that Chris.
Okay, and then just the last on forming since cost controls have really be come a greater focus over the last year. So.
When you look at some of the newer stores that have been opened.
With that the greater emphasis on that line item, how would those returns looking relative to older vintages.
And maybe if theres any update with respect to how the returns profile has trended down the stores that.
Eliminated the likes of delivery and or 24 hour model.
All right I mean, I get all the had a lot question up questions in there. So I'll try to add them all of those I think you're often the question is new stores and how they might be wrapping up relative to some of the.
Previous or is that we've built in general.
That's the question I would say that and Guaran kind of alluded to it obviously the new store contribution continues to perform in line or above our expectations and so certainly that's helping us.
The results and we currently have now I would say this as we get further down the path with the digital transformation further down the Pratt path of price optimization and fuel procurement I think we have an opportunity to shrink the maturation cycle of the new stores that we open.
And then increased the returns ultimately of those stores. So we're excited about all those opportunities.
Going forward.
Okay, great. Thanks, guys. Thanks. Thanks.
Thank you. Our next question is from Bobby Griffin from Raymond James Your line is now open.
Good morning. This is Alexandre Jimenez on for Bobby Griffin. Thank you for taking your question.
Welcome.
First did the fuel procurement strategy of moving towards more contract purchasing have a noticeable impact on fuel margins during the quarter.
Yes, so it would have I would say.
Roll up the fuel margin for the quarter. The predominantly comes to the initiatives that we're undertaking to predominant impact came from price optimization as opposed to fuel procurement. So we have been successful during the course of the second quarter and.
Increasing number of our fuel gallons under contract, but just by the nature of the timing of when those are executed those will be more balance for the back half of the year.
Okay. That's helpful and then at the midpoint of guidance the guidance implies the second half fuel margins are relatively flat to modestly higher.
Here is the industry pricing environment, starting to slow down.
Well I mean.
We are characterized that you go back and look at a historical Q3 in Q4 fuel margins, you'll typically see a drop in our fuel margins in every fiscal year that we have probably last 10 years. It's a function of the structural dynamics of that particular category does not necessarily we have now to that degree I think we have opportunity to offset some of that with some of the initiatives, we have going on with price.
Optimization and procurement.
Okay, and then lastly from me on can you expand on some of the labor initiatives, you're working on and how much more of an opportunity do you see from LIBOR allocation.
Great question. This is yes.
Kind of touched on a little bit in Alaska answer with his time in motion study and just to reflect what as reminder, what that is it's really we have many all of our Katherine will across our 16 state area and so with that we can certainly.
Provide an opportunity to have the time it takes to say make a pizza.
To take out the garbage whatever it is that should be the same and every store until they will layer that on top of the scheduling.
Tool that we have which will be able to assist the store operations individuals to to better better move their schedule with the movement of their stores so as as.
Traffic increases made ability to increase the the scheduling and vice versa. So I think we're excited about that opportunities. We had primarily to next fiscal year, but along those same line. We've continued always have an emphasis on looking at our labor hours in the store.
Our labor Allergan. So we'll continue to be down we are cycling over here in Q2 Q3 in Q4, some significant labor hour reductions that we took last year.
So just to it it will continue to be an area of focus.
Okay. Thank you and good luck on the balance of the here.
Thank you thanks.
Thank you. Our next question is from Paul Trussell from Deutsche Bank. Your line is now open.
Good morning.
Thanks for taking my question.
Maybe lets just touch on the grocery category.
You had nearly 6% comp I think acsix cigarettes, maybe just talk a little bit about the puts and takes there along with the margin performance of that category and what.
Kind of mix shift you're seeing two to drive that year over year game.
Yes, well, there's a couple of calls from a same store sales perspective in the grocery and general merchandise, we touched on one of those early with the the the vapor products, specifically jewel being very popular continues to be very popular and so that part of the that the lift but also there is some other categories that continue to gain some some pretty significant traction that would be like in a packaged beverage category.
The energy drink for instance, with you with the advent of abate, Jimmy Bang and Rick and rain.
So those two categories doing very well then the Apple and beer category continues to to make great strides as well and there's a couple of things to call out there. We had a few state law changes that allowed us to sell a stronger alcohol content beer, which those intuitively are moving forward, but we're also looking at additional store resets of line as well as additional resets.
Of alcohol and that seems to be doing very well in resonated with our consumer.
Now the margin side of that all those products I just mentioned, our higher margin items and certainly as you make a product mix shift. That's the predominant reason you see that that margin, but also as you may recall Paul.
The state of Illinois had a cigarette tax increase back in the first quarter and with that it did not tax the inventory on hand, and so the inventory that we had drilling our warehouses now funneling through through a sales aspect in the second quarter and so there is a benefit to the margin that's running through there of roughly about 30 basis points.
Got it that's helpful.
Then.
Maybe just touch on the on the fleet program you remain optimistic about the potential there.
Adding a lot of card holders, maybe just give an update on what you're seeing.
Yes, yes, we've had made some great traction this last quarter. We've had a couple of larger accounts come on and continue to be very diligent in bringing on new accounts to our specific fleet card, but probably more probably the bigger story here. Paul is looking at our Universal Fleet program of which component is that fleet car that you think you're referring to.
So we will continue to comp will continue to gain traction on the fleet card program, but starting about the beginning into fiscal year, roughly maybe even back in the fourth quarter. We made some changes to the overall universal fleet proven that to allow us to be a little more competitive some of the discounts that were offering as a consequence over the last records were averaging roughly about an 80.
9%, increasing universal fleet gallons quarter over quarter those respective periods. So we continue to gain traction that brings more customers into the store on allows us more intersection points as we launched a loyalty program to get to those customers as well on that on our loyalty program.
Thanks for the color best of luck.
Thanks, Paul Thanks.
Thank you.
Reminder, to ask a question you wanted to press Star one on your telephone to withdraw your question press the pound cake.
Our next question is from Ben Bienvenu from Stephens. Your line is now fan.
Hi, Thanks, good morning.
Event.
I want to ask first about fuel and you touched on earlier with some of the progress that's been made on procurement and that should be more impactful to the back half of the year I wanted to get a sense of.
Based on those changes what percentage of your fuel mix procured the contract.
I think youd previously referenced a 30% or the mix will ultimately be procured under contract.
End of the fiscal year is that still are reasonable watermark for us to think about.
In terms of the mix.
Yes, then this is Derek.
If you look through second quarter were actually at 37% of our overall volume is under contract at this point that that was building throughout the second quarter. So as we look to the balance of the year, we're expecting to get roughly 50% of our overall volume under contract by the end of the fiscal year.
Okay great.
And then following up on cheese, obviously, the commodity price inflation is causing some margin pressure in prepared foods and looks like.
At this point chosen to absorb the majority of that.
If not all of that versus passing along pricing increases is that how you'd expect to continue to handle it are you waiting to see what the competitive responses. Among your peers before you make a decision around.
Passing along higher prices, how should we be thinking about how you navigate this environment.
Yes. This is there and again.
So we're we're kind of taking that.
Day by day to be it to be Frank.
Looking at the commodity market and looking at the competitive environment as well in trying to strike that right balance.
Good.
We expect that the the cheese costs will start to come down at some point and so we don't want to put ourselves in a competitive disadvantage.
Well from a value proposition standpoint, so we're continuing to monitor that and we'll we'll see how we go but at this point, we've elected to not pass it onto the consumer and we're looking for opportunities to Opportunistically.
Procure the that she is a more advantageous fries.
Okay, Great and then one last one for me congratulations on the distribution center announcement.
When you guys Bill the Terra facility there was a significant reduction stem miles. In addition to opening up some contiguous geographies that you can build into.
When you think about the benefits that this joplin facility provides.
If you could give us a sense of how much of it is continued stem mile reduction inefficiencies and transportation versus opening up new geography is kind of course southwesterly.
That'd be helpful.
Yes sure I.
I would say that the bulk of it is really from improved efficiency within our distribution network right now.
That southern southwestern part of our geography is being serviced out of any Iowa and Terre Haute, Indiana. So that's that's a pretty long haul when we when we open up that facility in the spring of 21, I will immediately be able to service about 500 stores out of that facility, which will really.
Start to rightsize, our distribution infrastructure and reduce the overall cost to serve those stores.
That being said it does expand our ability to reach into some new geographies that were not currently and so.
The immediate impact would be on the efficiency side, and perhaps a little bit longer term would be on the development side.
Great. Thanks Best of luck with the rest of the year.
Thanks.
Thank you. Our next question comes from the line of Kelly Bania from BMO Capital. Your line is now open.
Good morning, Thanks for taking my questions.
Yes.
Wanted to ask about traffic I think I think Bill May you may have mentioned that it was sequentially improving but just can you help us understand where where that lies in what you're seeing.
And then on the loyalty program can you help us understand kind of what you experienced in the test.
Like.
The acceleration that your that you're hoping for here in prepared foods rests largely on the loyalty program. So maybe just help us understand what you've seen so far with the tester.
Yes, I'll try to get to all those questions answered but.
Make sure that we gather that though.
On the loyalty south starting a loyalty site.
With respect to that we certainly see that we are in a position now that we believe that we in some cases heavy well. Thank you step back I think we seem to fuel saver program. That's been out for probably six seven years now how that resonate with our consumers and so thats a form of the loyalty program. We see many of our larger regional players have loyalty programs coming on board.
The success of they have obviously and so we believe certainly this is going to be a positive impact for us, but I don't want to Miss have you come way from this call thing and that's the only thing thats going to be drive in prepared foods going forward. So as Darren mentioned will be having it at Investor day here in January and there are a number of other opportunities that we thought.
Outside of loyalty that we have in play coming up and the next fiscal years to drive that program forward, so more to come on that.
The first part question can you repeat that forming I was just put it out yet traffic count so right now transplant cat traffic count inside the stores roughly flat and we have actually that's as an improvement as we've been actually slightly negative here for the prior quarters, and we haven't seen and.
Gradual increase or probably the last three to four quarters. So we're encouraged by that we believe some of the things that we're doing with respect to the digital transformation are helping that.
I Miss anything there.
No that was that was helpful. Thank you.
Just.
Another one as I think about what you're you're talking about in grocery.
Real favorable mix shift from higher margin categories I guess there was.
Some impact from the cigarette.
Tax but.
But still some it sounds like you know favorable mix shift in just seems to be.
Very different from what's happening in the prepared food side, where you're doing more promotions.
And it just seems to be characterizes the tougher environment. So just curious if you had any thoughts on kind of the differences and the two categories.
Okay.
Yes, Kelly this is Derek I think it if you look at those two categories I mean, obviously.
In our prepared foods category, we've got to a big reliance on our our pizza product and we have a high mix of that and she is being the single biggest component of that cost of goods and so when you see the commodity markets get.
Out of whack like they are right now, that's obviously going to put a direct.
Pressure on margins that doesn't impact the fact that the guest still wants our pizza and they continue to buy it if you look at the grocery.
Category by comparison, you see people shifting.
Among product so carbonated soft drinks tend to be declining and that that's been a trend thats been going on for a while now and they're shifting over to energy drinks the energy drinks have a higher margin.
Then the carbonated soft drinks if you look at the cigarette category.
People are smoking less combustible cigarettes, and moving over to the electronics cigarettes, which have higher margin. So you're seeing those behaviors with the consumer whether shifting away.
Now because of pricing pressures, but they're shifting away about a preference to.
The products there they are naturally higher margin Bill mentioned earlier the.
The the development of our liquor and wine categories again premium beers are starting to decline craft beers are growing liquor on wine is growing all of those are favorable shift from a margin standpoint, so theres some natural.
Margin accretion there.
Thanks.
That's helpful and I guess, just maybe one more.
Just on retention levels and turnover both in the store and at the Dcs just general update on on what you're seeing there.
Thanks.
Well at the store level I mean, it continues to be anytime you're an entry level retail on it's only going to be a competitive landscape.
Rate pressure, obviously, we've seen that in the second quarter. That's part of the operating expense question that in past earlier. So we continue evaluate our markets to make sure that were competitive in on our rates and but it's still very challenging, especially with the low unemployment that we've experienced throughout the Midwest here.
Thanks to the corporate offices here or did this distribution, we generally tend to have low.
Very low turnover rate there so there's nothing really to call out at this point.
Thank you.
Thank you. Our next question is from Chuck Cerankosky from Northcoast Research. Your line is now open.
Good morning, everyone.
Yes.
Looking at the.
Joplin, Missouri distribution center seven of operating radius rolled out.
I have been.
What's the total number of stores, you expect that to be able to support.
After you after the initial 500 startup.
Yes, Chuck there and.
Typically operate our distribution centers with a 500 mile radius.
So that gives a pretty broad swath of.
Oh stores the weekend.
The we can service.
Your optimal efficiency range is a little bit.
South of that but we currently support stores within a 500 mile radius there.
And how many how many credit support over time.
Thousand or more than that.
Yeah, I mean, our initial initial push on store Kelby 500, but we could we get service upward thousand stores out of that distribution center. So we have.
We have plenty of room to grow.
Yes, the other thing that I'd point out is that.
In addition to the existing facility that we're designing.
And we're designing this to be.
To be more automated and more efficient than perhaps our other two distribution centers. We also have additional additional land adjacent to the.
To the site that we can expand if we need do so we've we've got a couple of 11.
And Greg.
The press release, the acreage purchase sounded a little high so that.
Covers that.
On the.
I think well you've mentioned some store projects that were deferred that led to a.
DNA reduction can you talk about that a little bit.
Yeah, absolutely so coming into fiscal year, we certainly have an idea of how many stores that we feel our candidates can you explain what's worse than the year.
Once we make that decision to replace it stores changes the useful life Thats, we had to accelerate the depreciation very quickly and so as we were looking at our plan about halfway through the fiscal year, we made a decision to defer roughly.
All right into next fiscal year, and consequently accelerate appreciate than we had planned for was not coming through and that's part of that appreciation testing.
Alright, Thank you very much.
Thanks Chuck.
Thank you Sir our next question is from John Royal from JP Morgan. Your line is now open.
Hey, good morning, guys. Thanks for taking my question.
First one is on uses of cash you guys have had enough free cash flow to pay down debt in the first half.
Sitting on the low twos on leverage right now so.
Any thought at this point for utilizing the buyback in the near future.
We take.
No John we we always keep that option available to US I think you know we have a 300 million dollar authorization.
For those share buybacks so.
We'll always take a look at our at our cash balance and Opportunistically.
When there's a.
When there's an opportunity we see that makes some sense, we can deploy that extra cash. So we'll continue to look for those opportunities and.
You'll see it if we do it.
Also John on our debt right now we have make whole provisions. So there would be prepayment penalties to accelerate any any payments on the current debt that we have but as we look to refinance that certainly is certainly an opportunity for us too and Thats therein lies the comment that we made that we will look to refinance all or a portion of the upcoming debt.
I hope that helps.
Yes. It does thank you and then.
On the distribution center.
Total cost number you guys can share with us at all or maybe how much is in this year's budgets worried about.
Yeah we're.
We budgeted about $63 million for the for the construction that facility.
Okay and then.
Maybe the sequencing.
You are starting in 2001.
How much maybe we should we expect next year.
Yes, just just to clarify will will be breaking ground later this month from that facility and.
We'll take give or take about 18 months to build so we'll.
We're targeting somewhere late spring of 2021 too.
To that.
Facility fully operational.
Understood. Thank you.
Yes.
Thank you. Our next question is from Karen short from Barclays. Your line is now open.
Hi, sorry, just a couple of follow up.
With respect to the loyalty program.
Did you have on the test.
Yes.
Yes, so when we did tested Lilly throw it was really centered around here at the office the corporate facility and then we just asked as Darren mentioned, we put out a soft launch.
Here beginning of roughly the beginning of this month and.
And then the cadence and we'll go to to a global launch that and we'll give more details on on that at the analyst day, Yeah. Karen is about 2000 employees ultimately that there were on the program in our in our beta test.
Ill now it's opened to the entire system.
And just to clarify that the read the testing for the employees was really intended to be making sure that the mechanics behind the loyalty program. We're working properly the discounts were being done and so thats why we wanted to make sure did not want to make a global launch and have a nuance occur only have maybe a poor experience with our guests. So.
And then the partly also pushes certainly.
It's put media around a loyalty launch not sure you get the value that media here around that run the holiday season, and so we want to pass holiday season for global launch.
Right.
So it's more the functionality mechanics.
That's correct that's right.
Then in terms of the second half.
Slide range.
Pretty wide range in terms of grocery.
Eric.
Maybe a little color on how to think about that and then the second part would be.
Really necessarily talked about.
Gross profit dollar growth versus.
But I.
Some context, and how you think about.
Generally.
Yes, yes, we'll I'll start and there so as far as the guidance ranges we.
In the past we have narrowed the guidance ranges get further into the fiscal year, which made the decision to keep those ranges intact unless there was something like from the prepared food category. We did not think the upper end of the range was attainable in the back half year, given what the results were at the six month, Mark and so I'm not sure there's anything to read necessarily into that.
Other than that than that and as far as gross profit.
Inside the store for us. It's here, we have to trying to gripe drive gross profit we stop short of given a target is relative to gross profit increase but we are seeing gross profit dollar increases either high single digits or low double digits inside the store depend on the category you're looking at.
Right.
Probably does.
Gross seems to be exceeding gross profit dollar growth wondering.
Depending on how you're including.
And credit card fees and things like yes, I'm not sure.
Yes, so when we look at our total gross profit.
We show exceeding the total operating expense growth.
And you want to getting confused with.
Or maybe with the same store operating expenses same store operating expenses were up 2.6%, we happen to reference excluding credit card fees up through little over 3%.
So our inside grow it would be right Brett comparable with that.
Yes.
Because I think.
We do we do expect acceleration in both those.
Like a widening of the gap between gross profit dollar growth.
Yes.
Correct.
Thanks.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Darren Red below us President and CEO for closing remarks.
Okay, I would like to thank everyone for joining us this morning, and close the call by reiterating our key initiatives are designed to position cases for accelerated revenue growth and improved long term profitability.
We're looking forward to sharing with you our plan to build upon was currently underway and outline our new initiatives that we believe we'll continue our long term track record of driving shareholder value. Thank you everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.