Q1 2020 Earnings Call
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I would now like turn the conference over to Bill Walljasper, Chief Financial Officer, Sir you may begin.
Good morning, and thank you for joining us to discuss Casey's results for the quarter ended July 31st.
I'm Bill Walljasper, Chief Financial Officer, Dan Rebel as President and Chief Executive Officer is also here.
Before we begin I'll remind you that certain statements made by us during the 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 related to our possible or assumed future results of operations.
Business strategies growth opportunities and performance improvements at our stores.
There are a number of known and unknown risks uncertainties and other factors that may cause our actual results.
To differ materially from any future results expressed or implied.
By those forward looking statements, including our ability to execute on the value creation plan or to realize benefits from that value creation plan as well as other risks uncertainties and other factors, which are described in our most recent annual report on Form 10-K , and quarterly reports on Form 10-Q as filed with the FCC and are available on our website.
Any forward looking statements made during this call to reflect our current views as of today with respect to future events and Casey's disclaims any intention or obligation to update or revise forward looking statements, whether as a result of new information future events or otherwise.
This morning, Darren will first take a few minutes to summarize the results of the first quarter and then provide an update on the progress with our value creation plan.
Well then open for questions about our results I would now like to turn the call over to Darren discuss those results.
Thanks, Bill and good morning, everyone before we get into the results of the quarter I'd like to start by saying how excited I am to be part of the cases team.
During my time in the coming years for industry I've always admired and respected cases and felt this would be the ideal opportunity for me given my background not only in the convenience store space, but also the fuel and restaurant industries.
I've been on the job now for about three months and I'm optimistic about the initiatives underway and the opportunities for us going forward.
I look forward to hopefully meeting all of you in person at sometime in the future.
As you've seen in the press release diluted earnings per share for the first quarter were up 22% to $2.31 a share compared to $1.90 cents a year ago.
The results were driven primarily by strong fuel margin versus the first quarter last year continued operating expense control and sale gains inside the store.
We executed on several key milestones of our value creation plan. This past quarter setting us up for continued strong performance in fiscal 2020.
I would now like to go over our results in some of the details in each of the categories.
During the first quarter in the fuel category, we experience a favorable fuel margin environment combined with our ability to leverage the implementation of price advantage, which is our fuel price optimization tool.
These factors enable us to achieve an average fuel margin of 24.4 cents per gallon up nearly 400 basis points from the same period last year.
This drove over 22% increase in gross profit dollars from a fuel category.
Same store gallons were down 2% in the quarter in line with our expectations for the quarter, but lower than our annual guidance range.
This was primarily due to our optimization efforts and softer demand as vehicle miles driven traveled in the Midwest decline.
The average retail price for fuel during this period was 263, a gallon compared to 274 a year ago.
Despite the decline in same store gallons total gallons sold for the quarter were up nearly 3% to 619 billion gallons due to the strong contribution from new stores opened in the last 12 months.
Same store gallons in August were below our annual guidance. The average fuel margin in August is trending ahead of our annual guidance range.
Moving to inside the store total sales on grocery and other merchandise category were up 6.7% to $688 million in the first quarter same store sales were up 3.2% during the quarter in line with our annual guidance.
Excluding cigarettes same store sales were up 6.2%.
The average margin in the quarter was 31.3% down from a year ago, primarily due to an out of period inventory adjustment related to how we account for inventory in transit, which had a $6.6 million adverse impact.
This impacted the margin by about a 100 basis points.
Gross profit dollars for the quarter in the category were up 3.1% to $215.5 million.
Without the previously mentioned adjustment gross profit dollars would have been approximately 6.3%.
And same store sales in August are trending within our annual guidance.
In the prepared food and fountain category total sales were up 5.3% to $296 million for the quarter.
Same store sales were up 1.6%.
We anticipate acceleration in same store sales in the upcoming quarters as we gain traction from the launch of our new ecommerce platform and mobile App.
As well as the upcoming launch of our loyalty program later this fiscal year.
The average margin for the quarter was up 20 basis points to 62.2% versus the first quarter a year ago, primarily due to a product mix shift and cycling over fiftyth anniversary promotions from a year ago.
In the quarter prepared food gross profit dollars rose, 5.6% to $184 million. The average cost of cheese for the first quarter was $1.96 and is trending up.
We're currently buying on the spot market and monitor this closely looking for buying opportunities.
Same store sales in August are trending below our annual guidance, but have been trending up sequentially as we gain traction with our new digital platform.
We can if we continue to stay focused on controlling operating expenses for the quarter total operating expenses increased 5.7% to $379.8 million. The increase was mainly driven by operating 76 more stores this quarter than a year ago.
Same store operating expenses, excluding credit card fees were up 2.5%.
I would now like to turn the call over to bill to discuss the financial statements.
Thanks Aaron.
On the income statement total revenue in the quarter was up 1.5% to 2.6 billion, primarily due to an increase in the number of stores in operation this quarter compared to the same period, a year ago and sales gains mentioned previously offset by lower retail fuel prices.
Depreciation in the quarter was up 1.6%, which was below our annual guidance, primarily due to a $4.1 million onetime adjustment related to the useful lives of our underground storage tanks without the onetime adjustment depreciation would have been up approximately 8.6%.
As we have mentioned there were several onetime items that occurred this quarter. The net impact of these was approximately a five cents adverse impact to diluted earnings per share.
The effective tax rate for the quarter was 23.6% up from a year ago, primarily due to a onetime adjustment last year related to state law changes, we continue to expect our effective tax rate for fiscal year 2020 to be between 24 and 25%.
Our balance sheet continues to be strong at July 31, cash and cash equivalents were $96.7 million long term debt net of current maturities was $1.3 billion.
Our trailing 12 month debt to EBITDA ratio was 2.3 times.
We anticipate this moving downward as we continue to execute on our fiscal 2020 operating plan.
For the quarter, we generated 178.8 million in cash flow from operations and capital expenditures were $106.3 million compared to 98.3 million a year ago in the same period.
Adjusted EBITDA grew 14.5% in a quarter compared to the same period a year ago.
Our capital expenditure estimate for fiscal 2020 is $516 million.
I would now like to turn the call back over to Darren to update you on our unit growth and the progress with our value creation plan.
Thanks Bill.
Our target this fiscal years to build 60 stores and acquire approximately 25 additional stores. This quarter. We opened 15, new stores acquired four stores and have 11 additional stores under agreement to purchase you should expect a relatively even distribution of new store openings this fiscal year.
Currently we have 107 sites in our pipeline, including 35 under construction, which positions us well for future growth.
As we grow our store base, we continue to look for ways to increase our efficiency.
We are in the final stages of evaluating a location and designed for our third distribution center.
As a result, we anticipate breaking ground on the new facility. This fall this will alleviate the pressure off of our current distribution centers, enabling our entire network to become more efficient. It will also allow us the ability to efficiently expand into new markets.
I would now like to provide an update regarding the value creation plan.
As a reminder, this is a multi year long term plan comprised of several key programs and value drivers, including a new fleet card program retail price optimization, new digital platforms for our guests as well as the continued focus on controlling operating expenses and capital allocation.
I've had an opportunity to review the value creation plan and feel that all of the components of the plan or the appropriate areas that we should focus our attention on in the near term.
As I review the plan it was clear that the intent was to deliver strong annual earnings per share and EBITDA growth, while increasing return on invested capital.
Im confident that the plan will collectively deliver on this expectation.
With this in mind I would like to share with you some of the key milestones that we accomplished over the course of the last quarter.
I will begin with the new fleet card program.
We launched this program in late October last year. We currently have over 2000, new accounts with approximately 11000, new cards issued.
Although the utilization of these cards ramped up slower than we expected is gained momentum recently as we focus additional resources around the program.
In addition, we continue to engage universal card providers as part of the overall approach to our fleet card strategy.
The total fleet gallons in our first quarter grew approximately 9% compared to a year ago, we remain optimistic about the potential of the overall fleet program going forward.
Price optimization is another key program and our value creation plan.
This will enable us to leverage the sales data generated by our broad network of stores combined with market data to make centralized rules braced pricing decisions at the pump and in the store, which we anticipate will improve gross profit dollars across all categories throughout our network.
As we mentioned in our last call. We completed the implementation of price advantage to all of our stores to assist in fuel price optimization.
During the first quarter, we began the integration of this tool directly with our point of sale system.
This will give us greater agility in adjusting retail prices in response to the ever changing fuel environment.
We anticipate having this phase completed by the end of September .
As we've mentioned before we are utilizing dunnhumby as our price optimization platform inside our stores.
After completing the successful test and learn pilot in the fourth quarter last fiscal year, we've created six distinct geographic pricing zones.
The pilot provided an incremental lift in revenue and gross profit versus the control group.
During the first quarter, we rolled out this platform to the center of our store and we'll continue the integration of the rest of our store over the course of our second quarter.
We're excited about the benefit these programs will bring to the company.
We continue to progress with our digital engagement program and have completed several key milestones over the last quarter.
As we mentioned in the last earnings call. We completed the integration of our new ecommerce website at the start of our first quarter. In addition to this we rolled out our new mobile app. During the first quarter. This platform provides an enhanced guest experience by streamlining the ordering and checkout process and allowing the guest to pay online.
In addition, the system automatically engages cross sell opportunities to the guests during every order.
Currently over 28% of our pizza orders are transacted online up from approximately 18% a year ago.
These new tools will provide opportunities for us to better understand the buying preferences of our guests. We're currently in the process of building out our consumer insight and analytics team to better leverage the data and insights.
During our second fiscal quarter, we will begin the process to launch our loyalty program.
We will start by implementing an employee pilot followed by a pilot in select geography.
Building upon what we learned from these pilots will then move forward with the expansion of the new loyalty program to all of our stores.
We are confident this approach will enable us to provide the best experience for our guests upon the full launch of the program.
The integration of the new suite of digital platforms for our guests will create a seamless experience both online and in store that enhances our digital capabilities and facilitates personalized marketing and rewards.
This digital platform allows us to gain a better understanding of our guest shopping behavior to better serve them. We expect this platform will increase our average basket size and drive additional traffic.
Another element of our value creation plan is a disciplined approach to capital allocation and increasing shareholder value through dividends and share repurchases.
Our capital allocation strategy, we will continue to prioritize investments with attractive return profiles, including our value creation programs as well as disciplined store growth through new store construction and strategic acquisition opportunities.
In closing, we continue to take transformational steps to enhance store performance and deliver long term profitable growth.
We will continue to review and had skillsets to successfully execute on our strategy to drive significant long term shareholder value.
We will now take your questions.
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Our first question comes from Chris Mandeville with Jefferies. Your line is open.
Hey, good morning.
Chris Bill Bill if we could start off just with the comments around rising cheese prices.
Did you proactively take any pricing to offset this pressure in the quarter and maybe if so.
To what extent and then how is how much did that maybe influence.
Consumer at last 50 in the quarter if at all.
Yes, no to answer your question, Chris we didn't proactively take any price increases to offset that as you know we're certainly in a competitive pricing environment in that particular area of the business and so we want to make sure that we continue to offer a value proposition to our to our guests with respect to the cheese cost from a comparative standpoint last year in Q1 of $1.87 a pound we're about $1.96 a pound for this quarter and just as a reminder, about every 10 cents per pound is roughly about 30 to 35 basis points to the overall prepared food margin.
Currently to give you kind of perspective, Chris we're about to low seven.
A pound we anticipate this declining towards the back half of the calendar year. This has always been a cyclical product for us and so after the school contracts get in place, we typically see a downward movement and look for opportunities.
Okay and then.
As we think about your enhanced fuel procurement practices.
Can you help us understand what's the reasonable assumption to think about when it comes to gallons transitioning over to short term contract versus spot buying by fiscal year end.
To what extent that may be reflected in guidance today.
Yes, so I'll give you a little bit of directional comments, there and so first of all three will fuel procurement had very little to no impact in the margin in the first quarter.
We have executed on a multitude of short term contracts here that you will see start to benefit our company here in the second quarter and then the rest of the fiscal year roughly right now we have about to about 11 or 12% of our fuel volume under contract.
Which is very different obviously than.
Structure than when we are buying on the spot market.
Now where that goes in the future I guess, we'll determine as we kind of progress for the remaining part of this fiscal year, but definitely we are progressing to have more and more of our fuel gallons to be on a contract basis, we definitely see some benefit moving forward and then with that.
Okay, and then just the last one for me.
Since you've actually outlined the value creation plan from six quarters ago.
You guys are now averaging pretty healthy EBITDA growth of around 12% on average so.
Just based on what lies in front of you with loyalty fuel procurement.
Additional price optimization and from various marketing initiatives.
Is there any reason to believe that such growth won't hold if not actually maybe improve for the remainder of the value creation timeline.
Well I'd, probably I'd, probably fall short of giving any type of forward looking expectation in that regard, but I think directionally you're on the right path.
We start thinking about some of the cadence that we have going forward. The rest of this fiscal year next fiscal year and Darrin alluded to this weekend, we kicked off ecommerce platform beginning of the fiscal year, just launched the mobile app.
We're seeing certainly online orders escalate.
In that area as well later this quarter, we'll begin the launch of the loyalty program.
And then as I mentioned, just previously that fuel procurement will start to take off in the back half of the year. So we're excited about the direction of the company with all of those to benefit us.
Perfect I'll leave it there thanks guys.
Thanks.
Our next question comes from Bobby Griffin with Raymond James Your line is open and good morning, everybody I appreciate taking my questions I just want to first follow up on Chris' question on cheese and kind of the cost environment inside the store when we looked at the margin guidance for the year for prepared foods found can you maybe just give us a little color on what's baked in there from a general cost environment inflation wise.
Well from a cheese costs I wouldn't have the expectation with the cheese cost environment would be but thats taken a consideration when we when we formulate that margin guidance. It's a combination of a lot of things bodies looking at external or macro issues cheese would be one of those issues could also be looking probably more in this case at our promotional activity that we have forthcoming.
And so when you think about some promotional activity that we have coming.
As I mentioned in one of the first questions. There is a competitive landscape in prepared foods, we want to make sure we offer value proposition generally speaking thats going to be a margin detriment in that regard. However, I would say price optimization might be a benefit for us with respect to maybe kind of boosting the margin.
Yes, Bobby this is Darren I guess, the only thing I would add to what Bill said is the the ability of our digital platform to be able to target that promotional activity towards specific gas as opposed to having a.
Blanket approach to promotional activity should help us be a little more effective in that and not have to be as margin.
Degrading as we go on.
And try to drive more traffic.
Okay I appreciate that Thats helpful and thanks, Darrin Bill I was actually my next question was right. There on some of the exciting things you guys are doing digitally.
And can you maybe just expand upon what you're seeing in some of the early learnings from the ecommerce platform with a mobile app that illustrate some of the confidence you have in the same store sales accelerating through the year, either maybe ticket size online versus in store or anything like that to help us get a better grass on what the opportunity is.
Yes. This is this is Darren again and.
Yes, we've seen.
Some pretty positive results, so far and really across the board. We're having good success in conversion rates and were seeing transactions.
Accelerate positively versus prior year on our digital platform.
We're also seeing some uptick on the average order volume or the average order size, so kind of across the platform, we're seeing that growth and as I mentioned earlier.
We're about 28% of our orders for peace are coming online so.
Or digitally so we we believe that can continue to grow we're just barely.
Very early stages in that process and so we'll continue to move forward with that.
Okay, well thanks for I. Appreciate you guys answering my questions and best of luck in the second quarter.
Hi, Thanks, a lot thanks.
Thank you. Our next question comes from Sharma with Stephens. Your line is open.
Hi, Good morning, guys just jump good morning. This morning.
Just wanted to ask about operating expense growth, how sustainable is opex growth at this level.
Yes ill start that one off here. So this was one of the lowest increases that we've had in quite some time and obviously to credit to the store operations team and and a continued focus and trying to match our labor hours with the with the guest experience and so you noticed that we didnt change anything with respect to the range and operating expense, obviously, we anticipate going forward and acceleration in comps across the board and with that we certainly have to anticipate labor hours, increasing to kind of match that guest experience. So.
We think about it from a high level I would probably look at it this way.
You look at about a same store operating expense in that low single digit unit growth in that for a 4%.
So you're getting a high single digit as kind of maybe a run rate on a normalized basis that you should be thinking about.
Okay, Great and then.
So just wanted to get your take on the cadence of the prepared foods in the grocery comp I know you are expecting prepared food comps to lift off and the.
Commerce platform China.
Progressive but I was wondering if you were able to provide a cadence.
Well.
Good you had in there yes.
I'll go ahead and take that.
Yes, obviously, we are a little bit soft in the first quarter and.
Well, we saw sequential improvement throughout the quarter.
And and again in August we saw another improvement so.
The intent all along as you look through the year was that we had growth accelerating throughout the year on prepared food and found as we stood up the digital platform side.
So I would think about it just like that as we continue to.
Get higher penetration of our digital platform and then ultimately launch our loyalty program you should expect to see some acceleration in the prepared food and found comps as we move forward through the year.
Okay, great well. Thank you guys I think I will leave it right there.
Thank you thanks.
Our next question comes from Bonnie Herzog with Wells Fargo. Your line is open.
Hi, there this is patty on for Bonnie.
Matt You mentioned, Hey, you mentioned your optimism about your insights to our price optimization tool in terms of grocery and I just wanted to ask when do you expect the tool to be fully rolled out and what kind of lift do you think it could contribute on an ongoing basis too.
The comp and then more specifically on the quarter.
The 3.2% same store sale that you posted pretty nicely above street expectations wanted to ask if it was above your own internal expectations and if so how much of that was from category momentum versus price optimization. Thanks.
Yes, so for price not ill try to answer all those questions. So we don't get that Patty Please circle back with us but.
Price optimization inside the store.
We did our test pilot testing and we noticed a couple of things we alluded to this we saw definitely an increase in revenue on a control group probably more significant we saw an increase to a greater extent on the margin side.
And so we are anticipating in the back half of year to see benefit from price optimization inside the store being rolled out in both of those areas. That's part of the sequential movement of comps moving forward.
Now with respect to that 3.2% comp and growing general merchandise one of the things that we weren't quite sure of coming into this fiscal year was we were going to be lapping the jewel products the rollout last fiscal year.
We weren't sure that momentum will continue in the same trajectory that it did last fiscal year and so we were certainly pleasantly surprised that the the popularity of that product continues to be relatively robust.
So the some other questions there maybe circle back with.
No actually it I'll just leave it there thank you.
You bet.
Our next question comes from Irene Nattel with RBC capital markets. Your line is open.
Thanks, and good morning.
And just continuing with the line of questioning around at the grocery category Bill closing was in your prepared remarks, mainly it was Darren you mentioned that ex cigarettes. It seemed the category was really strong can you talk about what you're seeing in beverage and other key inside category. Please ex cigarettes.
Yeah, I'll have Dan can take that one.
Yes.
Yes that was correct, we did see pretty strong growth exit.
Next cigarettes and.
It was really somewhat across the board we saw growth in the grocery category overall and saw sequential improvement throughout the quarter in alcohol in particular, but also in packaged beverages, we moved through the quarter. So those are really the three main areas that we saw the growth and that was somewhat offset by our cigarettes performance.
That's that's helpful. Thank you and the strength that you're seeing in both alcoholic packaged.
It is.
Is that a result of sort of a deliberate strategy shift in promotional tactics.
And were you able to sort of see any correlation between that and the weather trends during the quarter.
Well.
First to answer your first question I think it was a combination of some deliberate activity, particularly in alcohol, we've expanded through a number of stores with liquor and with wine and so we're seeing very strong growth in those two categories, albeit on a somewhat smaller basis, and then we're seeing momentum as well with.
With the.
Flavored alternative beverages, so like the hard selzer's and that sort of thing within the beer category on the packaged beverage side.
We're just seeing Conns continued strength in energy, although not as strong as it had been in years past.
And your graph to help me Irene what was your other question.
My other question was just really around weather in the quarter.
And what that might impact that might have had.
Yes, definitely may have an impact on us and you see it in the beverage categories across the board.
Alcohol packaged beverage and then found as well that was our toughest month and then every month got sequentially better as the weather starts to improve so theres definitely a core correlation there.
Irene I was going to add just on your first part of that question with respect to the beer category. We've also benefited from a couple of state law changes in Oklahoma and Kansas.
They are now able to sell a stronger alcohol content beer and that has been a nice boost in those two states for us.
That's great. Thank you and then I was just wondering if you could give us a little bit more color around the results of.
Sure of the zone pilots, you mentioned, some lift to topline some lift to margin, but which categories. In particular do you see it what kind of differential are you talking about in terms of pricing and does that make you think a little bit more about perhaps extending to the prepared foods category.
Yes, it's probably a little preliminary for us to to maybe give results of the pilot as we now are starting to stand that up but probably the best way to characterize that Irene is right now.
When we did that control group without mentioning specific items, we definitely reiterate this from a previous answer definitely saw a much higher impact to the gross margin than we did the revenue side of that I think this is one as we get more traction.
I would expect you to hear from us on this and how how thats performing going forward with respect to those zones. So in some of those cases some of those zones will be moving pricing up in certain key category. Some cases will move in products down it really depend on the competitive landscape there, but we're anxious to get that kicked off in and be able to report.
And like we do every quarter on the progress.
Thats, great and are you thinking at all about doing something similar with your insights to our category as far with your prepared foods categories.
Yes, yes, we'll certainly do that an updated with the progress that of all the categories impacted.
That's great. Thank you.
You bet Irene.
Our next question comes from Karen short with Barclays. Your line is open.
Hi, first housekeeping just how are you.
Good.
Just the credit card fees in the quarter.
$40.4 million.
Okay.
Okay. So I wanted to just talk a little bit about your guidance on the gross margin front.
Obviously.
You know Jeff margins were stronger than your guidance is for the year this quarter and you're really only early stage in terms of percent of fuel that you're purchasing on contract. So wondering kind of what your thoughts are on on the conservatism with the gas margin for the year guidance.
And then on the contract side, just any color you could give on what percent of fuel you think you'll have on contract by year end.
Yes, Karin this is Darren I think.
With respect to the fuel margin guidance.
We we had a combination of factors in Q1 that helped US obviously is a favorable fuel margin environment and I think we are better able to capitalize on that because of the price optimization capabilities that we've been building over the past year. So I wouldn't want to take that margin and extrapolate that to the to the rest of the.
Can you guys here.
No just like one completely blank.
Okay.
Ladies and gentlemen, please standby once again, please stand by your conference call will resume momentarily.
Ladies and gentlemen, please me your line your comps call will resume momentarily once again, please meaning your line your commscope will resume momentarily.
Sorry, maybe Brazil.
Okay, Hello, I'm, sorry about that.
Karen are you there now.
I am here you can hear me.
No not intentional Karen just so you know.
Thank you Mr. brilliant answer to the question that otherwise [laughter] I think we wouldn't want to extrapolate for the whole year.
So yeah, Okay. That's what I was on the fuel margin size I think you've got that answer and then with respect to our contracted fuel volume.
We expect to have about 28% to 30% of our.
Overall volume under contract this year.
Okay.
And then my second question was.
Obviously, you've talked about you talked about the 20% online I guess.
In terms of purchase I was wondering if you could give a little color on the average ticket online versus in store and what the attachment rate is now that you have I know, it's early stage, but now that you have visibility to cross sell on the App.
Yes, the conversion rate continues to climb on that as far as the average order volume.
Over the last probably six to nine months, we've increased that about a full dollar.
And continue to make strides in that so we're excited about what the opportunity presents for us as we get fully integrated with all the digital.
And so what would the difference beyond online versus in store.
For the average order volume, yes, total what is the actual ticket.
It's about well the difference is going to be about a dollar average ticket online is little over $20, but $21 online.
Okay.
And then wondering just you made some comments on.
Areas of expense management opportunities I was wondering if you could elaborate on that a little bit and then also just give a little color on what kind of greater efficiencies you plan to be able to accomplish at the new DC like what's changing would that that new DC specifically.
Yes, I'll start with the operating expense and Darren I can dovetail on the DC question. So one of the probably one of the things that stands out as far as an initiative that we're undertaking is finalizing the time and motion study and so this will provide an opportunity because all of our tests are very replicable across into 16 stay chain and so once we have a better understanding of the time it should take two to make a pizza to take out the trash so forth and so on will be able to take that information and sitting on top of the scheduler and be more efficient in this in the scheduling of our labor hours on a site by site basis to mass Apis that particular activity of that store, we think thats going to.
Provida, probably a better guest experience from a from a staffing perspective labor hours on a site by site basis. So that's one of the things that would stand out in that regard now with respect to the third distribution center Deron take that.
Yes, Karen on the distribution centers essentially what we've got today.
With our two distribution centers, we started to develop further south in our network and what.
What's resulted from that is a bit of inefficiencies, we try to self distribute into that geography, and as we measure that.
By the cost per pound to distribute and we started to see that cost per pound going up because we are driving further to support those stores. So as I mentioned then.
In my script that we are looking towards the southwest part of our geography to place a third distribution center and that will essentially just create more efficiency as those.
Those deliveries to those stores will will be far more efficient, we'll take some of the inefficiency off of.
The other distribution centers, particularly in Anchorage.
The agony distribution centers over capacity right now and so we've had to lease some extra space to be able to support the stores. So.
Once that distribution center gets up and running it will relieve all that pressure and we expect to see.
Cost per pound to distribute go down as well as.
Further, enabling our ability to grow.
More effectively in that geography.
Is there any way to quantify what the cost savings might be.
Yes, but we're not prepared to share that at this point.
Okay. Thank you.
Our next question comes from.
Kelly Bania with BMO capital your line is open.
Good morning, Thanks for taking my questions.
Hi.
Just wanted to ask just about general.
Customer traffic trends inside the store how they compared.
This quarter to maybe what you've seen in the last couple of quarters.
And then also just on terms of the loyalty program can you share with us some details about how that will work what is differentiated.
Versus competitors, there and and just remind me on the timing are you testing that in Q2, and then rolling that out later in the year.
Just some clarification on that would be helpful.
Sure.
First of all your first question there.
Okay and multiple questions in there so with respect to.
Hi, guys sorry.
Yes traffic. So we were down slightly if you look at customer count on excluding commissions and fuel inside the store, we were down slightly and had been down slightly for some time, we as you know we're in kind of an environment here in the Midwest. It has been pressured due to to do a continued downward movement of the farm income. However, it has been becoming less of a.
An impact for us, we've been getting better and better with the customer account and that's part of the process that we moved to digital.
And so that's that's the question with respect to the digital launch loyalty launch it will have Darren take that.
Yes, Kelly for the loyalty program.
Yes, a couple of things first of all I'll tackle the timing like I mentioned in the script.
We're about to begin our our testing and pilot of that so.
That's going to be largely contingent on how everything works in the pilot, but we anticipate that it will be late Q2 early Q3, when we would.
Launch that loyalty program, assuming everything works out.
As far as what differentiates the program versus anybody else I'm not prepared to share that at this point for competitive reasons, but.
Suffice it to say, we believe we have a long way in that will resonate uniquely with our guests and provide incremental value above and beyond what they might find other places so.
We feel really good about the platform itself and we just got to get through the the pilot process before we can get at launch.
Okay. That's that's fair.
I guess just another follow up in terms of of the distribution.
Now.
Kind of focusing on adding that third DC I guess Darren is there any any more thoughts now that you've had a little more time to kind of evaluate just the thoughts around maybe adding more fresh capabilities over time with more frequent deliveries.
Just any updated thoughts on that.
Yeah sure.
We have done an assessment on multiple deliveries per week to our stores and we're continuing to evaluate that as an option.
At the moment given the the situation where were overcapacity and distribution centers, we really aren't in a position to start that at this point, but once we get the third distribution center up and running then then we'll be in a better position to perhaps capitalize on that opportunity.
Thats, Okay Thats helpful. Maybe last one for me.
In terms of in terms of the free cash flow outlook I think Darren.
A couple of months ago, you talked about.
Maybe some more efficient approaches to cut to capex.
And that was just curious if you had any more details.
That you could share with us on how you may be able to accomplish that goal.
Yes, we are still in.
The planning phase of of all of that but the things I mentioned last time, we're just taking a look at it how we build our stores today and the opportunity to potentially take cost out without degrading the desk. The guest experience at the same time, we're taking a look at non fuel sites as a potential fill in opportunities in geographies, where we already operate but we have.
Pockets of unmet demand and so we are assessing both of those opportunities right now, we'll keep you updated on that.
Thank you.
Thank you once again, ladies gentlemen, if you wish to ask a question at this time. Please press Star then one on your Touchtone telephone.
Our next question comes from Chuck Cerankosky with Northcoast Research Your line is open.
Good morning, everyone.
Good morning.
I noticed you've closed six stores during the quarter is that indicative of taking a closer look at the store base or just an anomaly at this point, yes. Most of that has to do with an assessment of kind of an overall network capacity looking at replacement stores, where we can better serve the community for instance, we make we may close still would like to stores and build a larger footprint. That's a function more of that not so much as to the performance of the stores.
Okay and bill looking at the.
The success of the price optimization fuel I'm thinking you have more free cash flow this year next year.
How do you feel about the stock repurchase and the dividend.
Especially given that the stock prices has moved up is that something that you guys think you have to bite the bullet on to buy back shares are you looking to add at least offsetting.
Dilution from option grants et cetera.
I'll, let darren going to take that one yes.
Chuck with respect to share repurchases, we have the $300 million authorization, that's available for us and.
I will always want to keep that option available. So we can opportunistically buyback our stock when when that becomes an attractive investment opportunity, but our focus is on growth.
And so we're always going to prioritize our growth investments over share repurchases. When we can again get the attractive returns that we're aiming for so.
That's really the the mode that we're in right now and again, we have the authorization there we'll use it opportunistically, but our focus is on.
Investing capital and growth initiatives will drive greater shareholder return.
Hi, Thank you great quarter.
Thanks. Thanks.
Our next question comes from John Royal with JP Morgan Your line is open.
Hey, good morning, guys. Thanks for taking my question.
On on Capex.
The one Q run rate was well below guidance levels, which isn't unusual if I look at once you've historically.
But how should we think about the cadence for the rest of the year to hit.
He has been a ramp in Q.
More ratable in the second half or the kind of more ratable throughout.
Yes, you are correct typically in the past we have been a little bit more lumpy in the in the back half of the fiscal year when it came come to Capex spend.
We opened up 15 stores in our first quarter as you know we have a goal of 60.
We'd expect a relatively smooth cadence the rest of the fiscal year.
Now however, keep in mind with the third distribution center I would anticipate capex ramping up a little bit more aggressively as we get into that distribution center. We also have a an addition going on currently with our corporate facility here as well so I would expect that to move but we still do you still think that 516 would be a number thats when we update every every quarter as well.
Okay great.
And the next question on distribution Center and.
Appreciating that you guys aren't disclosing the exact location at this point, but.
When I look at the southwest of your territory.
The expansion of the radius for new stores should we be thinking about expansion into new states or would this be more of a further build out two three already operate.
Kansas, Oklahoma for example.
Yes, I certainly I would certainly think that the the new distribution center will bring about the opportunity of new states.
Right now.
The state of Oklahoma, we penetrated here in the last year, or so and that state of doing exceptionally well for us and we have quite a few more sites going up in that area, but definitely at their distribution center will allow us to efficiently expand in other geographies.
Great and then just one last one is more of housekeeping on the DNA.
The onetime adjustment anticipated when you rolled out the guidance just thinking about.
Kind of flattish year over year, and then the double digit guidance.
Implies some pretty a pretty substantial increase for the rest of the year, but my thinking about that correctly.
No. It was not contemplated in the guidance. So intuitively, that's probably one of those areas that we could adjust the guidance downward, but as Darren mentioned previously we felt you after the first quarter, maybe wasn't prudent for us So look for us to comment on that after the December call.
Great. Thank you.
You bet.
Our next question comes from Damian Witkowski with GE Research Your line is open.
Hi, good morning, guys.
Hi, I have a question on on fuel and profit optimization, there because I think thats the most.
Advanced programs that you have in that and that.
Initiative, and well where are we in terms of just rolling it out and testing it and actually getting the feedback necessary so meaning that.
Is there still room on the upside in terms of optimizing price by by geography, and have you had to roll back any geography, so I'm just from a competitive.
Spas perspective.
Yeah Damian.
Thanks.
From the rollout standpoint, we're just about completely rolled out in terms of the execution on price optimization, we still have some technology to put against about 400 stores, where we'd have automated price signs and that will get done here over the course of the year.
But I think in terms of the fuel pricing dynamics I mean, there's a lot going on it's obviously a very fluid play so as we continue to optimize our approach to pricing in the marketplace or competitors continued to adjust their position based on what we're doing and then that causes us to have to react to that adjustment. So I would expect over the course of the next year or so we're going to see some of the sizing of that positioning as as all of us and our competitors kind of react to the new normal and so.
It will be somewhat of a fluid environment I would expect over the next 12 to 15 months or so yes, I mean and just in general I mean, your your your thoughts on.
Are they are the competitors happy if someone's actually moving the price up and because they need the gross margin dollars as well or or are they.
And most by trying to steal back market share from you.
I have no way of knowing how they feel about what we're doing.
No word I want to speculate on that but.
Again, thats going to be competitor by competitor market by market and so we just we take the position we're going to take and our position may vary market to market, depending on the competitive set.
Okay, and then just staying on the field.
The fuel being under contract does that take away the opportunity to sort of when fuel goes down in crude goes down in price and you have typically higher margin does that.
At all affect how does that affect your ability to sort of capture that margin during those periods of time.
Well I think there's two different things going on we have supply under contract and yes, we're going to get to enjoy.
The downside of that when when commodity prices come down.
It doesn't in any way influence our ability to price at retail. So we can continue to manage how we approach those those cost decreases from a retail standpoint to capture margin if we elect to do that.
Okay alright, thank you.
Thanks, Dan.
Our next question comes from Chris Mandeville with Jefferies. Your line is open.
And thanks for the follow ups.
But bill Bill or Darren just looking at a few items or perhaps you've got that Midwest mystery. Pete and then you also introduced or at least replaced breaded chicken with a crispy chicken sandwich.
How should we think about newness to the menu board the possibility of maybe further rationalization.
And how that might influence margin or mix over time.
Yes, Chris this is Darren.
Yeah, you called out a couple of new food items, they are performing pretty well for us right now.
I think what you can expect is we'll continue to innovate around the menu I do believe we have an opportunity to rationalize our assortment to a certain extent, but that work.
Has yet to begin so we've got a lot of work to do on prepared foods from that standpoint, but.
I think in the near term.
You should expect that we will continue to innovate around our core items and look for opportunities to rationalize and get a little more efficient and effective with the breadth of our offerings.
Okay, and then bill one of your peers recently executed on a debt re Fi.
Can you update us on any possibility of doing something similar on potential timing there.
Yes, certainly give you a little bit of color. There. So as you know Chris we have a bullet payment of $569 million bullet payment. Due next August we still have make whole provisions that we need to contend with between now and then and so obviously treasuries have come down in the spreads have remained tight so I think we're in a very good opportunity.
To refinance and so we'll begin to start looking at that here between now and the end of the calendar year. So more to come there at this point, but I don't see any.
Concern on a refinancing risk.
All right and then just the last one for me just on your one of your latest filings.
That youve opted to expand the board size range can you, maybe just walk us through that thought process.
Is that an indication that you actually want to add a few body for certain skill set and if so is there any maybe color with respect to what sort of background you're looking for.
Yeah, Chris This is Darren.
No that really wasn't anything around.
Proactively adding more board members to the board I think you're pretty well aware that we just had a fairly significant board refresh and have five new directors within the last I guess, it's about two years so.
No. This was really more of a more of an effort to help facilitate a succession planning and transitioning so.
As.
Because we were at our authorization prior we're at full capacity from our board. So if we had anybody that was intending to retire off with the board we would have to lose lose them before we could add as a board member and I think it's a better practice to have some overlap so that those new directors can get up to speed and we can track transition more effectively. So that's really what this is all about is just giving us the bandwidth to do that at the appropriate time.
Got it thanks guys.
Thanks, Chris Thanks.
Thank you and Im showing no further questions at this time I would like to turn the call back over to Dara Pallas for closing remarks.
Okay. Thank you and I'd like to thank everyone for joining us this morning, and close the call by reiterating our key initiatives are designed to position cases for accelerated revenue growth and improved profitability through our long term value creation plan. This will be accomplished through a disciplined capital allocation strategy that focuses on prioritizing high return growth and profitable initiatives.
So with that I'd like to thank everybody and have a great rest of the day.
Ladies and gentlemen, this concludes today's conference thank for joining and everyone have a wonderful day.