Q2 2025 Casey's General Stores Inc Earnings Call
Inside the store innovation and prepared food continued to drive strong performance, while the grocery and general merchandise category was a primary driver of margin expansion.
On the fuel side. The team is doing an excellent job balancing volume and margin with fuel margins over 40 per gallon, while outperforming the geographic market and same store fuel gallons.
As we discussed at our analyst day in October we're very confident in our ability to execute on our three year strategic plan is showing up in our results both inside and outside the store.
I would now like to go over our results and share some of the details in each of the categories.
Inside same store sales were up 4% from the second quarter or seven 1% on a two year stack basis with an average margin of 42, 2%.
Same store prepared food and dispense beverage led the way our sales were up five 2% or 11, 6% on a two year stack basis with an average margin of 58, 7%.
Hot sandwiches continue their strong performance up over 60% and KOL dispense beverages also performed well up nearly 10%.
Margin was down approximately 30 basis points from the prior year.
Due to a modest cheese headwind.
Same store grocery and general merchandise sales were up $3 65.
Five 4% onto your stack basis with an average margin of 35, 6% an increase of approximately 160 basis points from the prior year due to product mix and the excellent work of our asset protection and strategic sourcing gains.
We saw positive momentum in the category, notably in both nonalcoholic and alcoholic beverages, specifically in the energy and electric categories.
Our merchandising team is doing an excellent job optimizing our assortment to meet our guests' needs.
For fuel same store gallon sold were down 6% with a fuel margin of 42 per gallon.
We continue to outperform our geographic region on volume as Opus fuel gallons sold data shows the mid continent region down approximately 5% in the quarter, indicating that we are taking market share.
Our field team is doing a tremendous job balancing volume and margin and the results continue to show it.
Operating expense management remains a focus in the second quarter saw an increase of just two 3% on a same store excluding credit card fee basis.
Our continuous improvement team is identifying.
Areas to be more efficient in our store operations team is executing on those opportunities at a high level.
The results speak for themselves our same store labor hours were down 1% once again.
I would now like to turn the call over to Steve to discuss the financial results from the second quarter Steve.
Steve: Thanks, Darren good morning, I'm very proud of the hard work of our team during the quarter. We're now halfway through our three year strategic plan and we are carrying tremendous momentum into the second half of it.
Steve: Total revenue for the quarter was $3 9 billion, a decrease of $118 million or two 9% from the prior year and Thats due primarily to a 14, 1% decline in the retail price of fuel, which was nearly offset by higher inside sales as well as higher fuel gallons sold.
Steve: Results were also favorably impacted by operating approximately 4% more stores on a year over year basis.
Steve: Total inside sales for the quarter.
Steve: 147 billion, an increase of $121 million or 9% from the prior year for.
Steve: For the quarter prepared food and dispense beverage sales rose by $35 million to $418 million, an increase of nine 2% and grocery and general merchandise sales increased by $85 million to $1 5 billion, which is an increase of eight 8%.
Steve: Retail fuel sales were down $232 million in the quarter, driven primarily by a 51.
Steve: The decline in the retail price of fuel from $3.62 per gallon in the prior year to $3 11 per gallon in the second quarter.
Steve: This was partially offset by a 6% increase in total fuel gallons sold as our newer units tend to sell more fuel pennant chain average.
Steve: We define gross profit as revenues less cost of goods sold but excluding depreciation and amortization.
Steve: <unk> had gross profit of $959 million in the quarter, that's an increase of $73 million or eight 2% from the prior year.
Steve: This is driven primarily by higher inside gross profit of $66 4 million or 12%, while fuel gross profit was higher by $3 4 million or one 1%.
Steve: In fact gross profit margin was 42, 2% and Thats up 110 basis points from the prior year.
Steve: Fair food and dispense beverage margin was 58, 7% down 30 basis points from prior year. The primary driver. Despite decrease was a modest headwind on cheese, which was $2 25 per pound in the quarter compared to $2 12 per pound in the prior year.
Steve: An increase of 6% or approximately 35 basis points.
Steve: Grocery and general Merchandize margin was 35, 6% an increase of 160 basis points from prior year. The change was primarily due to favorable mix and good asset protection performance fee.
Steve: Fuel margin for the quarter was <unk> 42 per gallon thats down $2 one from the prior year.
Steve: Fuel gross profit includes almost $5 million from the sale of brands and that's down $3 5 million from the same quarter in the prior year.
Steve: Total operating expenses were up five 2% or $30 million approximately 4% of the total operating expense increase was due to unit growth as we operated 93 additional stores versus prior year.
Steve: Same store employee expense accounted for approximately 1% of the increase as modest increases in wages were partially offset by the reduction in same store hours.
Steve: Depreciation in the quarter.
Steve: $96 6 million Thats up $11 million versus the prior year, primarily due to more stores.
Steve: In fact, a tax rate for the quarter was 24, 5% that's compared to 23, 6% in the prior year that increase was driven by a one time benefit in the prior year that did not repeat.
Steve: Net income was up versus the prior year to $189 million, an increase of 13, 9% EBITDA for the quarter was $348 9 million compared to $305 $9 million a year ago, an increase of 14, 1%.
Steve: Our balance sheet is in excellent condition and on October 31, we had total available liquidity of one and a quarter billion dollars.
Steve: Please note the liquidity calculation excludes the impact of the restricted cash balance which is included within long term assets as of October 31.
Steve: The restricted cash relates to cash held in an escrow account for the acquisition of <unk>, which closed the next day on November one and that is subsequent to the quarter end.
Steve: On October 31, our leverage ratio of debt to EBITDA was two three times per the covenants in the company's recently amended credit facilities, we still plan to Delever to two times within the first year of closing and we will reduce spending as originally planned on property plant and equipment, we likely will not repurchase.
Steve: Shares until we achieve the targeted leverage ratio.
Steve: For the quarter net cash generated by operating activities of $271 million less purchases of property and equipment of $111 million.
Steve: Solid and the company generating $160 million and free cash flow compared to $145 million in the prior year.
Steve: At the December meeting the board of directors voted to maintain the quarterly dividend at <unk> 50 per share.
Steve: Primarily due to the closing of the <unk> transaction, we are updating our previously communicated fiscal year guidance.
Steve: For the second half of fiscal 2025, specifically related to the fights transactions Casey's expects to incur an additional $15 million to $20 million in one time deal and integration costs, primarily in the third quarter.
Steve: EBITDA contribution from fights is expected therefore to be modestly dilutive in the third quarter again, primarily due to the previously mentioned costs EBITDA contribution from <unk> is expected to be modestly accretive in the fourth quarter.
Steve: Interest expense will be $35 million higher than the original outlook due to the financing of the transaction.
Steve: For Casey's total fiscal year, 2025 outlook, including the impact of FX acquisitions EBITDA is now expected to increase at least 10%.
Steve: Total operating expenses are expected to increase between 11% to 13% for the fiscal year and that includes approximately $25 million to $30 million in one time deal and integration costs, while same store operating expenses, excluding credit card fees are expected to only increase approximately two.
Steve: <unk> for the year net.
Steve: Net interest expense is expected to be approximately $90 million for the year.
Steve: Depreciation and amortization is expected to be approximately $410 million and purchases of PP&E are expected to be approximately $550 million.
Steve: <unk> rate is expected to be approximately 23% to 25% for the fiscal year.
Steve: Note that Casey's is not updating its outlook for the following metrics.
Steve: Don't expect to add approximately 270 stores for the fiscal year.
Steve: We expect inside same store sales to increase between 3% to 5% and insight margins to be comparable to the prior year comp.
Steve: The company expects same store fuel gallons sold to be between negative one to positive 1%.
Steve: Overall <unk> is expected to contribute over $200 million of inside sales and approximately 200 million gallons of fuel for the second half of fiscal 'twenty five.
Steve: The expected total operating expense increase of 11% to 13% approximately 5% to 7% of the increase is due to the existing Casey's business and that's a decrease from our previously communicated 6% to 8% expected increase.
Steve: The <unk> acquisition is expected therefore to contribute approximately 6% of the total increase over 1% of which is related to the one time deal and integration costs.
Steve: Our results for November were as follows inside same store sales were near the midpoint of the annual outlook range.
Steve: As we enter the seasonally lower time of year for both fuel margin and fuel volume same store fuel gallons are near the low end of the annual outlook range and CPG is between the mid to high Thirty's.
Steve: Currencies costs have improved but are still modestly unfavorable versus prior year by several hundred basis points.
Steve: Our third quarter total operating expense expectation there is an increase of approximately 20% and thats, primarily due to the <unk> acquisition in the $15 million to $20 million of one time deal and integration costs. As a result of these closing costs and the incremental interest expense fix will be dilutive to.
Darren: Our earnings in the third and fourth quarters as we expected I'll now turn the call back over to Darren.
Darren: Thanks, Steve I'd like to thank the entire cases team for another outstanding quarter, and again I want to welcome the <unk> team to the cases family.
Darren: We're excited to have you on board and are looking forward to integrating these stores into our network.
Our team has done an incredible job executing on the first half of the three year strategic plan and is looking forward to finishing out the second half strong.
Darren: Growth is a key pillar of our strategic plan and we're executing on it.
Announcing the closing of the largest transaction in the company's history is extremely exciting and right in line with the plan we laid out in June of 2023.
We're also committed to maintaining a strong balance sheet and we will work to delever toward targeted two times leverage ratio quickly.
We believe our ability to execute and integrate acquisitions like these will continue to build shareholder value.
Darren: Inside the store, we continue to produce excellent results from our prepared food and dispense beverage side of the business guests are flocking to our refresh sandwich lineup as we offer high quality products at a great value.
Darren: With respect to grocery and general merchandize, our merchandising team is doing an excellent job of identifying the right products and working with our supplier partners to develop effective promotions for our guests.
Darren: One shining star within the non alcoholic beverage category remains energy drinks, where we had another quarter of over double digit same store growth.
Darren: Overall, we believe our insight offering as a meaningful differentiator in the industry.
Darren: Enhancing operational efficiencies is the third pillar strategic plan.
Darren: Our continuous improvement team is doing a great job collaborating with store operations to make the organization more efficient.
Darren: The results are compelling as the second quarter marked the 10th consecutive quarter with a reduction in same store labor hours.
Darren: The team has done this with a rigorous process to simplify store operations and get rid of non value added work.
Darren: Some things up we've never felt more confident in our team's ability to execute our plan and deliver differentiated results for our shareholders.
Darren: I will take your questions.
Speaker Change: Thank you.
Speaker Change: To ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again in the interest of time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Speaker Change: And our first question comes from Bobby Griffin of Raymond James Your line is open.
Bobby Griffin: Good morning, Good morning, everybody. Thanks for taking my questions and good morning.
Congrats on getting the fights deal over the finish line.
Bobby Griffin: Thanks.
Speaker Change: First for me I, just wanted to kind of dive in a little bit to the grocery and general merchandise margin another great quarter.
Speaker Change: Second quarter in a row over 35%. So can you maybe talk a little bit more about the puts and takes there and is this a more structural step up in your view of where the margins in this business.
Speaker Change: Out of the business could be up, especially with some of the opportunities like we saw out there with the back bar team has come in and some things like that.
Yes, Bobby this is Darren.
Speaker Change: Yeah, what I would tell you is I think there is a few things going on in grocery and general merchandise obviously.
Speaker Change: We've done a great job and just working with supplier partners on joint business planning and that ultimately translates into some impact there but.
Speaker Change: Really I think the biggest driver is in mix.
Speaker Change: And what we're seeing kind of across the board is.
Speaker Change: Mix shift to some of the higher margin items that we have in the categories I'll give you a couple of examples.
Speaker Change: You take a look at alcohol as an example.
The lowest.
Speaker Change: Margin sub category within alcohol as premium beer and Thats.
Speaker Change: And thats been probably the softest of the subcategories within alcohol.
Speaker Change: Inside of beer, though the fastest growing part of that is imports and super premiums, which tend to come with higher margin.
Speaker Change: If you go to the other subcategories liquor and wine those are both growing at about a 10% clip and those have higher margin as well so as we continue to accelerate growth in the higher margin areas.
Speaker Change: And the lower margins are kind of hanging in there.
Speaker Change: Seeing that that margin shift and so that was a 200 basis point improvement year over year, primarily driven on mix.
Speaker Change: You go to the other example would be tobacco.
Speaker Change: And again, you have a similar dynamic where.
Speaker Change: Cigarettes combustible cigarettes are the lowest margin sub category within.
Speaker Change: Within that category and they're declining and have been declining for a number of years.
Speaker Change: On the flip side, yes, nicotine alter alternatives and vapor which are growing at the fastest pace in fact nicotine alternatives are almost triple digit increases.
Speaker Change: And those tend to come with a much higher margin rates. So we're actually seeing margin rate expansion in tobacco.
Speaker Change: Overall, even though youre seeing that decline on combustible cigarettes.
Speaker Change: And then lastly, our asset protection team has done a really nice job on shrink and we've done a lot of work over the last year or so with exception based reporting and some other technology to really identify sources of shrink.
Speaker Change: Route those out so when you put all that together.
Speaker Change: Where did you end up with 160 basis point improvement in margin and so I would say to your other question is a structural let's say to a large extent.
Speaker Change: It is because of that mix shift is continuing to to go.
Speaker Change: Thank you that's very helpful and I guess my final one for me is just on the <unk> deal itself is there a seasonality aspect to the EBITDA that we should be aware of I think there is some of the vessels that we are doing some quick math on the 89 million that was given.
Speaker Change: When you announced the deal and then kind of back into what's implied for the guidance change. So I just want make sure was there any any seasonality I think we should be aware of and is that business still trending around $98 million.
And EBITDA as it was when you guys announced the deal.
Speaker Change: Hey, Bobby this is Steve.
There is some seasonality with <unk>.
Bobby Griffin: Yes, it's probably not quite as significant as.
Bobby Griffin: What we would call the Casey's mother ship, just because they're not as far or.
Bobby Griffin: We're not as far north as we.
Bobby Griffin: But theres still some seasonality so the second half of the year for them is not going to be quite as big as the first half of the year and that would be consistent.
Bobby Griffin: With our business on a general rule in the B L.
Bobby Griffin: <unk> eight.
Bobby Griffin: The $89 million that we had talked about previously which included some contributions from ramping stores right that had not been opened at about.
Bobby Griffin: 20 stores or so that we are either under construction or had not been open a full year.
Bobby Griffin: It's a good number to start with Thats been under we're basing all of our planned et cetera on but just remember that there is there is some ramping store dynamics in that number.
Speaker Change: Absolutely I appreciate the details and congrats again on a great quarter.
Speaker Change: Thanks.
Speaker Change: Q.
Speaker Change: Our next question comes from Bonnie Herzog of Goldman Sachs. Your line is open.
Speaker Change: Alright. Thank you good morning, everyone.
Speaker Change: Good morning, Gary.
Speaker Change: <unk> sales guidance of 3% to 5% for the year, which you maintained I guess at the midpoint. It does imply a bit of an acceleration in the second half versus the first half. So just curious what will be the drivers of this and then along those lines could you maybe touch on how your traffic levels trended in the.
Speaker Change: Quarter versus last quarter, and then maybe any color on November and so far in December and again outlook for traffic for that.
Speaker Change: Heading into next year or the rest of their fiscal year.
Speaker Change: Yeah, Hey, good morning, Steve I'll start with that traffic was positive in the quarter.
Speaker Change: For us.
Our November experience.
Speaker Change: Were right at <unk>.
Literally right at 4% inside.
Inside of the same store sales for for November so right in the middle of the range and so.
Speaker Change: We were obviously below.
Speaker Change: The low end of the range in the first quarter on inside the same store sales. So we're aware of that obviously, but our current thought is the <unk>.
Speaker Change: Second quarter was.
Speaker Change: Kind of right on the nose in the middle of the range November which is the biggest month of the third quarter is right on the nose in the middle of the range, we feel pretty good about.
Comparability for some of the exogenous stuff on weather and a lot of the initiatives that the team has.
Speaker Change: The launch various programs et cetera, as we kind of get into the new part of the calendar year. So it just felt like that range still felt good to us within the range.
Speaker Change: We are certainly aware of in the fourth quarter that there is the dynamic obviously of lapping the prior year's leap day, but we know that that's in there.
Speaker Change: Already so.
Speaker Change: It felt like there was no need really to change that range. It feels feels pretty safe based on what we know kind of year to date through through November and what we have going forward.
Speaker Change: Okay and can I, just clarify something that I'll pass it on.
Speaker Change: In the context of what you just talked about then are you seeing any change.
Speaker Change: Consumer behavior are you seeing any strengthening with the consumer in the context of all of this.
Darren: Hey, Bonnie it's Darren.
Speaker Change: With respect to the consumer.
Speaker Change: Directionally.
Speaker Change: <unk> is hanging in there are about the same as what we would have talked about last quarter.
Speaker Change: We're still seeing a little bit of softness on that lower income consumer.
Speaker Change: But.
Speaker Change: Again, we don't have.
Disproportionate exposure to that consumer.
Speaker Change: The balance of the consumers, which are about three quarters of them Theyre continuing to shop. There continue to visit the store at the same frequency.
Speaker Change: Continuing to to buy as normal so I think getting back to Steve's point.
Speaker Change: This quarter, we were at the midpoint of the guidance. This past month in November we were at the midpoint.
We think that three to five is the appropriate range that that <unk>.
Speaker Change: Ultimately, we will land for the year.
Yeah.
Thank you.
Speaker Change: Our next question comes from Jacob <unk> with Melius Research Your line is open.
Speaker Change: Hi, Thanks for the question.
Speaker Change: Just wanted to go a bit into prepared food in the competitive dynamic there.
Speaker Change: I'm, just wondering what youre seeing in terms of competition with speed.
Other <unk> and if you feel the need to increase.
Speaker Change: <unk>.
Speaker Change: Gross margin there.
Speaker Change: Yes, Jacob this is Darren.
Speaker Change: Yes.
We're keeping an eye on the competition pretty closely.
Speaker Change: Yes, I'd break it into two segments. There is the pizza segment and then there is.
Speaker Change: There is the the rest of the <unk>.
Speaker Change: With the rest of the <unk>, obviously, it's become a.
Speaker Change: Much more value oriented environment, but as we've discussed previously our our value proposition just.
Speaker Change: On an aligned pricing basis is pretty compelling relative to what a lot of the others are doing and so if you think of the sandwich <unk> players.
<unk> really invested heavily in an extreme value I mean, those are typically sandwiches and.
Speaker Change: And that sort of thing and Thats, where were seeing the most strength.
Speaker Change: And so thats more.
Speaker Change: Okay.
Speaker Change: They are more reflective of the innovation and are aligning pricing value proposition. So we don't feel the need to have to get any more aggressive than we already are in those products carry.
Speaker Change: A pretty healthy margin on the pizza side.
I wouldn't say that it's gotten any more competitive than it always is and we.
Speaker Change: We look at our pricing across our geography.
Speaker Change: Probably remind you that in about half of our stores, we don't even have one of the major pizza competitors. So we're not under any real pressure at all from a pricing perspective, and about half of our stores and the other half.
Speaker Change: We tend to be a $1 to $2 below.
Speaker Change: They're they're standard menu pricing just everyday and then of course, we layer in.
Speaker Change: A variety of promotional offers via our rewards platform and so.
Speaker Change: What you see right now in terms of margin and value proposition is pretty reflective of our normal operating mode and as long as our sales volume continues to.
Speaker Change: To perform like it has been we don't see the need to.
Speaker Change: Get any more aggressive from a value standpoint.
Speaker Change: I appreciate that and then just one.
Speaker Change: Wondering if you had any updates on the timeline of our re banner stores or for incorporating some of their fuel assets into your upstream capabilities.
Speaker Change: Yes.
Speaker Change: With respect to the.
The remodeling of stores, that's going to that's probably the longest pole in the tenant in terms of the overall integration that will take a few years.
Speaker Change: First we.
Speaker Change: As we discussed before they had a pretty successful food program and obviously, we have one as well and so we're.
Going too quickly remodel a few stores integrating those two platforms and really understand how they performed together. So we can really have an informed scope of work too.
Speaker Change: To apply to the rest of the chain and so there'll be a little bit of work to do there and then permitting process can take.
Speaker Change: Anywhere from 12 months to 24 months, depending on the jurisdiction. So there's a there's a pretty long timeline there on the fuel side that that integration will happen a little more quickly as we take over pricing and procurement activities and that sort of thing. So I would anticipate a little more benefit sooner.
Speaker Change: And the timeline then.
Then on the remodel side, but but really you should be thinking three to four years from from where we sit here today to the to the end of that integration process.
Thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from Anthony Bonadio of Wells Fargo. Your line is open.
Anthony Bonadio: Hey, guys nice quarter.
I just wanted to talk a little bit more about guidance.
Anthony Bonadio: It looks like the back half now implies 8% EBITDA growth.
Speaker Change: <unk> call it a 4% headwind from onetime costs in that $15 million to $20 million.
Speaker Change: So have you guys worked through your revision to guidance I guess has anything fundamentally changed about how youre thinking about.
The existing Casey's business in the back half.
Speaker Change: And then any initial thoughts on fiscal 'twenty contribution.
Speaker Change: From synergy capture from <unk>, just trying to better bridge the back half of the year.
Speaker Change: Hey, Anthony Good morning, Steve.
Speaker Change: Start on that.
Speaker Change: Related to kind of mother ship.
Speaker Change: Assumptions for the second half of the year I think no nothing is fundamentally changed.
Speaker Change: Tried to acknowledge our Opex performance is better than we originally guided to so that the opex growth in the Casey's legacy operations as he is going to be lower than we had originally guided to by 100 basis points or so.
Speaker Change: That's even with some incremental incentive compensation. So I think we feel really good about that we certainly to Dan's earlier comments have seen really good margin performance in the legacy business inside of the stores.
Speaker Change: So we would.
Speaker Change: I have no reason to think that thats not going to that's not going to continue as a general rule and so I would say, it's largely kind of steady as she goes and the mother ship from an income statement perspective, we are.
Speaker Change: We're making some consciously different decisions on some items that will impact cash flow just to contribute to the speed of deleveraging and so we're re sequencing some capital spending on new units that we otherwise would've been building will have a little bit lower set of tax payments because of.
Speaker Change: Some of the benefits of the deal so cash flow I think should be a little higher than we had initially thought it was going to be and that will directly get applied to.
Speaker Change: Paying off debt associated with the transaction and as it relates to <unk>. We don't have any specific commentary out on the next fiscal year yet at this point in time, but generally on synergies from the transaction as if I bucket them kind of what comes first et cetera, Yes, we would expect to get some fuel synergies.
Very quickly.
Speaker Change: The game, that's really a function of us taking over and centralizing the pricing and the procurement of fuel that's already underway as we sit here today.
A little bit further out will be some some SG&A related synergies as some of that work.
Speaker Change: <unk> consolidated.
Speaker Change: S and then procurement synergies will come kind of in line with the G&A as we get the advantage of greater scale on a lot of the sourcing side.
Speaker Change: Side of the business ultimately.
Speaker Change: The real most significant savings will be on <unk>.
Speaker Change: Inside of the store as we introduce the pizza into the stores that is more dependent on the remodel schedule. So that will certainly not be in.
Speaker Change: The next 12 months realistically, but in the second half of this fiscal year.
Speaker Change: Not going to be a significant number.
Speaker Change: And it is reflected in our guidance that we've given budgets.
Speaker Change: In the next six months other than a little bit of fuel I don't think there'll be synergies per se.
Speaker Change: It would move any of the numbers we've given.
Speaker Change: Got it that's Super helpful. And then just to follow up on fuel I guess, just any additional thoughts on how youre thinking about.
Speaker Change: Fuel margins in the context of that 10% EBITDA growth.
Speaker Change: And just to clarify that.
Speaker Change: I believe mid to high Thirty's, you said keep it it includes the new <unk> stores.
Speaker Change: And just any thoughts on how those margins blend in.
Speaker Change: Yes, listen we consciously we don't we don't guide, we don't guide to fuel margins, our crystal ball is not any better than anybody else's necessarily and.
And so our obviously experienced in the quarter.
Is kind of between the mid and the high the high <unk> I would expect just the mixing in the fixed business those geographies tend to be a little bit lower margin fuel geographies than what we have there is probably about a penny or maybe a little bit more than a penny per gallon.
Speaker Change: Headwind just on the math of mixing in that fuel.
Speaker Change: Profitability from bikes that would be reflected obviously in our EBITDA expectations for for the second half of the year, but we don't have a specific number we're we're going to guide to for CPG in the second half of the year, just just consistent with how we manage the full year expectations.
Speaker Change: Thank you.
Speaker Change: Right.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Our next question comes from Michael <unk> of Evercore ISI. Your line is open.
Yes, hey, guys, congrats on the quarter and getting the flakes deal completed.
Speaker Change: Thanks.
Speaker Change: I just wanted to ask on the inside margins first off if there's anything to be aware of.
Speaker Change: Timing or headwinds et cetera, they could.
Speaker Change: Kind of impact this improvement that we've seen in grocery and gen merch into the back half of the year.
Speaker Change: And then secondly.
Speaker Change: Other than cheese spot any headwinds you'd call out to the prepared foods side of the gross margins as well.
Speaker Change: Yes.
Darren: Michael This is Darren.
Yeah on the grocery and general merch side.
Darren: I wouldn't anticipate any any real headwinds.
Darren: CNA that will as we rollover the calendar year there'll be some cost increases in some categories and we will we should be able to offset that largely through through pricing actions. So I wouldn't anticipate any big shifts there.
Darren: The mix.
Darren: Evolution is something that I do think it will stick.
Darren: And so.
Darren: So I think that's that's probably to our benefit on the cheese side.
Darren: Steve maybe you can comment on the GFS side.
Speaker Change: Just one thing to buttress to Aaron's comments, theres, a little bit of seasonality in our normal course product mix on the grocery side right.
Speaker Change: And the coldest part of the year, we don't sell as much ice and things that are kind of higher margin products for us. So I think the third quarter natural mix is probably going to be a little bit.
Speaker Change: Dilutive relative to the summer periods of time and outside of cheese and prepared food.
Speaker Change: No I don't think Theres anything significant to note again cheese at the moment is a little bit more.
Speaker Change: It's less of a headwind as we sit here today than it was in that.
In the second quarter.
Speaker Change: Okay.
Speaker Change: Thank you.
Thank you.
Speaker Change: Our next question comes from Cristina <unk> of Deutsche Bank. Your line is open.
Speaker Change: Hi, good morning, Darin and Steven and congrats on nice results.
Speaker Change: I wanted to ask on Opex, but as it relates to the five stores now that you've owned them for almost a month and a half I was wondering if you could just discuss your initial assessment on some of the opportunities at these acquired stores just how do you see opportunities to implement many of the same labor hours saving initiatives that were so successful at Casey's and then.
Speaker Change: What could the general timeline look like over the next 18 to 24 months.
Speaker Change: Yes, Kristina this is Darren.
Speaker Change: Yes, we feel pretty good about that.
Speaker Change: Sykes.
Sykes: Has done a great job operating their stores. So I would say they have a good operation generally but.
Sykes: We've learned a lot ourselves over the last couple of years employing a lot of these.
Sykes: Different.
Sykes: Techniques and tactics and technologies to impact are our opex. So we feel we still have that opportunity to do that in the <unk> stores.
Sykes: Going to take some time I wouldnt anticipate a lot of that for the balance of this fiscal year, we're still.
Sykes: Pulling together that operation overall, but <unk>.
Sykes: Some more detailed plans.
Sykes: We go into the next fiscal year in terms of how we might approach that and when we might expect to see some of those benefits.
Sykes: We definitely have the opportunity there so we feel really good about that.
Speaker Change: Got it that's helpful. And then just a follow up I was hoping you could talk a little bit more about your.
Speaker Change: About your joint planning process on the prepared foods side of things, which I think is a relatively newer development for you and then just if you could discuss on the type of benefits you in your vendors look to achieve and the upcoming calendar year. Thank you.
Speaker Change: Yes.
Speaker Change: You are right.
Speaker Change: The joint planning process on prepared foods is a little bit newer than that.
Speaker Change: It is on the grocery and general merchandise side, but I think what we're what we're seeing more broadly is that we are.
Speaker Change: The suppliers that we've used historically are pretty large companies that have a lot of capabilities and I don't think we were truly tapping into all of the capabilities that they can bring to bear to help us improve our business and so.
Speaker Change: We're doing a much better job of that and I think thats starting to two.
Speaker Change: Yield some results I would say primarily in the innovation side of the equation. So.
Speaker Change: Most of these ingredient suppliers have pretty sophisticated culinary teams in their own right and when we partner them with our culinary team. We can really get some great innovation get some great improvements in quality and get some improvements in costs at the same time and so I think the.
Speaker Change: The chicken sandwich platform and really the highest Android platform. Overall is a great example of that all of the ingredients and components in those sandwiches are new and those were jointly developed with our culinary team and the culinary team.
Speaker Change: The ingredient manufacturers too.
Speaker Change: It is a higher quality product.
At a better cost that allowed us to get the kind of performance. We're getting so we're going to continue that that process with all of our <unk>.
Speaker Change: Suppliers and this will be a year or two of that process that we're wrapping up right now and so we're pretty optimistic about whats lying ahead for us.
Speaker Change: Thank you and as a reminder to ask a question. Please press star 111.
Speaker Change: One moment.
Speaker Change: Our next question comes from Macquarie Carlo of Jefferies. Your line is open.
Speaker Change: Great. Thanks.
Speaker Change: Darren.
Speaker Change: Two for you and then one for Steve on.
Speaker Change: For Darren I had so you mentioned I think it was energy drink <unk> seen some nice momentum I was just curious if you could talk a little bit about.
Speaker Change: What's driving that momentum.
And then I was also curious about the effectiveness of the promotions that you've been doing recently.
Speaker Change: How thats helped.
Speaker Change: Support inside sales.
Speaker Change: And then for Steve could you just remind us.
About what the traditional ramp to maturity is for a new KC store and maybe if you could contrast that with <unk> as well. Thank you so much.
Speaker Change: Yes.
Speaker Change: Corey.
Speaker Change: Darren on the energy drinks.
Speaker Change: That category is up.
Speaker Change: Essentially 13%.
Speaker Change: Year over year end.
Speaker Change: I would say to that is it's a combination of assortment.
Speaker Change: Assortment optimization assortment management and promotional activity so yes.
Speaker Change: We've got some new new products in the assortment alani Nu.
Speaker Change: Ghost and see four are all performing very well and those are newer entrants into the assortment.
Speaker Change: Red Bull and monster on the flip side have been.
Speaker Change: Stalwarts in the category and continue to grow and accelerated pace. So I would say the growth is really being driven in part by the new <unk>.
Speaker Change: New items coming into the assortment and then on the Red Bull or monster side.
Less of that and more of some different promotional activities and really execution at the stores.
Speaker Change: As a reminder, we self distribute monster, which is unique in the industry and I feel like our execution at store level and our in stock position as a result of that is a differentiator versus others in the industry and so I think that really accrues to our benefit.
Speaker Change: Part of the equation behind the growth in energy drinks.
Speaker Change: Okay.
On the.
Speaker Change: Question on ramping so we really don't have a significantly different expectation for ramping.
Speaker Change: New to industry build versus an acquisition model, but in terms of returns and how quickly they generate returns.
Speaker Change: MTI, we would expect that to be certainly a positive return in the very first year right out of the gate it should be a double digit after tax returns by the second year and it should be mature in terms of kind of mid teens. After tax returns on invested capital by the third or fourth year.
Speaker Change: <unk> are literally decades of history with ntis would be very supportive of that as a consistent pattern and a newer geography.
Speaker Change: Where the brand is a little bit less recognized and people aren't as familiar with the quality of the pizza, specifically you probably add an extra year to that ramp is as a general rule and that's all about just adoption of prepared foods for Fikes stores specifically.
Speaker Change: They are a little bit different in that we're obviously buying an existing business they've got some very very busy high returning stores already.
Speaker Change: The returns there.
Speaker Change: They are not going to be starting at zero, because you are buying that existing business. So.
Speaker Change: You'll get more of a step change as we remodel those stores because you're putting in.
Speaker Change: The pizza business kind of all at once and that you're introducing our prepared food business that you have.
Speaker Change: Are they just don't have something comparable so that'll be a little bit different pattern, but back to the return expectations on those stores right, we'll finish the remodeling of those stores.
Speaker Change: Over a three to four year period of time based on permitting timelines, but in the meantime.
Speaker Change: Above unit of the stores right the fuel benefits the procurement benefits the SG&A benefits those are going to accrue to kind of Acs.
Speaker Change: Consolidated even if they don't show up on an individual's stores P&L necessarily.
Speaker Change: Great. Thank you so much.
Speaker Change: Thank you I'm not showing any further questions at this time I would like to turn it back to Darren <unk> for closing remarks.
Speaker Change: Okay. Thank you for.
Speaker Change: Taking the time today to join us on the call and before we sign off I want to once again, thank our team members and wish them and everyone on the call and happy holiday season.
Speaker Change: This concludes today's conference call. Thank you for participating and you may now disconnect.
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