Q3 2023 Caseys General Stores Inc Earnings Call
Speaker 1: You.
Speaker 2: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.
Speaker 3: thankfour.
Speaker 4: Good day and thank you for standing by. Welcome to the third quarter ended January 31, 2023, Casey's General Stores earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer.
Speaker 4: being recorded. I would now like to hand the conference over to your speaker today, Brian Johnson, Senior Vice President of Investor Relations and Business Development. Please go ahead.
Speaker 5: Good morning and thank you for joining us to discuss the results from our third quarter ended January 31, 2023. I am Brian Jackson, Senior Vice President, Investor Relations and Business Development. With me today are Dan Rebellis, President and Chief Executive Officer and Steve Ramlage, Chief Financial Officer.
Speaker 5: Before we begin, I'll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, and financial conditions.
Speaker 5: liquidity and related sources or needs, the company's supply chain, business and integration strategies, plans and synergies, growth opportunities, and performance at our stores. 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 by those forward-looking statements.
Speaker 5: including but not limited to the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine, and related governmental actions, as well as other risks, uncertainties and factors which are described in our most recent annual report on Form 10-K .
Speaker 5: and quarterly reports on Form 10Q as filed with the FCC and 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 disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information,
Speaker 5: future events or otherwise.
Speaker 5: A reconciliation of non-gap-to- GAAP financial measures referenced in this call, as well as a detailed breakdown of the operating expense increase for the third quarter, can be found on our website at www.kacie.com under the investor relations link. With that said, I'd now like to turn the call over to Darren to discuss our third quarter results.
Speaker 6: Darren. Thanks, Brandon. Good morning, everyone. We'll get to the strong third quarter results in a moment. But first, I want to thank our team for their dedication during a great quarter. They continue to show their resilience in a challenging operating environment.
Speaker 6: Our team is also here for good in the communities we serve, like Dawson Springs, Kentucky, as the community continues to recover from last year's devastating tornadoes and storms.
Speaker 6: Joining forces with Gatorade, we provided $100,000 towards the rebuilding of the local youth sports field in town.
Speaker 6: Joining forces with Gatorade, we provided $100,000 towards the rebuilding of the local youth sports field in town. We're looking forward to seeing the kids playing on them next year.
Speaker 6: Thank you to our team and guests who help make our communities better and support these local initiatives that make Casey's here for good.
Speaker 6: Now let's discuss the results from the quarter. As you've seen in the press release, we had an excellent third quarter, further building on a strong first half of the fiscal year.
Speaker 6: Diluted earnings per share finished at $2.67 per share, a 56% increase from the prior year.
Speaker 6: As we communicated previously, diluted EPS benefited by 31 cents per share due to a one-time operating expense reduction of approximately $15 million from the resolution of a legal matter.
Speaker 6: excluding this adjustment. Deluted earnings for share was still an impressive up an impressive 38 percent.
Speaker 6: Inside sales remain strong, driving inside gross profit up over 11% to $451 million.
Speaker 6: The company generated $100 million in net income, an increase of 56%, and $220 million in EBITDA, an increase of 28% from the prior year.
Speaker 6: We know our differentiated business model can succeed in a variety of economic conditions.
Speaker 6: We continue to effectively implement our strategic plan across grocery and general merchandise, prepared food and dispense beverage, and fuel with excellent execution and outcomes from store operations.
Speaker 6: I'd now like to go over our results and share some of the details of each of the categories.
Speaker 6: Inside same source sales we have 5.6% for the third quarter, for 13.6% on a two-year stack basis.
Speaker 6: with an average margin of 40.6%.
Speaker 6: Our team did a wonderful job managing the product mix and Instaq levels.
Speaker 6: as well as implementing the joint business plans we developed with our vendor partners.
Speaker 6: We saw notably strong performance in pizza slices and bakery, as well as alcoholic and non-alcoholic beverages.
Speaker 6: Same store grocery and general merchandise sales were up 5.8% or 13.9% on a two-year stack basis.
Speaker 6: with an average margin of 34%, an increase of approximately 200 basis points from the prior year.
Speaker 6: results by leveraging our approximately 1,500 stores with liquor licenses.
Speaker 6: We also saw strong performance in non-alcoholic beverage in private label sales.
Speaker 6: Margin was favorably impacted by a product mix shift towards higher margin items like energy drinks and candy, as well as further penetration from private label.
Speaker 6: Same store prepared food and dispense beverage sales were up 5% or 12.8% on a two-year stack basis.
Speaker 6: with an average margin of 57.3% versus 58% a year ago.
Speaker 6: Sales were due to strong performance in pizza slices as well as bakery, and we continue to have better product availability throughout the category.
Speaker 6: The third quarter had sequential improvement in margin versus the first and second quarters, but cheese costs continued to pressure profit margins.
Speaker 6: For fuel, same store gallons sold decreased 0.5% with a fuel margin of 40.7 cents per gallon.
Speaker 6: While we did see gallons go back slightly, we should note that in yet another volatile quarter for fuel, we compared favorably to the relevant OPUS geographic data, we believe we are continuing to take share while balancing volume and margin to drive gross profit dollars.
Speaker 6: I'd now like to turn the call over to Steve to discuss the financial results from the third quarter. Steve.
Speaker 5: Thank you, Darren, and good morning. I'd like to start with crediting our fuel, merchandise, and store teams for their continued ability to execute on the plan and drive strong performance across all facets of our business.
Speaker 6: Each of the three areas of the business perform well in the quarter, and our model has proved to be resilient in this challenging environment.
Speaker 5: Total revenue for the quarter was $3.3 billion, an increase of $284 million, or 9% from the prior year.
Speaker 6: Total inside sales for the quarter were $1.1 billion, an increase of 84 million, or 8% from the prior year.
Speaker 6: For the quarter, grocery and general merchandise sales increased by $63 million to $796 million, an increase of 8.6%.
Speaker 5: Prepared food and dispense beverage sales rose by $21 million to $314 million, an increase of 7%.
Speaker 5: Results were favorably impacted by operating approximately 2% more stores on a year-over-year basis.
Speaker 6: Retail fuel sales were up $206 million in the second quarter to a 3.7% increase in gallons sold to $645 million, as well as a 6% increase in the average retail price per gallon.
Speaker 6: That average retail price of fuel during this period for us was $3.34 a gallon compared to $3.14 a year ago. We define gross profit as revenue less cost of goods sold but excluding depreciation and amortization.
Speaker 6: Casey's had gross profit of $737 million in the third quarter, an increase of 73 million or 11% from the prior year.
Speaker 6: This is driven by higher inside gross profit of $46.7 million or 11.6% as well as an increase of $24.7 million or 10.4% in fuel gross profit.
Speaker 6: Inside gross profit margin was 40.6%, a 120 basis point increase from a year ago.
Speaker 6: The grocery and general merchandise margin was 34%, an increase of 200 basis points from prior year.
Speaker 6: We saw continued margin expansion in alcohol, grocery, and packaged beverage, as the Merchantising team has done an excellent job of lining up our offering with our guests wants and needs.
Speaker 6: In addition to the favorable mixed shift, the margin was dated by approximately 75 basis points.
Speaker 6: from a combination of a smaller year-over-year LIFO charge, as well as the achievement of higher than expected calendar year vendor rebates.
Speaker 6: Prepared food and dispensed beverage margin was 57.3%, down 70 basis points from the prior year, but sequentially improving versus the first and second quarters.
Speaker 6: Consistent to the entire fiscal year, the category margin was negatively impacted by commodity costs, specifically cheese, which was $2.30 per pound for the quarter compared to $1.99 per pound last year, and increased with nearly 16%. And this negatively impacted...
Speaker 6: the prepared food and dispense beverage margin by approximately 100 basis points.
Speaker 6: Excluding the impact of cheese inflation, we would have outperformed margin from the prior year, as our actions to balance protecting our margins while delivering a strong value proposition for our guests continue to make a difference for both.
Speaker 6: Fuel margin for the quarter was 40.7 cents per gallon. That's up 2.4 cents per gallon from the prior year. And fuel gross profit benefited by $2.9 million from the sale of rims. Fuel operating expenses were up 5% for $25 million in the third quarter.
Speaker 6: There was the one-time operating expense reduction of approximately $15 million that Darren mentioned, and that was disclosed in our recent business update. Excluding this reduction, total operating expense would have increased by approximately 8 percent.
Speaker 6: Over 2% of the total operating expense increase is due to unit growth, as we operated 41 more stores than the prior year.
Speaker 6: FAME store operating expenses, excluding credit card fees, rose 4.6%.
Speaker 6: SameStore employee expenses were up by only 1%, benefiting from a 1% reduction in SameStore labor hours. Our store operations team continues to do outstanding work operating our stores more efficiently without compromising the experience of our guests.
Speaker 6: Approximately 2% of the same store increase is related to non-employee operating expenses.
Speaker 6: with repair and maintenance and utilities being the largest contributors. Insurance expense accounted for another 1% of the same store increase, driven primarily by higher general liability and health insurance costs.
Speaker 6: Depreciation in the quarter was up only modestly. That interest expense was $11.7 million in the quarter.
Speaker 6: down 2.7 million versus the prior year. That's aided by rising interest rates on our cash balances.
Speaker 6: As a reminder, only 17% of our debt is floating rate. The effective tax rate for the quarter was 24.1% compared to 23.4% in the prior year.
Speaker 6: The increase was driven by a one-time benefit in the prior year to update the state deferred tax rate following the acquisition of the pilot source.
Speaker 6: Net income was up versus the prior year to $100.1 million, an increase of 56%.
Speaker 6: The VDOT for the quarter was $221.7 million compared to $173.5 million a year ago, an increase of 28 percent. Each of these measures benefited from the one-time $15.3 million operating expense reduction.
Speaker 6: Our balance sheet remains in excellent condition. On January 31st, cash and cash equivalents were $413 million, and we have a remaining capacity of $463 million on our lines of credit, giving us ample available liquidity of $876 million. Furthermore, we have no significant maturities coming due until fiscal 2026.
Speaker 6: Our leverage ratio, calculated in accordance with our senior notes, is now 1.8 times, which is generally in line with our preferred longer-term target of 2.0 times.
Speaker 6: Our balance sheet has plenty of capacity to make sound strategic and EBITDA and ROIC accretive investments that present themselves and we will remain opportunistic in doing so.
Speaker 6: For the quarter, net cash generated by operating activities of $150 million, plus purchases of property and equipment of $123 million, resulted in the company generating $27 million in pre-cash flow. This compares to a use of $24 million in the prior year.
Speaker 6: And as a reminder, the third quarter is a seasonally low quarter for the company in terms of free cash flow generation.
Speaker 6: At the most recent board meeting, the board of directors voted to maintain the dividend at $0.38 per share.
Speaker 6: We will continue to remain balanced in our capital allocation going forward.
Speaker 6: We're going to remain opportunistic related to our $400 million share repurchase authorization. So again, we did not purchase any shares this quarter.
Speaker 6: The company is modifying its fiscal 2023 outlook based on our performance through the first three quarters and our experience so far in the fourth quarter.
Speaker 6: The company now expects same store inside sales to increase approximately 6 to 7 percent.
Speaker 6: Versus our prior guidance of increasing 5 to 7%.
Speaker 6: The company also now expects same-store fuel gallons to be down 1% to up 1% versus our prior guidance of flat to up 2%.
We are not updating our outlook on the following annual metrics.
Inside margin is still expected to be approximately 40%. The total operating expense increase, excluding the one-time benefit received this quarter, is expected to be near the low end of up approximately 9 to 10%.
Based on our construction schedule and our signed purchase agreements, the company continues to expect to add approximately 80 stores in fiscal 2023 and expects to exceed our stated three-year commitment of 345 units added.
Interest expense is expected to be approximately $55 million. Depreciation and amortization is expected to be approximately $320 million. The purchase of property, plant, and equipment is expected to be approximately $450 to $500 million. That will include.
approximately $135 million in one-time store remodeling costs for the recently acquired stores.
The tax rate is expected to be approximately 24 to 25 percent for the year
I would note that capital spending on store openings and remodels are clearly back in weighted versus our initial expectations due to ongoing construction delays, supply chain challenge and especially local licensing inspection timelines.
for our February results and our expectations for the current quarter, inside same-store sales and fuel same-store gallons are both consistent with levels that will deliver our annual expectations for these metrics.
Fuel CPGs in February or in the mid 30s.
Fourth quarter total operating expenses are still expected to be near the low end of our annual guidance.
Fourth quarter total operating expenses are still expected to be near the low end of our annual guidance. And with that, I turn the call back over to Darren.
All right, thanks, Steve.
I would like again to say thank you and congratulations to the entire PC team for delivering another great quarter.
During the first three quarters of the year, our merchandising team is driven business inside the store by optimizing a store and value prices, especially our private label program.
The store operations team is doing an excellent job officially managing operating expenses while executing on initiatives such as store simplification as we reduce same store labor hours by 1%. We've had sequential growth in prepared food and dispense beverage margin in every quarter in fiscal 2023 as we continue to manage both commodity and other costs prudently.
while holding a relative value proposition for guests. We continue to lean into our prepared food and have a number of different innovative food products they're now a cases.
In the third quarter, we launched a refreshed chicken wing offering, as well as introduced bacon, mac and cheese.
And we are launching a pepperoni, pepperoni, pepperoni pizza just in time for the NCAA tournaments.
while securing NIL deals with three college basketball standouts in our footprint.
All of these new offerings, coupled with our existing guest favorites, strengthen our best-in-class prepared food offerings.
And a robust assortment of grocery and general merchandise products and Casey's is a 1 stop shop for any occasion.
Our business development team has stayed busy evaluating potential deals, both large and small, and will remain diligent with respect to valuation.
Our two-pronged approach to growth allows us to remain flexible.
Our balance sheet is strong, which puts us in a position of strength when the right opportunity presents itself.
This is especially true as the cost to operate, maintain, and grow is challenging for the industry in the current macroeconomic landscape.
Casey's has historically been resilient in recessionary times, as the business model allows for our guests to find quality and value conveniently.
Our integration team has done an excellent job executing on the Buchanan Energy acquisition.
We now have kitchens at substantially all Bucky's locations where we plan on adding kitchens.
One of the pillars of our strategic plan was to reinvent the guest experience.
As part of those initiatives, we've been surveying our guests to try to evaluate satisfaction, with guest satisfaction scores increasing throughout the fiscal year.
The third quarter results show that we can operate stores more efficiently without sacrificing a quality guest experience.
In fact, we've reached the highest scores in guest satisfaction since the onset of the COVID-19 pandemic. As the industry continues to trend towards a more frictionless environment, we started piloting self-checkout in select stores.
The ability to add even more convenient checkout options for our guests, while allowing guests to continue to earn Casey's rewards, is another promising addition to our ability to better serve our guests and communities.
Our digital teams' hard work continues to pay off as we surpass 6.1 million rewards members as of January 31.
Digital revenue is growing rapidly, up 12% versus the prior year and 25% on a two-year stack basis.
Our guests are taking advantage of our ability to deliver grocery and general merchandise products because delivery is over-indexed versus bothered digital grocery and general merchandise transaction types, such as pickup.
We continued growth on the mobile side as mobile app orders now represent 69% of all digital orders. As we look ahead to the final quarter of Fiscal 2023 and beyond, I'm excited for the outlook of the business, with capabilities and talent to execute Casey's business model in the face of uncertain times and challenging economic environments.
We have ample flexibility due to the strength of our balance sheet that allows us to act on attractive growth opportunities when they arise.
As we close fiscal 2023, I look forward to the next three years strategic plan. We're excited about the hand we're holding.
We will now take your questions.
As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. And please limit to one question and one follow-up question. Please stand by while we compile the Q&A roster.
Our first question comes from Patty Conada with Goldman Sachs. Your line is now open.
Hi, it's actually Bonnie Herzog from Goldman. And I had a question about your fuel margins. I was hoping you could talk about how the margins have trended monthly, over the quarter, and then any color on February and June .
You know, very early March trends would be helpful. You know, there's just such a big debate about, you know, margins and the sustainability of your field margins and the industries for that matter. So, just curious to maybe understand where you guys are seeing, you know, break even margins for the marginal player. Are they, you know, possibly moving lower? Thank you. Hey, Bonnie, this is Darren.
Yeah, I'll take that one. As we look through the quarter, this past quarter, we actually saw a lot of volatility on the cost side, which translates into some volatility on the margin side. I guess the cadence through the quarter, we saw a cost.
drop about 60 cents a gallon in November , which resulted in really strong margins. December rebounded and went up about 22 cents. And so margins started to moderate a little bit. And then December , or January rather, went up another 10 cents. And so margins got a little bit squeezed.
In the month of January to around 30 cents a gallon. So overall. We landed at 40 cents, but there's a little bit of a rocky ride to get there. What we're seeing now well, through February was about mid 30. Fence per gallon, so that's
That's about where the run rate had been prior to a lot of the volatility with the war in Ukraine and that sort of thing. We kind of think that's a little bit more of a representative baseline of where margins go. Again, as we've looked at the marginal operator.
That has higher break evens, we expect that margins will continue to gradually expand over time as the cost pressures continue to.
to follow up on that operator, but that's about the cadence that we've seen so far.
Okay, that's super helpful and just maybe a quick follow-up, if I may. I was curious about your store builds and you touched on this that it's going to ramp pretty aggressively in Q4 just to hit your full year guidance, but I just have maybe more of a strategic question on how you're thinking about store builds and wondering what other things.
why you couldn't ramp your new store builds, you know, just much more aggressively, or maybe even M&A for that matter, to take advantage of the, you know, really the white space opportunities you've highlighted. Thanks.
Yeah, sure. We certainly have the balance sheet ability to ramp up in either direction. And really, we like to have the optionality to.
To adapt to what the playing field is getting us and what I tell you right now is that. In this current environment, we're seeing a lot of potential acquisition activity. You know, our, our business development team is really busy talking to a lot of folks and as we, we mentioned with our current year, we have a.
a number of smaller deals under agreement right now that will close before the end of the fiscal year. So we're very confident we'll get to the number for this year. But really, we will go either way and frankly, right now the environment is probably leaning a little bit more favorably towards M&A at the moment.
And so we're looking at a number of deals, but we're also going to remain disciplined with respect to the valuation and what we pay for those deals. So we need to let that process play out. But what I also tell you, Bonnie, is that we have not in any way told our real estate team to slow down on finding new sites. And so we'll keep that optionality if the M&A...
deals don't come to fruition, then we'll just lean heavier on organic growth to accelerate that store development.
Please stand by for our next question.
Our next question comes from Karen Short with Credit Suites. Your line is now open.
Hey, thanks very much. It's good to talk to you. I wanted to just ask a question or two questions. So one, with respect to your implied guidance, and I realize there's a wide range of guidance, but your 4Q implied expense, operating expense, and this is excluding DNA and excluding credit card fees.
kind of seems to be up around 9.4% versus gross profit dollars in store. And again, that's excluding gas up 13. So I want to just talk about that relationship, but also want to just talk separately about what your comments were on OpEx in general with respect to
So I just want to parse that out a little bit and wondering if you could talk about it if you're maybe cutting a little bit too deep into the meat, I guess, with respect to store labor. Hey, Karen. Good morning. This is Steve. It's nice to hear from you again. I'll take the first one and then I'll let Darren.
address the second one, related to the fourth quarter guide specifically on on OPEX. You know, I maybe just a reminder for our fourth quarter, we will do a variety of your end-of-distance on OPEX of things like consent of compensation.
True ups, et cetera. And so given the. Given the company's continued strong performance this year, I think we are certainly going to have incentive compensation above what we would have planned. When we, when we started the year, and that would. That's going to happen kind of irrespective of whatever the trajectory. Maybe within.
within the business and then I think if you if you're comparing it to just kind of a cadence of gross profit the gross profit cadence certainly is.
Heavily influenced by what is the fuel CPG at any point in time? And so as we sit here right now in the mid 30s, that's obviously going to give you a different. Fourth quarter gross profit you're over. I was asking that excluding fuel in for only.
Okay, yeah, okay. Then I would still tell you that we're
With the year-end true ups we have and then we're also going to start lapping on the inside of the store. A lot of the price increases.
Okay, and then the store hour and labor. Karen, this is Darren. Nice to talk to you again. Welcome back. Thanks. Yeah, so with respect to the hours, I'll just. I'll tell you a little bit about how we're getting to the hour or decreases rather and. And this, this started really at the end of last year when when we. You know, we were looking at our office performance and really getting into the root causes of that. And a lot of that really from a root cause perspective was driven by turnover in our stores. And we started digging into the turnover and and.
started getting into our engagement scores. Our engagement was a little bit off. And so we've really made a concerted effort around team member engagement and a lot of that had to do with simply removing complexity from the store. Meaning, we've added a lot of new capabilities into our stores from a merchandising and prepared food perspective over the last couple of years. But we really didn't take anything away.
And our team members were telling us the job was just getting too hard.
And so we stood up a continuous improvement team and their sole focus is identifying processes where we have bottlenecks or opportunities where we can remove complexity and remove hours out of the store without impacting the guest experience.
We've done an implement a number of those initiatives over the course of the year. And what we've ended up with is. Removing hours from the store, reducing that turnover. Which in turn is reduced late overtime and training hours. In fact, in the 3rd quarter, we are down.
31% in overtime and about 20% in training hours just because we had reduced turnover. All of that's working in concert and then, lo and behold, our guest satisfaction scores are the highest they've been since the beginning of the pandemic.
Everything is working as it should. So we don't think we're cutting deeply. In fact, we think we're cutting smart and we're eliminating the non-value added hours and it's showing up and gets satisfaction as well. So we feel really good about that and really good about the sustainability of it because we're doing it the right way.
Please stand by for our next question. Our next question comes from Anthony Benidio with Wells Fargo. Your line is now open. Call and receive your address for your own personal information, Career Gray.
Yeah, hey, good morning guys congrats on the nice quarter. I just wanted to ask about grocery margins. Obviously a very strong result there. You talked about mixed talents and then your efforts in private labels supportive. But can you dig in a little more on what drove that composition of non controllable and controllable. And then we're now running well ahead of pre COVID levels.
Obviously, you've done a lot strategically over the last few years, but can you talk about how sustainable you think the levels are? Yeah, this is Darren. I'll take the 1st crack at that. Yeah, with respect to the margin on grocery general merch. There's a fair amount of that they had to do with mix shift and.
So I'll kind of walk you through that a little bit, but we had a couple of different categories had some favorable nickships and then some margin expansion within those categories. The first thing I'd point out.
is that in the tobacco category, and we put cigarettes and all the smokeless and vaping and everything else into that category, we saw a little bit of a fall off in mix.
Category so that accrues to the benefit of the overall category when that mix goes lower. So, where did that mix go? It went to alcohol alcohol increased and in particular went to non alcoholic beverages. Which carries the highest margin rate in fact, and non alcoholic beverages, the margin rate in that category is about double what it is in tobacco. So when. That makes shift shifted up 90 basis points. So when you. Take all those moving parts back and forth.
The mix was favorably impacted. The second piece was in non-alcoholic beverages, the actual margin rate was up about 110 basis points within the category. And that's just really a function of a lot of good work that the merchandising team has done in concert with our vendor partners to come up with joint business plans that have allowed us to accelerate growth and at the same time expand margin.
I'd say the same thing on the grocery part of that where there's about 130 basis point improvement in margin year over year really do the same thing. So all of that was what led to grocery and general merchant I'd say, because those those trends and plans are are sustainable. I would expect that.
that the margin improvement is sustainable as well. Got it. That's helpful. Thank you. And then quickly on RINs, I know you guys talked about a $7 million headwind year over year in the quarter. Can you just talk about how that flows through to earnings? It's obviously easy to do the math on if it flows through outright, but I believe some of that ends up getting pressed into.
recognize any value associated with RINs until we actually physically transfer transfer them out of the company and that's really a timing issue. The generation of the RIN in the first place is more of byproduct of how we buy fuel at any particular point in time and we do not we don't have a point of view on how we should generate RINs. We're agnostic on RIN generation. We task our fuel team with go go acquire the lowest cost fuel you can and regenerate RINs when we splash blend at a terminal and we're mixing ethanol with.
with clear fuel. Sometimes we buy it pre-blended and so our view is that the net cost of the rent is already going to be baked into the cost of the fuel. Now when we do half the rents, we do have a point of view on.
what's the value of a rent in the market and then we do exercise some discretion on how we choose or when we choose to transfer those and so the year-over-year Delta is a function of
agnostic generation and timing on when we chose to transfer them this year versus last year. Please stand by for our next question.
Our next question comes from Bobby Griffin with Raymond James. Your line is now open. Fine.
Good morning, buddy. Thanks for taking the questions and congrats on a very good quarter. I guess first, Darren, the fuel team's done a lot of nice work over the last couple years inside contract buying as well as pricing. Is there any other initiatives that the team's working on that could benefit the underlying margins?
excluding the volatility of the industry over the next couple years.
Yeah, Bobby, you know, as you know, we've been on. On a journey for the last few years and standing up different capabilities and really the last, the last step in that process that we're going to begin working on this next fiscal year is. Perturing fuel further upstream in the process. So.
buying at the refinery gate and shipping pipelines into terminals. That's a capability we needed to grow into. And we stood up the systems, the technology solutions last year to enable that. And now that those are stabilized, our team is looking forward to doing that.
Okay, thank you. And then I guess secondly for me, just just on the grocery and prepared food, can you can you give us any color, I guess, on how units have turned it? You know, I understand there's some pricing flowing through on both sides of that business. Just just any detail on on, you know, the unit share and kind of what's been going on there.
Yeah, Bobby, we've had a little bit of softness as I was going to make a broad statement. We I'd say we have had a little bit of softness on units. Not. Not significant and not concerning, but a little bit of softness now, that being said within subcategories. It bounces around a bit, so we've really had some strength. In our alcoholic and non alcoholic beverages energy drinks in particular.
a lot of good movement in candy and snacks, pizza slices, donuts, have all had positive units, and then it's been offset by some other categories and it's seen a little bit of softness. But that tends to be par for the course in any times where..
different categories are performing differently. So again, a little bit of softness, but nothing that's overly concerning at this point.
Please stand by for our next question. Our next question comes from Irene Natell with RBC. Your line is now open.
Thanks and good morning everyone. Just sticking with the whole question around mix in grocery, you said you saw tobacco fall off. Was that a temporary element that just sort of impacted Q3? Or is that something that you're seeing continuing? And is that something we should be anticipating?
important to recognize that the tobacco manufacturers, this is part of their strategy actually is to reduce the velocity of combustible cigarettes and shift people over to other smokeless options like vaping or smokeless tobacco. So this is...
Sort of a natural occurrence, but at the same time. Our merchandising team has really done a nice job of accelerating the growth. In the non tobacco categories, specifically in alcohol and non alcoholic beverages. So as we accelerate the growth in those that mix. Starts to shift a bit on its own, and then that's been happening over the last couple of years. So. You know, I don't anticipate that really changing that dynamic changing.
because we'll continue to lean into those other non-tobacco categories. Then the tobacco category itself is in somewhat of secular decline. We'd expect that next shift to happen.
That's great. So all of that should continue to support stronger margins. If I can just switch topics for a second to M&A and notably valuation. What are you seeing at this point in time in terms of seller expectations both serve as the smaller operator level and for some of the larger networks?
Yeah, we're taking a look at a lot of different deals and I'd say there's a variety of expectations. I think some, in some cases, there are some sellers that are sitting on historically high fuel margins that would love to be able to sell at that rate.
We don't necessarily believe that those margins at the most recent year are reflective of what the long term trend is going to be. And so we're having those ongoing discussions.
margins at the most recent year are reflective of what the long-term trend is going to be. And so we're having those ongoing discussions. But yeah, I think...
If I step back a minute and look at the environment overall, it's an interesting dynamic because we have sellers that Obviously are trying to maximize value, but we also have really high interest rates So there's a few or participants in the process as I think and maybe otherwise would have been because of that so
We're in the midst of a lot of different discussions, so I've yet to see how this is all going to play out, but that's what we're seeing at this point.
Please stand by for our next question. Our next question comes from Chuck Somrinkowski with North Coast Researcher Line. It's now open. Good morning, everyone. Great poor. When you're looking at the grocery category and the merchandise.
Yeah, you're correctly, we typically negotiate those.
a little bit of moderation in the cost increases versus where we were in the prior year. And where there were cost increases is a little more targeted to certain subcategories from the supplier as opposed to across the board increases. So while we were still experiencing inflation, and in that category about 8% inflation, it has moderated a bit from what we were experiencing the year before.
to have strong sales results, but at the same time, blend up the margin from a mixed perspective to get the margin at a really strong rate. So we think we're striking that right balance right now. We'll continue to do that. So 8% is the average cost increase.
Well, Steve, yeah, it's a little bit, that was, we had higher inflation at fiscal 23 than we did at fiscal 22, right, just if you think of the lags in the time.
The timing that we negotiate on a calendar basis that we certainly have incurred more Consistent and higher levels of inflation this fiscal year than we did in the prior fiscal year
Please stand by for our next question. Our next question comes from then. Then, Benu with Steven's line is now open.
Please stand by for our next question. Our next question comes from Ben, then Benu with Stevens. Your line is now open. Hello, this is Jack Horton, Subbing and Ferbendian.
in the category. Yeah, Jack, this is Darren, or Pete the business is performed pretty well. We've had a strong volume in the third quarter in slices, both...
in sales and in units. On the whole pies, we're still keeping positive sales. The units are softened a bit, but not, again, not at a concerning level, just a little bit softness. And I actually would characterize that a little bit more from as a timing.
issue in terms of innovation that's launched and so we're starting to see that velocity recover here more recently with the launch of our peppery peppery peppery and impzzie.
launched and so we're starting to see that velocity recover here more recently with the launch of our pepperoni, pepperoni, pepperoni pizza.
That being said, from a promotional standpoint, we are seeing increased activity from our major pizza competitors mostly around the medium-sized pizza at a, which they can get at a lower price point. So, we're keeping an eye on that. We haven't seen a material impact to our business at this point.
the key factors driving that change? Well, fuel has been a dance for a while now with volume. And so I think we've been able to maintain our strategy, which is to maximize gross profit dollars. And that's a balance of driving gallons and.
driving margin. And so what we've seen in most quarters is that we've been hovering right around that flat level, sometimes a little bit below, sometimes a little bit above. Flat fuel gallons, what we're seeing in the industry. In this industry.
to have everybody else and then we're actually taking shares as a result of that. Please stand by for our next question. Our next question comes from Christina Katai with the Witch Bank. Your line is now open. Thank you.
Hi, good morning and congratulations on very nice results. I wanted to circle back to the strengths that we saw at the grocery set, but men, coming in at 34% of the...
the strongest at least since 2010. So as private label penetration increases there, are you seeing that vendors are more open to taking less pricing maybe as their units could be coming under pressure? And does that essentially help with your joint vendor planning process as it relates to getting great margin in the segment going forward?
Yeah, Christina, it does change the conversation a bit with some of our supplier partners when we have the private label products. In some cases.
It's a matter of shortening the pencil on cost of goods. In other cases, we've been able to prove some different pricing strategies that we've implemented on the private label side that causes them to rethink some of their pricing strategies with us on their brand and their products. So...
We've been able to have those discussions and in some cases. Create different plans. From a joint business planning perspective to take advantage of those learnings and. To maximize the overall category, because ultimately that's the goal. Is to grow all boats, not 1 at the expense of the other. And so I think our.
Merchandising team and our supplier partners have worked together really well to make that happen. Thank you for that. I have a follow-up question. Around capital allocation, you do have a lot of cash on the balance sheet.
And as well above what we've seen from you guys, at least from a historical perspective. So how do you think about the strong cash flow generation of your business in the context of organic unit growth, pursuing M&A opportunities, and potentially buying back shares opportunistically? Yeah, good morning, Christina. This is Steve. I'll address that.
You know, the reality is because our capital spending this year and the closing of the small deal M&A that we talked about, both of those items are heavily back and loaded, right? We're very busy April , realistically, in terms of opening and buying stores.
It seemed the most prudent for us to hold that cash over the course of the year because we knew we were going to have uses for it. But as the cash flow generation potential of the company continues to grow in an environment where we don't have any leverage concerns of significance and we really don't need to pay off.
That we will go back to where we start, which is the best use of capital dollar number 1 for us. We believe this is investing in something that's EBITDA and ROIC is creative in terms of growth. And so we'll continue to lean into those new units and. We are very respectful and thoughtful around making sure our dividend. Growth continues.
of pace with what it has been historically and the earnings profile of the company. But there is a point in time where there is excess cash beyond the near-term growth needs of the company and the leverage and the dividend uses and clearly share repurchase comes into the fore at that point in time. So we haven't been there. Last couple of quarters obviously, we have an authorization that we're...
very aware of and so I think we will continue to remain quite aware of that but in the short term we know we're going to be spending some of that cash to finish the things we've already committed to doing. Please stand by for next question. Our last question comes from John Lawrence with Benchmark, your line is now open.
Thank you for squeezing me in.
Darren, would you talk a little bit about Private Label, what your best customers, the loyalty members, what are you seeing in that basket now as that...
Journey and private life will continue is it the drinks is it what are you seeing private life more often in that in that basket and is there any any type of a shift as we have gone through the year.
In terms of the basket itself, I think...
The private label runs the same sort of cycle from a seasonality standpoint that the rest of the sort does. And so doing a third core, what you see is less beverages because of weather's cold outside and it shifts more to the snacks and candy and that sort of thing.
And then as we get more into the summer, you'll start to see the acceleration of the beverages and the beverage category. That being said,
You know, or some of the mix in the basket has accelerated in the candy category due to some recent introductions of candy products, and I'll tell you that this is a great example of why I try to label so important.
We saw in the candy category that a lot of the national brands were really passing on some aggressive cost increases to all retailers and it was starting to put some pressure on unit velocity and it was something like we had not seen before and so that really
Gave us confidence to go into the candy bar category, which historically has been a really difficult category to penetrate because of the brand strength Of the national manufacturers and we have introduced a line of candy bars that have actually become some of the top selling Items in the category
because of the value price and because of the quality of the product. And so...
We continue to look at that and continue to look at expanding that, but that's something that the mix has kind of shifted in a way we originally hadn't anticipated because the address of cost increases from the national manufacturer. So that gives our guests a great quality product at a value price and allows us to continue and grow the category. Great, thanks. Congrats.
guys good morning thanks for taking my question. Really it's we're at the end so I'll just try to squeeze one in. So just to follow up on the M&A side, I know you've got a lot of questions on it today, but you talked about the environment being constructed today and it seems like you've plenty of liquidity to execute on a larger scale deal.
So any thoughts that there might be another Buchanan out there or do you consider having done a deal of that scale kind of more of a one off that wouldn't be repeated? No, John . We certainly look at as large or deals with that scale or even bigger. You know, our issue isn't around the size of the deal. It's like our balance sheet speaks for us.
a larger acquisition. It's really, from our perspective, it's really more about finding the right deal. It's strategic for us. It's in the right geography. It's at the right valuation. And so we continue to work on those opportunities, but we're looking at all types of deals, large and small.
a larger acquisition. It's really, from our perspective, it's really more about finding the right deal. It's strategic for us. It's in the right geography. It's at the right valuation. And so we continue to work on those opportunities, but we're looking at all types of deals, large and small. Thank you. Thank you.
I show no for the questions at this time. I would now like to turn the conference back to Darren for closing remarks. Thanks for taking the time today to join some of the call. As we finish our final fiscal quarter and three year strategic plan, I just want to thank our team members again for all their hard work and commitment to cases and the communities we serve every day. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
I show no for the questions at this time. I would now like to turn the conference back to Darren for closing remarks. All right, thanks for taking the time today to join some of the call. As we finish our final fiscal quarter and three year strategic plan, I just want to thank our team members again for all their hard work and commitment to cases and the communities we serve every day. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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