Q3 2021 Casey's General Stores Inc Earnings Call
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Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, please stay on the lives.
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Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Q3, FY 2020, One Casey's General stores earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation and there'll be a question and answer session to ask the question. During the session you of the press Star one on your telephone if you require any further assistance. Please press Star then zero.
I would now like to do sales release conference call. Mr. Brian Johnson, you may begin.
Thank you.
Good morning, and thank you for joining us to discuss the results from our third quarter ended January 31, 2021, I and Brian Johnson Senior Vice President Investor Relations and business development with me today is Dan rebel of this president and Chief Executive Officer, and Steve Bramlage, Chief Financial Officer at.
Before we begin I'll remind you that certain statements made by us during this investor call at May constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 of these forward looking statements include any statements relating to expectations for future periods possible or assumed future results of operations and financial conditions liquidity and related sources of.
Needs, the company's supply chain business and integration strategies plans and synergies growth opportunities performance at our stores and the potential effects of COVID-19, and there are a number of known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied.
Of those forward looking statements, including but not limited to the timing of closing and the integration of the pending Buchanan and energy acquisition and our ability to execute on our strategic plan at a realized benefits from our strategic plan and the impact and duration of COVID-19, and related governmental actions as well as other risks uncertainties and factors, which are described at our most recent.
And annual report on form 10-K, and quarterly reports on form 10-Q as filed with the SEC and available on our website any forward looking statements made during this call reflect our current views as of today with respect of future events, and Casey's disclaims any intention or obligation to update or otherwise of revise forward looking statements.
Whether as a result of new information future events or otherwise.
Now I'd like to turn the call over to Darren to discuss our third quarter results Darren.
Thanks, Brian and good morning, everyone look forward to sharing of our third quarter results to you. This morning.
Once again, our team has demonstrated tremendous resilience and a difficult environment and as a result, we've maintained our strong financial performance one year into the pandemic.
For the past year, we've navigated many challenges and complexities.
And we've been able to continue serving our guests and new ways.
From offering curbside pickup and expanded delivery to refreshing our brand, including a new logo to launching our <unk> branded products, we are more relevant and with our guests and ever.
We're here for our guests and we're here for good.
Our team makes this all possible.
And I couldnt be prouder of each Casey's team member of 40000 team members of going above and beyond and to serve our guests. Despite the pandemic and of harsh winter in many areas.
We remain intensely focused on their health and safety and now that includes encouraging all of our team members who are eligible to get the COVID-19 vaccine.
To support vaccinations, Casey's is providing of wellness bonus of $50 to team members that complete the full dosage of the vaccine.
As availability and access increases.
We're optimistic that more of our team members will be vaccinated in the coming months.
We're also here for good and our communities.
During the third quarter cases completed and in store, giving campaign in partnership with Pepsico to raise funds for organizations, providing assistance to veterans and their families as.
As a veteran of myself I know the great sacrifices these families of made and the challenges they face.
This year's campaign raised over $1 4 million that benefited two outstanding organizations children at a fall of Patriots and hope for the Warriors and.
Each of them received over $700000 from the giving campaign that occurred in November.
These funds will allow the charities to have an even greater impact on the lives of veterans and their local loans.
Thank you to our vendor partners each casey's team member that made the donation of asking our stores and especially to our guests who truly do good when they shop and cases.
Now, let's discuss the quarter's results.
We finished the third quarter with diluted EPS of $1, <unk> and increase of 14% from the previous year.
The results are particularly impressive given the challenges of team faced with the COVID-19 resurgence during the quarter.
Fuel profitability remains a primary driver of the increase along with inside same store sales, which were up two 1%.
The team also remained nimble throughout this turbulent time and was able to reduce same store labor hours and 5% after adjusting for the store reset and COVID-19 related day as we continue to actively adjust operating expenses and real time to the circumstances.
I would now like to go over our results and share some of the details on each of the categories.
During the third quarter, we continued to experience of favorable fuel margin environment fuel.
Fuel gross profit was up 37% compared to the prior year with of fuel margin of 32 nine per gallon.
Our fuel team did a tremendous job balancing volume and margin when considering wholesale fuel cost rose approximately 45% throughout the quarter.
A steady rise in costs throughout the quarter at the most challenging fuel margin environment to operate in and the team responded by delivering yet another solid performance.
I'm also proud of their performance relative to industry volumes and profitability and our geography.
Same store gallons sold were down 12, 1% compared to the prior year due to the continued traffic disruption from the pandemic.
We currently have 74% of our fuel volume under contract and our fleet card program has over 8900 accounts, which is of 3% increase from the second quarter commercial.
Commercial sales represent about 12% of our total fuel sales.
Same store inside sales were up two 1% for the quarter with an average margin of 39, 6%.
We continue to see larger basket size offset by lower inside guest traffic.
During the first half of the quarter. The company performed of significant store reset at over 2200 locations.
The reset involve moving interior sheldon to improve traffic flow as well as adding shelf space vertically to expand and selling space.
Not only and will this enable us to more effectively rollout of our private label program. We believe this will optimize category flow and adjacencies with existing Skus and has allowed us to add more variety within existing categories.
Initial results from the reset of encouraging we did see grocery and other merchandise sales improved throughout the quarter following the reset.
Alcohol and packaged beverages continued to perform well and tobacco was positive for the second quarter on a row.
Same store sales were up five 4% with an average margin of 37%.
The margin is still adversely impacted by both tax size and mix shift among the categories.
Along with the onetime impact of discounted merchandise no longer carried from the store reset.
Same store sales were down 5% and our prepared food and pharma segment.
The average margin for the quarter was 66% versus 62% from a year ago.
Self serve items, particularly those sold during the breakfast day part like bakery and coffee continued to be hampered by lower guest count.
The COVID-19 resurgence experienced during the first half of the quarter amplified this as more people were at home from work or school.
Whole piece of Pie has continued to outperform with same store unit sales up 17%.
Margins benefited from a modest cheese price improvement, partially offset by sales, particularly in the morning day part.
I would now like to turn the call over to Steve to go into some detail on the financial statements. Steve. Thank you Darren and good morning total revenue for the quarter was $2 billion.
A decline of $240 million or 11% from the prior year. This was due to the decline and retail sales of fuel of approximately $275 million driven by the lower number of gallons sold and the lower retail price of fuel the average retail price of fuel. During this period was $2 12 per gallon compared.
To $2 40.
Gallon a year ago.
Total gallons sold for the quarter were down nine 5% to 518 million gallons total inside sales were up three 8% to $888 million.
Grocery and other merchandise sales increased by $42 million, while sales of prepared food and fountain fell approximately $10 million. Please note that all reported figures are favorably impacted by approximately 2% more stores operated on a year over year basis of <unk>.
Lottery ticket sales are not included and inside sales, rather we record our net commission and other income.
And what are we at ticket sales have performed well throughout the pandemic, especially in the third quarter were two very large jackpots drove guest interest. If we had recorded them as part of our same store sales our year over year performance and the third quarter would have increased inside sales by approximately 380 basis points case.
<unk> had gross profit, which we which we define as revenue less cost of goods sold but excluding depreciation and amortization of $540 million and the third quarter at an increase of over $43 million from the prior year.
This is primarily attributable to higher fuel gross profit of $46 million offset by a decline of $5 million of prepared food and fountain gross profit.
In fact gross profit margins were 39, 6% of decline of 200 basis points grocery and other merchandise margin was 37% of decline of 220 basis points.
<unk> food and fountain margin was 16, 6%, which is an increase of approximately 40 basis points from prior year grocery and other merchandise margins continue to be pressured by a mix shift both within categories as consumers continue to purchase larger pack sizes as well as across categories is lower.
Margin products like beer and tobacco outperform.
The company also discounted at certain merchandise in conjunction with the store reset that Darren previously mentioned.
Prepared food margins did modestly benefit from a favorable cheese cost comparison, our cheese costs were $2 of apparel and this quarter and that compares to $2 17 for the same quarter, a year ago or about an 8% decline. This represented a 60 basis point improvement and segment margins for the quarter.
The company has locked in approximately 60% of its volume through April and at current prices expects a modest year over year margin benefit from cheese and the fourth quarter.
Total operating expenses were up nine 8% to $414 million. There are several factors driving this increase first the increase from operating 36 more stores and a year ago of $7 million. The company also incurred $11 million and COVID-19 related expenses $10 million and.
General long term and short term incentive compensation costs, and $3 million and labor costs associated with the major store reset we've already discussed.
Our store operations team did an outstanding job managing labor during this challenging environment with same store labor hours down 5% when we adjust for the Covid sick pay and the store resets.
Interest expense was down 13, 6% to $11 $5 million due primarily to the refinancing of our senior notes that we completed in August.
The effective tax rate for the quarter was 21, 3%, which is comparable to the prior year during the third quarter. The work opportunity tax credit program was extended through December 31, 2025, and that drove a positive discrete adjustments of our tax rate and the quarter. The company generally receives approximately 5%.
And $6 million and annual tax savings from this credit and the prior year third quarter rate was similarly impacted by and extension of the same credit last year net.
Net income increased 14% of $238 6 million <unk>.
Adjusted EBITDA for the quarter was $127 4 million compared to $124 million, a year ago, and Thats an increase of 6%.
Our balance sheet continues to be very strong at January 31, cash and cash equivalents were $389 million and we have the full capacity available of our $475 million and lines of credit.
During the quarter of the company amended our existing credit agreement to include a $300 million term loan debt will be used to finance the pending Buchanan energy acquisition once it closes.
Our leverage ratio stands at one eight times and we have no maturities of significance until 2025.
At the March quarterly meeting the board of directors voted to issue a dividend and the amount of <unk> 34 per share.
The company generated $7 million and free cash flow and the third quarter, which we define as cash flow from operating activities of $111 million less purchases of property and equipment of 104 million. This compares to negative $33 million and the prior year and was driven by both higher earnings and improved working capital performance.
<unk> <unk>.
Capital expenditures were less than the prior third quarter, but construction efforts are accelerating from the COVID-19 delays that we experienced at the start of this year our year to date free cash flow performance continues to be favorably impacted by higher earnings stronger working capital performance, which primarily from fuel prices and the deferral.
<unk> of social security payments under the cares Act, but also from a proactive effort to extend our payment terms as well as lower purchases of property plant and equipment.
We do expect free cash flow to be negative and the fourth quarter due to the timing of capital spending.
The company has opened 27, new to industry stores. So far this year and completed the acquisition of three additional stores. We have 23 stores currently under construction. We continue to believe we will finish the year with approximately 40 newly constructed stores opening.
As we disclosed previously Casey's and Buchanan and energy received a request for additional information from the Federal Trade Commission, we continue to cooperate with the FTC and we do not expect this review to have a material impact on the acquisition or the anticipated economics and synergies.
Given the current uncertainty brought on by the pandemic, we are still going to refrain from providing guidance on future results. The fourth quarter is going to be and especially challenging period to model given the pandemic hit that occurred mid quarter last year that being said, we do expect profits and the fourth quarter to be low.
Our than prior year due to the unusually high fuel margin and the business achieved last year as well as the unusually low operating expense of the business incurred as we drastically reduced store operating hours due to the imposition of Lockdowns, we expect our fourth quarter Opex will exceed the year over year percentage.
Increases of the second and third quarters by several hundred basis points because of these comparisons.
While our volumes and the first part of the fourth quarter have experienced a double headwind due to the widespread winter storm and mid February and the continuance of the COVID-19 pandemic, we expect very strong improvement for the second half of the fourth quarter as we begin to lap of negative traffic patterns of the prior year period I'll now turn the.
Back over to Darren.
Thanks, Steve.
First I'd like to congratulate the entire cases team for delivering impressive results from the third quarter during turbulent times.
The fourth quarter got off to a very challenging start with extreme cold temperatures and highest snowfall totals impacting much of our operating territory at.
As of this call our quarter to date year over year same store fuel gallons sold are trending down mid teens.
Fuel margins remain favorable and are trending around 30 per gallon currently.
Inside sales quarter to date are down low single digits, the prepared food categories under the most pressure and is trending down and the low double digits.
Grocery and other merchandise is trending positive in the low single digits.
Quarter to date figures just disclosed excluded the impact of the extra day in February 2020, due to the leap year.
While we experienced a challenging start from the fourth quarter due to the temporary impacts of both the weather and continuing and COVID-19 restrictions. We're excited for the late spring and summer months.
With that same distribution already started and projected to ramp throughout the next two quarters, and whether and our geographic footprint warming up and were excited about more guests being able to visit our stores and experienced and refreshed assortment.
The improvements we've made to our digital guest engagement capabilities should enable us to retain guests that were drawn to our whole pizza pie business.
We will also be ready to deploy effected promotions through our reward program to drive business when regular commuter traffic returns for work and school.
The team continues to execute our long term strategic plan and we continue to stand by our commitments we made last year.
I'd like to go a little deeper on one of the pillars of the plan reinventing the guest experience.
Our Casey's rewards program just celebrated its one year anniversary.
The program is very popular with our guests and we now exceed $3 3 million members.
We've recently completed customize promotional campaigns to targeted cohorts based on and purchasing history.
We're excited for what the future holds for this effective digital guest engagement and we're confident we can have an impact on guest behavior moving forward.
We also continue to expand our third party delivery services.
We added 120, new stores to bring our total to 700 site and door dash.
Cash provided an incremental delivery orders is over 60% of orders were outside of Casey's delivery hours and.
In addition to door Dash cases is piloting Uber eats with an expense expected launched and the first quarter of the next fiscal year.
Our private label program continues to outperform initial expectations.
As previously mentioned and the store reset we did to drive inside sales, including private label products.
After the first month of the reset the Casey's brand was the most popular non tobacco brands sold throughout the chain.
We're thrilled with the guest response and we'll continue to add products of the program. So long as they need these three requirements.
First the product must have a lower retail price compared to the competing national brands.
Second the penny profit for each item must be higher compared to the competing national brand and.
And last and most important of the quality of the product must be in line or higher than the competing national brands.
Adhering to these criteria is proving to be very effective thus far.
Private label sales were two 5% of grocery and other merchandise sales throughout third quarter and by the end of the quarter were in excess of 3%.
The Casey's brand has already grown to be the number one guest choice and bags jerky packaged bakery and nuts, and seeds and amazing accomplishment and such a short amount of time and shows the power of our brand holds beyond our traditional prepared food program.
Due to the progress made with our digital guest engagement.
We are positioned well to retain the guests we've attracted to our whole pie business during the pandemic.
Over 59% of our orders are placed digitally whether it be via our app website or door dash.
Our Casey's rewards is assisting with the strong performance of our private label offerings by offering double points as we introduce new products and we have expanded our segmented promotional campaigns by targeting pizza activity.
Offering bonus points to new whole pie purchasers proved effective and we experienced good conversion on campaigns targeting pizza slice buyers to increase purchasing frequency.
In closing I just wanted to pass on my appreciation of the entire <unk> team for continuing to execute our long term strategic plan and delivering fantastic third quarter results.
We're looking forward to at a steadier future of vaccine distribution becomes more widespread and believe our business is well positioned both financially and strategically to take advantage of pent up demand.
We will now take your questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone and we also ask that you limit yourself to one question and one follow up.
First question comes from Karen short with Barclays.
Hi, Thanks, very much and I wanted to actually focus on the reset a little bit better.
You mentioned and the <unk>.
Repaired remarks, obviously, there was an effort to improve traffic flow, but you talked about at an increase and vertical square footage. So wondering if you could give a little more color on how much vertical square footage you actually added.
And then just kind of quantify that in terms of the actual increase and percent of.
And shelf space I guess, and then I had at separate follow up.
Yeah.
Yeah, Karen this is Darren.
And we did do the reset for a couple of reasons. The first was to.
Orient, our shelving and such a way that at <unk>.
Improved traffic flow and promoted of.
Impulse purchasing and adjacent purchasing so.
Goal number one was to get the right products and the right place within the store so that is.
And as people were walking by day wood.
The impulse to buy other products and we've seen improvement and our.
And our add on purchases and conversion rates as a result of that at the same time it did.
Excuse me.
Raise the heights of the gondola is about 12 inches that we raised.
And.
But that did essentially was allow us to add about another 250 items to the assortments, so roughly 10% increase.
And Skus and at the same time, we refreshed the entire Assortments. So we were able to get more new products into the assortment and get rid of some of those stale items that had been there for a while and and just weren't selling and being on productive.
Okay. That's helpful and then I actually wanted to switch gears to fuel for a second.
Obviously, you called out of rising wholesale and environment, but.
I guess for you and say your turns have decreased pretty meaningfully.
During the Covid period, so I'm actually wondering if you could give an update on how many days of inventory you have and the ground on fuel just to try to get a sense of how much.
And so you might be benefiting from a rising wholesale environment.
Comps given the weak gallon comps.
Yes, it wouldnt be prepared to give you the days of inventory, but we do manage that very closely and try to time our purchases such that.
We don't work.
Into the teeth of a rising market now that being said.
And frankly, it's been on avoidable because of the the wholesale fuel market has been rising literally ever since the end of October.
Through today.
And so yes.
Theres only so much you can do at a time time, those purchases and try to manage that inventory, but at a certain point it almost doesn't matter anymore. Because you have got to get back and stock. So.
Our fuel team does a nice job of managing that and the short run, but ultimately and this type of environment. There's not much you can do it and that's why this is.
As always such a challenging environment to operate and when you have a protracted.
Slow steady rising wholesale environment.
Thank you. Our next question comes from Ben <unk> with Stephens.
Hey, Thanks, good morning, everybody.
Okay.
So what I wanted to follow up on the store reset around the correction of our merchandise margin impact.
Any quantification you could give us for the impact to the third quarter margin and should we expect that impact to be discrete and <unk> or will any of that bleed into <unk> as well.
Yeah, Ben Good morning. This is Steve we had several million dollars of and.
Inventory adjustments across the supply chain stores and warehouse related to the reset and the quarter that would be discrete.
For sure of the resets are largely largely finished.
We continue to have.
Year over year margin pressure, just because of mix changes right. So as as there are larger pack sizes being purchased especially on the alcohol and tobacco categories and generally speaking as those two categories, which are lower margin and the first place continue to outperform that debt put some <unk>.
<unk> on the margin so with current trends I think the mix pressure continues but the several millions of dollars that we took and the third quarter specific to the reset should be discrete.
Okay, Great and then on the operating expenses you noted your expectation from <unk>.
And that's partially reflective of bonuses for vaccinations, as well and incentivizing of workforce to get back from <unk>.
So think of degree you have visibility and I know labor hours will be a key component of that so as you look for traffic and normalizing.
And as we head into fiscal 2022.
But where do you think is at a reasonable expectation around operating expense growth for your business.
Assume.
A lower rate than Youre and store gross profit dollar growth, but any sort of barometer you can give us on what you think is reasonable at some.
Of these COVID-19 costs start to abate.
As we move forward.
We continue to believe that and the medium term consistent with the Investor day communication that we had had right we're going to choose to grow operating expense generally at a lower rate than the EBITDA of the companies grow and so we're trying to grow EBITDA at an 8% to 10% CAGR over that <unk>.
Some term and we feel good about that and operating expense should be a couple of turns below that and so if you think of if we're adding 3% to 4% more new stores each year, that's going to increase operating expense by a comparable percentage and then the rest of the rest of the organization.
And we would expect to grow a couple of percent and keep the entire thing south of that 8% to 10% and as the Covid related expenses start to start to dissipate hopefully going forward that will make that a little bit easier and obviously the companys performance has generated.
Quite a bit of incremental incentive compensation year over year on the long term and the short term side and we would not normally expect it to be at at that level.
Thank you. Our next question comes from Bobby Griffin with Raymond James.
Good morning, and body. Thank you for taking my questions first I just wanted to touch on the fuel.
Fuel side again.
Very solid margins actually only down modestly from the second quarter. Despite the rising wholesale environment. So is it just.
Are you guys just getting a larger benefit from procurement all the work you've been doing there or any can you just help us unpack some of the drivers there and then as a second part of that.
And when do these contracts that we have been moving towards renewable and and how has that renewal process is there any risk associated with that and and the benefit won't be at large if you have to renew during this rising period of wholesale prices.
Yes, Bobby this is Darren.
Yes, I think the.
There is a combination of factors that have really led to the margin you touched on the procurement piece of it and certainly.
We're at about 74% of our volume under contract now so that that number has continued to rise throughout this year and so as we get more volume under contract.
We realize more benefits at the same time.
The team has done a really nice job of managing pricing and managing to strike that right balance between volume and margin and so I think <unk> seen based.
Based on <unk> data.
And outperformed from a volume standpoint, and our geography and at the same time and capture these margins with respect of the contracts. They all have different terms and so there is.
There is a number of them that half of one year term, but we signed those contracts at varying times throughout the year. So we don't have any sort of bubble so to speak up.
Number of contracts expiring on any given time.
With respect to renewing those at their renewal process can.
And can be pretty straightforward, we can negotiate with the with the current provider. We can put it out to RFP with a number of providers, depending on the geography and.
And the fact of the matter is we're at pretty attractive customer were.
And we pay our bills, we have a solid balance sheet.
Very low risk from that perspective, and the fact that we sell unbranded fuel versus branded fuel gives us a lot of optionality, because we're not tied to any.
Any major <unk>.
Oil companies brands. So there's not a day branding costs associated with switching suppliers to be able to capture the best cost.
Thank you and I guess secondly from me just on the private label growth.
Pretty nice uptake for <unk> launch and the product and stuff at the early success changed and.
And how you think about the ultimate penetration or how the team thinks about what products you might have permission from the customer to participate and from a private label standpoint.
You know Bobby it's a good question I don't know that it's really changed our perspective, but I think we've learned a lot and frankly.
And the level of adoption.
And that we've received from the guest on on our products has really exceeded our expectations and I think as we reflected on why that is I think theres a couple of reasons certainly those three areas I mentioned before around our private label strategy of having a lower retail price the benefits of the guest.
Higher penny profit for us the benefits us and then at a higher quality product, which also benefits the guests having that combination.
And is really powerful and so the guests.
<unk> received of well, but I think.
Probably what we didn't fully appreciate as much was the strength of our of our brand with respect of prepared foods gave us outsized credibility I would say with other categories and so when we introduced packaged bakery or meat snacks are nuts and seeds theres, an expectation of high quality.
<unk> at a reasonable price from us and our brand and so people immediately gravitate to those and so it has accelerated so I would say.
It's certainly given us the confidence to continue to accelerate and this path and.
And we'll see what the ultimate mix as we continue to go but our private our private brands team is small, but mighty and they've done tremendous work and a very short period of time and have a great pipeline of new products that will be coming over the next several months.
Thank you. Our next question comes from Bonnie Herzog of Goldman Sachs.
Thank you good morning, everyone.
I wanted to hi, I just wanted to stick with this topic from your comments that you just made on that.
Private.
Very interesting and I did want to just to clarify something you mentioned you saw the improvement during the quarter, but just trying to get a sense of how many weeks were you able to measure I mean when wines Inc.
And our finished.
Finished being implemented.
Yes, Bonnie I would say, we kind of declared the rollout of finished in January of.
The initial slate of products. So we began the resets and November and that was about a six week process and.
At <unk>.
And while we are resetting the stores, we're also kind of filling the pipeline and the warehouses with inbound product and so all of that product was coming on at different stages, depending on the manufacturers, but in January was when we really kind of officially introduced.
The new assortment of the new year, new look and feel for Casey's, new private brand products, So really and this quarter, we only experienced about a month worth of benefit there.
Okay. That's helpful and then.
Just on your previous comments it sounds like at not only maybe of margin lift Martin partly of comp driver and my chair basket price from this short period of time of that sort of what youre, saying with this program are expected to achieve.
That's certainly our expectation yes.
And there's a there's a couple of things that drive that one is just the re merchandising of the stores itself to improve the adjacencies.
Within the store and the placement of the product and the store and.
And then certainly the value proposition around our private label is.
Is much stronger than the national brands and then the third piece is just expanding that assortment.
And by about 10% really.
All of those things should come together and we have seen the benefit of that and that grocery category now.
And I'd just clarify is.
This was really kind of a center of store activity. So when you look at grocery and general merchandise overall that category also include includes beverages and.
Includes alcohol includes cigarettes, so we kind of take that out and.
The benefit has been really seeing in that grocery subcategory.
Thank you. Our next question comes from Paul Trussell with Deutsche Bank.
Good morning.
I appreciate the quarter to date.
You've provided just wanted to maybe dig a little bit deeper into that on on how youre thinking about the weather impact and also just what other items should we really be keeping in mind as we think about kind of modeling out each of the business segments and this fourth quarter.
Yes, Paul I'll touch on that brief I'll, let Steve take you through some modeling stuff but.
And it was cold here and.
I think.
I think Brian had mentioned to me earlier he'd never heard so many native island's whine about the weather and as he had this year it was at.
It was as of <unk>.
November about double the amount of normal snowfall.
Negative <unk> before wind chill around here so.
And frankly, nobody was wanting to get out of their car and go anywhere if they can avoid it so yes it was because of.
At challenging February we've seen that reverse.
Once the weather broke and and.
So look.
You have tough winter, sometimes and this is just kind of the way. It works. So youre not going to hear me talk much about weather on a normal course, we fully expect that it will rebound and.
We will have a good fourth quarter and I'll, let Steve talk about the modeling.
And it'll be at.
A tale of two cities and the quarter. So the first half probably through the end of this week is about when we lap the real lockdowns will be negative exacerbated by the weather as Darin mentioned for sure.
And it will be at all.
Almost volume improvement for the rest of the rest of the quarter just because of what happened.
Last year and it will put us into.
And the strange situation, where it is certainly possible but.
The quarter numbers end up being positive by the time you average the negative first half and a very positive second half, but because of the fuel dynamic that we referenced earlier right. We're at.
The short period of time, I think margins were close to 60, a gallon last year and we ended up printing 40, a gallon overall profitability won't reach the prior year level, because obviously fuel is not running at at that rate.
Got it that's helpful and then.
And just also bigger picture.
And just maybe talk a little bit more about how you are positioning.
Positioning the business.
Going forward, when we're kind of all back out and about and vaccinated. How do you plan on really hold on to the.
These new customers that you've acquired while consumers are staying at home and ordering.
Hi, guys. How are you thinking about the loyalty program and and promotions to really drive that engagement and activity back inside of your stores.
Yes I.
I'm really optimistic about that and we have a lot of tools at our disposal that.
12 months ago, we didn't have of 15 months ago, we didn't have we.
If you remember in January of last year. We had we were just and started with rewards now we have $3 3 million members and growing and we add another three 300000.
Rewards members and the third quarter. So that number continues to grow so that gives us a really strong base of people to engage with and to influence behavior with them and our team is getting much more nimble about how to recognize different cohorts of guests and their purchasing behavior and being able to.
Feed them.
Differentiated offers that drive performance. So we certainly have that we have curbside, we've expanded our door dash relationship.
We mentioned that we're going to ask.
The accelerated with Uber eats and the first quarter.
We've got the store resets and we just completed and are on prepared foods team.
And as filling the pipeline of innovation and so as I've mentioned before that takes a little time and.
And heavy product development consumer insights work, but that work is ongoing right now and we expect to see some innovation coming from that team throughout this year and so all of those things I think we'll come together certainly too.
To help make that relationship between our guests and us a little more sticky.
Thank you. Your next question comes from Chuck Cerankosky with Northcoast research.
Good morning, everyone.
Going back to the resets a little bit did you.
Address the fresh categories at all and did you add any entirely new categories. As you went through this process.
No Chuck we really didn't add any new categories at this point on.
Although we significantly expanded categories. So a lot of the store.
Salty snacks increased space meats.
Meat snacks doubled and space nuts, and seeds nearly doubled and space packaged bakery, we really shifted away from some.
Some of the national brands in favor of our own private brand and then reduced space and some of those slower moving categories like automotive and Pat and paper and that sort of thing but at.
At this point, we have not introduced new categories, but.
Category management team's working hard on on.
And on what's next from that perspective.
And then I was wondering if some of the.
And customer traffic flow was designed to do anything to help prepared foods.
And nothing really to help prepared foods at this point of prepared foods.
And somewhat of a separate exercise and like I mentioned.
And the culinary team is working on on the innovation from from that standpoint, but of but.
And while we did do is make sure as part of this reset processes, we had the.
And the center of the store categories of those grocery categories and the proper adjacencies to impact <unk>.
Wholesale so I'll give you of one easy example is making sure that that package bakery product was merchandise adjacent to the coffee where has the highest affinity and impulse right and so I think part of the strength, we've seen in that category, where it's up nearly 40% is a combination of the value.
<unk> of our private brand product and in addition to positioning and next to the coffee where there is the highest.
Likelihood for an impulse purchase.
Thank you. Our next question comes from Irene <unk> of RBC capital markets.
Thanks, and good morning, everyone.
Can we just come back from moment to personalize the offer of really intrigued by some of the things that youre talking net in terms of identifying cohorts and personalize offers but can.
Can you tell us.
I as a consumer receives that like what types of personalization level and in terms of health part of along that process are you.
Yes, we're one of the early stages of that process Irene and what we've done at this point is we've identified.
What we call of cohort of gas so a group of guests at a similar purchasing behavior and so we.
We look at that guests and see what it is they are buying and then what it is they are buying at but are more likely to buy so a simple example is somebody who comes in during the week and buys a slice of pizza for breakfast or lunch, but doesn't buy a whole pizza on a Friday and Saturday night, but we know they like our pizza.
We just haven't got them into that other occasions. So our team will put together a differentiated offering that can be fed through the rewards program and.
And they'll get that the attacks or via E mail based on how they bought it and on the rewards program and they will receive that offer and then they can go and and redeemed at and the store. So they may get double points. They may get dollars off they may get a buy one get one and.
And so the team is actually testing different offers and see which one has the most effect.
And so far kind of I guess, what's been the uptake on that are of what's been the next when you do that.
Yeah, we're not really going to share the details of that but suffice it to say we've had some that have done really well and some of the team will double down on some of those and frankly some of those things don't work out as well and we won't do them again, but that's all part of the test and learn processed at that our team goes through and assessing these offers.
Thank you. Our next question comes from Matt Fishbein from Jefferies.
Good morning. Thanks for the question now that we're beginning to have some clarity around the timing of stimulus checks do you have any sense of what the business impact was from the previous rounds of stimulus.
They argue.
Had bike and impact on gasoline prices at the pump of inside sales and the last time interested in your perspective there.
Yeah, Hey, Matt and good morning, this is Steve.
We don't have hard data on exactly how the earlier versions of stimulus necessarily impacted.
US directly I mean, clearly our view is that when there is more disposable income or discretionary spending power and the system, we're going to benefit from that just like anybody who's consumer facing would do that.
For sure and some of the categories that have shown some strength here alcohol lottery et cetera, right. There is seems to be of historical correlation of discretionary spending on on those categories.
As you look forward right I think we would stand by the fact that more and more discretionary income and the system is not going to be a bad thing.
For for us or for our space necessarily though I don't think we could and good faith tell you we can quantify exactly what what the impact would be but of general tailwind for us is certainly our expectation.
Great I appreciate that and.
Can you give us and update as far as timing goes for the Joplin distribution center opening and think the last time, we heard it was like the middle of the calendar year.
Yes.
Yes, Joplin is beginning to wrap up low.
We should take possession of the building here and the and the next month and we will probably start delivering.
Call at end of May early June.
Thank you and our next question comes from Kelly Bania with BMO capital markets.
Hi, good morning, Thanks for taking our questions.
One can you just again on the reset if you could go back and just clarify would the grocery and general merchandise margin how would it have been without the reset and was there any impact on <unk>.
So just general traffic and the store.
Yes, Kelly Hey, good morning. This is Steve and then clearly it was a tough quarter on the margin rate that we plan and there is no doubt about that a couple of a couple of points the comp and the prior year was.
It was the highest comp that we had had and the third quarter and that particular segment for a couple of years to the prior year was about 100 basis points higher than kind of a normal third quarter run rates of that does not flatter. The comparison that we had as a general rule there was a little bit of disruption to the <unk>.
Last part of your question and the stores, we didn't close the stores for long periods of time, it doesn't take that long, but for sure. We've got people and Theyre, obviously moving product around et cetera. So we haven't quantified what that impact is on traffic necessarily we tried to minimize it.
As as much as we could and so we wouldn't expect again that to the earlier question to increase or to impact.
Margins.
Going forward, but it certainly had a modest modest traffic impact as we roll through all of the stores.
Okay. Thank you and I guess just in terms of.
The next couple of quarters, just as you think about the pizza.
And the category and prepared foods and general.
Just what youre expecting in terms of the promotional environment.
And that category over the next several quarters.
Yes.
Yes.
And <unk>.
Frankly, it's a little bit hard to handicap right now in terms of what competition is going to do it we haven't seen necessarily any uptick and promotional activity but were.
And we're on the brink of cycling over last year. So I think we're going to have to.
See on that we're focused on is just continuing to grow that whole pie business and.
Get some recovery and our slice business and that the <unk>.
Covering and the slides businesses.
As a bigger priority, frankly, which really doesn't.
Pete with most of the other pizza players out there. So we're more focused on trying to get that traffic back into the store, particularly in the morning day part to recapture that business and and.
And so we think that will start to come around particularly as the vaccine becomes more widely distributed and and.
People returned to more normal routines.
Thank you. Our next question comes from Anthony <unk> with Sidoti and company.
Good morning, and thank you for taking the questions. So.
My first question is about your digital sales which were up.
95% as you called out on your press release I was just wondering if you guys could talk about.
The transaction size versus transaction volumes for that and just wondering how much of your <unk>.
Overall sales of coming from your mobile App and then ahead of separate quick question.
Yes Anthony.
So about 59% of our orders debt.
For our prepared food came through digital means.
That would be app or website and then.
Another 4% or so is about 55% on a 4% or so from door dash, so 59% of that total and we see about a $2 per check uplift and those digital formats vs.
Our phone and order, let's say.
So roughly 10%.
Got it Okay. That's very helpful and then.
My other question and so as far as your.
Of course, you mentioned cheese costs, you have block those Anthony of AP.
Paul I believe so as far as other input costs can you just talk about that what are you seeing as far as trends.
And as to how we should think about that.
Anthony just clarify for me I'm sorry. The question is specifically related to cheese cheese cost I just want to make sure no no no no.
No no no.
And you already addressed at the cheese cost I was just wondering if you could comment on the on your other input costs.
And things like coffee or.
Meats and stuff.
And anything else as far as it and put the supply costs.
Yes, there's nothing out of the ordinary around supply and supply cost inflation and we've got contracts for most of the center of the store.
Goods that we purchased so we will.
And deal with normal course price changes as a result of those I don't think theres anything thats changing on that there's nothing notable coming through and in terms of some of the other commodities that would significantly.
<unk> margin pressure or headwinds for us one way or the other as we look forward at least over the next couple of quarters I think the larger issue we continue to deal with.
And input cost standpoint, we'll just be ongoing wage pressure right as we continue to cycle through multiple states and our geography are already on graduated minimum wage kind of increase paths and though we don't.
Hey at the minimum wage very often and it creates compression further up the chain as those go so I think the wage pressure.
For us and everybody and the service industry is probably the most relevant kind of ongoing costs that we will continue to look to manage through both productivity and pricing actions.
Thank you. Our next question comes from Brian Mcnamara, with Brent and <unk> capital markets.
Hey, good morning. Thank you for taking my questions Bobby alluded to this earlier with <unk> question as well, but fuel margins remained elevated as we approach at a year after the sharp drop in oil price as far longer than most of us at anticipated your margins have benefited from your internal initiatives price optimization and alike.
Is there any way to tease out how much of the margin improvement and structural rather than cyclical as we see some of these external benefits normalized.
No.
And I'll, let Steve weigh in on this as well but.
It's really hard for us to define all of that is yet and so many different things going on you've got the actual execution of retail pricing, yes, the different.
Different supply agreements and we have and then you have run up and commodities or drop and <unk> case may be but.
And certainly over the last four months or so it's been a run up.
It's really hard to tell where that all settles out it does seem that.
At least for the time being debt.
There is smaller and less resilient operators, who don't have a lot of other options in terms of trying to maintain a certain level of profitability and frankly on their part just to survive and.
And so the lever. They do have is is pulling of the fuel price lever. So I would say as long as well.
We're in an environment, where traffic is significantly impact impacted by this pandemic and.
And people not being able to go to work or school that we're going to see that bad debt that.
Dynamic persist and.
And I've said repeatedly I think that when this all settles out.
And that margins generally and the industry will be lower than what they've been through the pandemic, but higher than where they were going into the pandemic.
Simply because of the underlying cost to operate the business are continuing to rise.
Okay.
And I don't have anything to add to that.
Great and then secondly, as you guys are now equipped with valuable data from your rewards program. What at this data tell you to inform your decisions prior to the store reset on what is at telling you. A few months later as you look to continue to expand your private brands business.
Well I would say really what what we knew going into into the resets is that we were underpenetrated on certain categories relative to what we thought we should be and.
And frankly, when you look at the assortment of itself and the stores. We just we had an imbalance of.
Of space too, so really gross profit dollars into and to opportunities and we just.
Didn't have the growing categories with enough space to be adequately represented and to adequately sell and so we fixed that with this reset and then expanded the assortment and those areas and so frankly, we've got a.
Better and more productive assortment and then.
Compounding that is that we've re arrange of furniture, so to speak to put those categories and and the optimal place within the stores. So that we generate the highest impulse.
Possibilities.
Thank you ladies and gentlemen, this does conclude the Q&A portion of today's call I'll turn the call back to Darren for any closing remarks.
Alright, Thank you for taking time today to join US on the call and we look forward to visiting with you again at our fiscal year end conference call on June a great day.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.