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No. of Recommendations: 3
Casey's General Store

While looking at several convenience store operations like 7/11 and the Pantry, I found this small little- known company that has some interesting features. Its located mainly in the midwest in small towns and this is where they intend to stay. Since I live in the west, I had never heard of them.

Management believes that its current market area presents substantial opportunities for continued growth, and the Company intends to concentrate its expansion efforts in this area before pursuing expansion in other geographic markets. In the opinion of management, the Casey's Distribution Center in Ankeny, Iowa can adequately supply the general merchandise requirements of over 400 additional stores.In its expansion, the Company intends to follow its traditional store site selection criteria and to locate most new stores in small towns, and along busy highways near or at the edge of larger metropolitan areas. Management believes that, if there is no competing store, a Casey's General Store may operate profitably at a highway location in a community with a population of as few as 500 persons.

Casey's has traditionally has located its stores in small towns not served by national-chain convenience stores. This gives them less competition to deal with ie WalMart. Approximately 63% of all stores operate in areas with populations of fewer than 5,000 persons, while approximately 11% of all stores are located in communities with populations exceeding 20,000 persons. Casey's provides a service not otherwise available in small towns and a convenience store in an area with limited population and competition can be profitable if it stresses sales volume and competitive prices.

Casey's General Stores are free-standing and, with a few exceptions to accommodate local conditions, conform to standard construction specifications. This link will give you an idea of what they look like:

http://www.caseys.com/

The current store design measures 40 feet by 68 feet, with approximately 1,300 square feet devoted to sales area, 500 square feet to kitchen space, 500 square feet to storage and two large public restrooms. Store lots have
sufficient frontage and depth to permit adequate drive-in parking facilities on one or more sides of each store. Each store typically includes three or four islands of gasoline dispensers and storage tanks having a capacity of 24,000 to 30,000 gallons of gasoline. Stores remain open at least 16 hours per day, seven days a week.

What they sell

They sell the same products offered in a supermarket, except that Casey's does not sell produce or fresh meats, and selection is generally limited to one or two well-known brands of each item stocked. Most staples carried are of nationally advertised brands. Stores sell regional brands of dairy and bakery products, and approximately 84% of the stores offer beer. The non-food items carried include tobacco products, health and beauty aids, school supplies, housewares, pet supplies, photo supplies, and automotive products.

All of the Casey's General Stores offer gasoline or gasohol for sale on a self-service basis. The gasoline and gasohol offered by the stores generally are sold under the Casey's name, although some franchises sell gasoline under a major oil company brand name.

Casey's has added prepared food items to its product line over the years. In 1980, they initiated "snack centers" which now are in all stores. The snack centers sell sandwiches, fountain drinks, and other items that have gross profit margins higher than those of general staple goods. Since their margins are thin, expanding these sales would be an important growth strategy. They also sells donuts, prepared on site, in approximately 97% of the stores as of April 30, 2003. You can also get cookies, brownies, danish, cinnamon rolls and muffins.

Casey's began marketing made-from-scratch pizza in 1984, expanding its availability to 1,205 (90%) stores as of April 30, 2003. Pizza is their most popular prepared food product. They also make pork and chicken fritters, sausage sandwiches, chicken tenders, sub sandwiches, breakfast croissants and biscuits, breakfast pizza, hash browns, quarter-pound hamburgers and cheeseburgers, hot dogs and potato wedges. They are attempting to expand their prepared food segment. These seem to be foods that would be very appealing to the same clientele that buys food away from home at chains such as McDonalds, Burger King and Wendy's. Success hinges on taste price and lack of competition. I can't speak to any of these at present. However, the company believes it can be competitive in price. They attribute this to their central distribution system, purchasing practices which avoid dependence upon jobbers and vendors by relying on a few large wholesale companies and success in minimizing land, construction and equipment costs.

The following table shows the number stores in each state on April 30, 2003:

 
 

Company Franchised
State Stores Stores Total
---------------------- ------- ---------- ------
Iowa ................. 319 28 347
Illinois ............. 356 10 366
Indiana .............. 56 0 56
Kansas ............... 103 1 104
Minnesota ............ 84 6 90
Missouri ............. 265 6 271
Nebraska ............. 58 4 62
South Dakota ......... 34 0 34
Wisconsin ............ 15 0 15
Total ............. 1,290(96%) 55(4%) 1,345(100%)

Same Store Sales

Years ended April 30, 2003 2002 2001
------------------------------------------------------------------------------
Corporate stores
Average retail sales $ 1,659 $ 1,618 $ 1,590
Average retail inside sales 648 646 584
Average gross profit on inside items 239 228 218
Average retail sales of gasoline 1,011 972 1,007
Average gross profit on gasoline 74 69 81
Average operating income 82 75 88
Average number of gallons sold 732 755 692


Franchise stores
Average franchise revenue $ 34 $ 35 $ 35

Average retail sales increased 2.5% in 2003
Sales of retail inside sales only up 0.3%--this is a poor showing
Sales of gasoline up 4%
Growth in same store sales in not high. If they continued at same rate growth would be a little over 4% per year.

Same-store comparisons include only those stores that had been in operation for at least one full year on April 30 of the fiscal year indicated.

Income Statement in thousands

2003 2002 2001

Net sales $ 2,155,606 $ 2,032,226 $ 1,904,899
Franchise revenue 2,451 3,059 3,767
------------ ------------ ------------
2,158,057 2,035,285 1,908,666

Cost of goods sold 1,743,971 1,658,511 1,558,147
Operating expenses 290,801 268,766 241,444
Depreciation and amortization 47,299 44,702 41,492
Interest, net 13,030 12,756 11,998
------------ ------------ ------------
2,095,101 1,984,735 1,853,080

Income before income taxes 62,956 50,550 55,585
Provision for income taxes
23,420 18,805 20,584
------------ ------------ ------------
Net income $ 39,536 $ 31,745 $ 35,001

Earnings per common share

Basic $ .80 $ 0.64 $ 0.71
Diluted $ .80 $ 0.64 $ 0.71

Ratios for the income statement

2003 2002 2001 2000 1999
Gross Profit 19% 19% 19% 20% 23%
Operating Margin 6% 5% 5% 6% 8%
Net Margin 2% 2% 2% 2% 3%
Growth in Revenue 5% 7% 17% 32% --
Growth in Net Income 25% -9% -11% -2% --
Growth in COGS 5% 6% 18% 38% --
Change in Marketing Costs 0.01 0.12 0.17 0.16 --

**Income from franchises is decreasing per the company's plan. They would like to have all stores be company stores eventually with no franchisees
**Revenues are up slightly
**Operating margins up only slightly

**Net income has increased faster than revenue helped by proportionally smaller increase in marketing costs and COGs
**Growth may continue to slow (compared to 1999-2000) if store openings remain at current low levels
**Although retail sales of non-gasoline items during the last three fiscal years have generated approximately 38% of retail sales, such sales resulted in approximately 75% of the gross profits from retail sales. Gross profit margins for prepared foods items, which have averaged approximately 57% during the last three fiscal years, are significantly higher than the gross profit margin for retail sales of gasoline, which has averaged approximately 8% during such period. I would like to see them increase their prepared food business.

**Net sales for fiscal 2003 increased 6.1% to $2,155,606, primarily due to a 7.6% increase in gas prices and the net addition of 32 corporate stores. Retail gasoline sales for the fiscal year were $1,290,094, an increase of 8.3%, and gallons sold increased .7% to 934 million. Retail sales of grocery & other merchandise increased 4.7% to $825.2 million.

**Cost of goods sold as a percentage of sales was 80.9% for fiscal 2003 compared with 81.6% for the prior year. The decrease was caused by an increase in gas margin to 7.9% of sales in fiscal 2003 from 7.6% in fiscal 2002.

**The grocery & other merchandise margin increased to 31.5% from 30.3%, primarily attributed to the scanning of tobacco products. The prepared food & fountain margin increased to 59.4% in fiscal 2003 from 55.4% the prior year. The improvement was due to buying forward to lower the wholesale cost of cheese, obtaining other products at decreased costs, making price adjustments, introducing new food items, and reducing stales.

**Operating expenses increased 8.2% in fiscal 2003, driven by higher insurance costs, increased bank fees resulting from customers' greater use of credit cards, and the larger number of corporate stores. These factors also increased the operating expense ratio to 13.5% of sales in fiscal 2003 from 13.2% the prior year.

**Net income increased to $39,536 in fiscal 2003 from $31,745 in fiscal 2002. The increase resulted from the combination of higher gasoline and grocery & other merchandise margins.

Growth

Two company stores were opened in May and June 2003 and 11 company stores were under construction at June 30, 2003. On June 30, 2003, the company had purchased or had the right to purchase 11 additional store sites. All the stores under construction or planned for construction on such sites will be company stores(no franchises). Management anticipates opening approximately 15 new Company Stores during fiscal 2004.

Balance Sheet in thousands abbreviated

2003 2002


Current assets
Cash and cash equivalents $ 40,544 $ 18,946
Short-term investments -- 10
Receivables 5,742 5,127
Inventories 63,009 60,498
------------ ------------
Total current assets 116,874 97,619

Other assets 808 992
Property and equipment, at cost
Land 166,262 155,794
Buildings and leasehold improvements 386,552 366,328
Machinery and equipment 463,240 429,012
Leasehold interest in property and equipment
(Note 6) 9,712 10,446
------------ ------------
1,025,766 961,580
Less accumulated depreciation and amortization 368,123 324,936
------------ ------------
Net property and equipment 657,643 636,644
------------ ------------

Total assets $ 775,325 $ 735,255
Liabilities and shareholders' equity
Current liabilities
Note payable to bank $ -- $ 5,275
Current maturities of long-term debt 19,897 9,648
Accounts payable 64,880 69,912
Accrued expenses
Property taxes 8,011 7,470
------------ ------------
Total current liabilities 117,338 112,073


Long-term debt, net of current maturities 162,394 173,797
------------ ------------
Total liabilities 371,087 366,036
Shares outstanding 40,008 39,562
Retained earnings 364,230 329,657
------------ ------------
Total shareholders' equity 404,238 369,219
------------ ------------
Total liabilities and shareholders' equity $ 775,325 $ 735,255

Balance Sheet Ratios

2003 2002 2001 2000 1999

Current ratio 1.00 0.87 1.05 0.53 0.84
Quick Ratio 0.35 0.17 0.23 0.11 0.07
Accounts receivable growth -39.16% 68.24% 107.32% 46.43%

DSO 1.47 2.54 1.61 0.91 0.82
Days Inventory on hand 13.19 13.29 12.11 11.42 17.91
Day Payable Outstanding 13.58 15.35 15.83 16.83 16.77
ROA 5.09% 4.31% 5.05% 6.32% 0.00%
ROE 9.77% 8.59% 10.28% 12.76% 13.32%
ROIC 12.53% 10.79% 11.97% 13.99% 3.04%
Fixed asset turnover 3.28 3.23 3.29 3.01 --
Debt to equity 45.10% 51.11% 56.56% 54.60% 46.14%
Debt to capitalization 31.08% 33.82% 36.13% 35.32% 31.57%
Book value 8.13 7.44 6.88 6.24 5.73
Cash per share 0.81 0.38 0.46 0.32 0.11
Working capital -0.4 -14.5 4.9 -65.6 -13.6
Non Cash Working Capital -21 -18.5 -8.6 -25.8 -2.7
Cash Conversion Cycle 1.08 0.48 -2.11 -4.50 1.96

**Accounts receivable under good control
**DSO is low, but that is the norm for a retail business that requires payment for goods at time of purchase--restaurants, grocery stores, clothing stores
**Inventory turns are good--again to be expected for a business that deals in consumables ie food and gas.Revenue recognition: the company recognizes retail sales of gasoline, grocery & other merchandise, and prepared food & fountain at the time of sale to the customer. Wholesale sales to franchisees are recognized at the time of delivery to the franchise location.

** Franchise fees, license fees to franchisees, and rent for franchise facades are recognized monthly when billed to the franchisees. Other maintenance services and transportation charges are recognized at the time the service is provided.

**Payables paid rapidly--why more quickly than a 30 day billing cycle
**Cash conversion cycle show efficiency putting cash to work
**High debt
**Increasing cash reserves
**Working capital declining--increasing liabilities, mainly debt
**Poor returns on assets, equity and capital

Cash Flow Statement in thousands

2003 2002 2001

Cash flows from operations
Net income $ 39,536 $ 31,745 $ 35,001
Depreciation and amortization 47,299 44,702 41,492
Deferred income taxes 11,085 12,136 6,000
Changes in assets and liabilities
Receivables (615) 63 (1,079)
Inventories (2,511) (8,726) (10,409)
Prepaid expenses (774) 1,645 284
Accounts payable (5,032) 2,177 6,776
Accrued expenses 5,323 2,414 2,876
Income taxes 6,333 (5,777) (5,329)
Other, net 3,270 2,711 2,384
------------ ------------ ------------
Net cash provided by operations 103,914 83,090 77,996


Cash flows from investing
Purchase of property and equipment (62,736) (97,569) (81,556)
Purchase of investments -- -- (34,190)
Maturities of investments 10 17,862 24,087
------------ ------------ ------------
Net cash used in investing activities (62,726) (79,707) (91,659)


Cash flows from financing
Proceeds from long-term debt -- -- 80,000
Payments of long-term debt (9,698) (9,510) (10,010)
Net activity of short-term debt (5,275) 5,275 (45,950)
Proceeds from exercise of stock options 346 1,051 374
Payments of cash dividends (4,963) (4,211) (3,710)
------------ ------------ ------------
Net cash (used in) provided by financing
activities (19,590) (7,395) 20,704
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 21,598 (4,012) 7,041
Cash and cash equivalents at beginning of
year 18,946 22,958 15,917
------------ ------------ ------------
Cash and cash equivalents at end of year $ 40,544 $ 18,946 $ 22,958

Ratios For the Cash Flow Statement

2003 2002 2001 2000 1999
Total shares 49.7 49.6 49.5 49.5 52.7
Growth in Capex -35.76% 19.61% -20.62% 5.22% --
Capex to operating cash flow 60.35% 117.45% 104.62% 94.31% 131.32%
Free cash flow 41.2 -14.5 -3.6 6.2 -26.5
Free cash flow per share 0.83 -0.29 -0.07 0.13 -0.50
Operating cash/Revenue 0.05 0.04 0.04 0.07 0.06
Growth in Cash Flow 384.14% 302.78% 158.06% 123.40% --

**Not much capex spending and its declining--how do they intend to grow if same store sales continue to be sluggish
**Positive free cash flow that is increasing
**They pay a small dividend--0.84% yield


Options,insider holdings, shares outstanding

average
Number of exercise
shares price
-------------------------------------------------------------
Balance at April 30, 2000 1,053,450 $ 11.04
Granted 13,000 12.31
Exercised (44,000) 8.52
Forfeited (17,000) 14.10
-------------------------------------------------------------
Balance at April 30, 2001 1,005,450 $ 11.12
Granted 325,500 11.59
Exercised (130,300) 8.06
Forfeited (27,000) 11.76
-------------------------------------------------------------
Balance at April 30, 2002 1,173,650 $ 11.61
Granted 13,000 12.58
Exercised (45,300) 7.64
Forfeited (22,500) 12.77
-------------------------------------------------------------
Balance at April 30, 2003 1,118,850 $ 11.76

Shares Outstanding: 49.86M
Float: 45.20M
% Held by Insiders: 9.36%
% Held by Institutions: 74.23%
Option dilution o 2.2%--very low
Total value $3.2 million (Black-Scholes value $2.90)
Per share $0.06

Discussion

Same store sales are not very dynamic. Couple that with only 15 new store openings and the rate of future growth is a little slow. For simplicity's sake, with 1,345 stores doing $2.155 billion in sales works out to $1.6 million per store. Assuming new stores would add $1.6 million, that is an increase of $24 million or about 1%. Not exactly high growth. Evaluating Casey's with a DCF giving them 5% growth rate for 5 years and a stable 3% growth gives a value of $8.94. Working capital has been declining 4 out of 5 years and makes the calculation slightly inaccurate. Here is a company, increasing liabilities and decreasing assets almost every year. In the short term, this works to increase free cash flow, but is not sustainable--another reason I am not ready to buy Casey's currently. At approximately $16 per share, they are probably overvalued if they don't begin to make some real commitment to growth. They can probably continue to grow slowly and pay a small dividend, but they do not look like a compelling investment now.

>^..^<
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