Casey's Reinvigorated

10/3/2011

Couche-Tard's hostile takeover attempt left a mark and strengthened this management team's resolve

Reflecting on Alimentation Couche-Tard's April 2010 $1.9-billion unsolicited bid for 1,600-unit Casey's General Stores Inc., Casey's COO Terry W. Handley is frank. "There remain some very deep feelings about the hostile takeover attempt, however, we've moved on with a renewed focus to grow our business," he told Convenience Store News exclusively.

The nearly seven months of turmoil brought on by Couche-Tard's unsolicited bid of $38.50 per share — and a counter bid of $43 per share by 7-Eleven Inc. — didn't weaken the chain. In the first quarter of fiscal 2012, which ended July 31, Casey's same-store sales were up 6.2 percent (beating the company's goal of 5.8 percent) with an average margin of 32.5 percent. For the full fiscal year of 2011, which ended April 30, its store count grew by nearly 7 percent — outdistancing its goal of 4 to 6 percent — with 20 new store constructions and 89 acquired stores. What's more, it replaced 15 stores and did 120 major remodels.

The chain's three-year-old "O" design, featuring greater retail floor space, additional cooler doors, larger kitchens to include made-to-order sub sandwiches and enhanced coffee/fountain offerings, is now in place in more than 100 locations.

Casey's Goals for Fiscal 2012

As the Casey's team focuses on continuously improving its offer and efficiencies, it has laid out the following goals for fiscal 2012:

■ Increase same-store gasoline gallons sold by 1 percent, with an average margin of 13.5 cents per gallon.

■ Boost same-store grocery and other merchandise sales 5.8 percent, with an average margin of 32.8 percent.

■ Grow same-store prepared food and fountain sales 7.7 percent, with an average margin of 61.8 percent.

■ Expand total store count by 4 to 6 percent.

"The takeover attempt created great resolve and enhanced pride within the company," said Handley.

Management's desire to keep Casey's from others' hands was not born of selfish motives, he said. It came from a corporate culture that has been instilled for decades. "We feel we do things right," he said. "Many of our employees, vendor partners and customers who have grown up with Casey's were fearful it would all go away, regardless of what was stated by Couche-Tard, whose management said there would be little change."

Ultimately, the takeover attempt didn't succeed because the Casey's team was able to demonstrate to shareholders that the retailer can continue to drive long-term value, the COO said.

"Shareholders looked at the number of record quarters we've been able to produce in succession and the growth and stability of our foodservice program, which is unrivaled in this market," Handley explained. "The board of directors did a wonderful job assessing the offers. They did their due diligence properly, with help from our advisory team at Goldman Sachs. As they looked at potential return on investment, the board was very comfortable knowing we were on the right track and the prices being offered by CoucheTard and 7-Eleven didn't reflect the true value of the company."

A HISTORY OF INNOVATION

The 44-year-old company is a pioneer in vertical integration, with more than 1,600 stores in 11 states supported by a single distribution facility, its own service and construction network and an internal gasoline distribution system — all located on the corporate campus in Iowa. Such an operation was the vision and design, Handley said, of cofounder Don Lamberti — a member of the Convenience Store News Hall of Fame — and former CEO Ron Lamb.

In the wake of the acquisition attempt, Handley has come to appreciate the courage of Lamberti and Lamb as they laid the foundation for what Casey's is today. "There were many challenges over the years and a great company is the result of their vision and leadership. It is our responsibility to sustain the momentum," he said.

That objective starts with sustaining the company's core values: taking care of the customer by providing a clean store, friendly service and quality products at competitive prices. "There has always been an honest relationship between Casey's and the customer," said Handley. "Customers expect more from Casey's and it is our responsibility to fulfill those expectations."

The COO describes the relationship between customers and Casey's store-level employees as "personal." Customers know the manager. Their kids may play ball together. Employees and customers live in the same small communities and may socialize together. "If there is a failure to provide good customer service, customers will alert us regarding their concerns," the retailer said. Customers may provide feedback through comment cards, by phone, letter or via the company's website.

Instilling that high standard of customer satisfaction can be a challenge for a large chain. To advance that goal, management awards all store employees a certain degree of autonomy to satisfy the customer. "If we did not provide the right pizza or did something that makes the customer unhappy, then store employees are charged with making amends," Handley said. "Granted, we will make mistakes, but we want to minimize those mistakes and rectify them. That culture of good customer service has always been the center of our philosophy."

That core value has helped drive Casey's earnings growth. For fiscal 2011, basic earnings per share were $2.24 vs. $2.30 for the same period last year. Excluding $27.4 million in expenses related to its recapitalization plan and the unsolicited bid by Couche-Tard, basic earnings per share would have been $2.65 and $2.38 for fiscal 2011 and 2010, respectively.

Indeed, despite the brouhaha — or maybe because of it — Casey's had an outstanding fiscal year. While it aimed for a 1-percent increase in same-store gasoline gallons, with an average margin of 13.5 cents per gallon, actual same-store gallons sold for the year increased 1.6 percent, with an average margin of 15.2 cents. Total gallons sold were up 8.6 percent to 1.4 billion, while gross profit dollars rose 19 percent from the prior year.

In grocery and other merchandise, Casey's aimed for a same-store sales increase of 6 percent with an average margin of 33.9 percent. It came close, as total grocery and other merchandise sales for the year were up 11.4 percent to $1.2 billion, and same-store sales increased 4.6 percent with an average margin of 32.2 percent.

Meanwhile, an important element of the Casey's brand — its prepared food and fountain business — continues to grow. While skyrocketing commodity costs affected gross margins, same-store sales for the year on foodservice were up 7.7 percent with an average margin of 62.2 percent (close to the team's goals of an 8-percent sales increase and 63.1 percent margin.) For the year, total foodservice and fountain sales were up 13.5 percent. (See "Introducing The Sub," below.)

Technology plays a huge role in ensuring the stores are stocked well with local favorites, particularly in the tobacco and beer categories. By utilizing the stores' point-of-sale system, data mining software and retail pricing surveys, category managers within the marketing and foodservice departments can pinpoint new sales and gross profit opportunities. For instance, the chain's systems identified incremental dollars that could be generated in the other tobacco products (OTP) category.

"We saw great results with a more diversified product mix based on geography," Handley said. "We expanded that strategy into the cigarette category across our entire market. Doing so had positive sales and profit results."

Introducing The Sub

With its made-to-order sub sandwich program exceeding expectations, Casey's General Stores is moving forward with the concept as an integral part of its iconic foodservice business. The offering is now in 300 stores, positioning subs alongside the retailer's pizza, bakery and coffee/fountain programs. Foodservice currently accounts for 7.4 percent of Casey's total sales and 29.3 percent of total gross profit dollars — figures that continue to grow.

New stores, acquired units undergoing remodeling and existing store remodels will feature the sub program at as many sites as possible. "We feel the sub sandwich program offers our customers a high-quality option to an already strong menu," noted COO Terry Handley. "The menu is diverse, and the pricing is competitive with the recognized category leaders."

The chain's extension of its signature coffee, cappuccino and fountain programs also has been rewarding, he added. Casey's continues to transition away from pots to urns and has added flavored syrups and bulk creamer while boosting variety in coffee and cappuccino flavors in many locations.

Limited-time-only offerings have kept sales of the chain's popular bakery items hot. A pumpkin doughnut may be featured in the fall, and a cherry doughnut in the spring. Demand for jelly-filled doughnuts remains high, perhaps because they are offered only for a few months before being rotated out of the case, introduction of new items on a regular basis only enhances those mainstay products of the bakery case, according to Handley.

In other parts of the foodservice operation — which includes a variety of breakfast pizzas and sandwiches, BBQ beef, breaded pork and chicken sandwiches, hamburgers, popcorn chicken and potato wedges — limited-time-only items are, well, limited. But the foodservice team led by Vice President Darryl Bacon is constantly searching for new products, especially for the chain's to-go cup program. Popcorn shrimp in cups, for instance, is added to the menu during Lent.

Perhaps the biggest challenge facing the foodservice team has been skyrocketing commodity prices. "Costs for coffee and cheese have been at all-time highs during the past year," Handley explained. Casey's conducts regular pricing surveys to ensure they remain competitive in the foodservice arena. The retailer increased some coffee, fountain and sandwich retails earlier this year in response to movements within the market.

There was minimal customer feedback regarding the price increases because the public is very much aware of rising commodity costs, the COO said. "Still, as a retailer, you have to be cognizant that consumers will look for the best deal."

Despite the retail bumps, over the past five years, same-store foodservice sales have increased an average of 8.5 percent annually and there's no sign the strong performance won't continue.

Casey's gasoline pricing strategy has remained consistent for decades: Identify the competition and ensure Casey's will not be undersold at the pump. The retailer's ability to remotely monitor tank levels at every store in real time lessens the possibility of stores being out of gas, even during extreme situations such as after Hurricane Katrina in 2005.

"While we are challenged on occasion, I'm not aware of an instance where we've had a store out of gasoline because we couldn't get it there," Handley said, noting 75 percent of the chain's gasoline gallons are delivered by its own trucks, with common carriers bringing in the other 25 percent, which is especially helpful in times of great demand. The company has 68 gasoline tankers and 172 gasoline drivers strategically positioned throughout the market, operating 24 hours a day in response to automatically generated gasoline orders when tank levels fall to a certain level.

GOALS: SHORT AND LONG

What makes the Casey's team optimistic that growth will be sustained, quarter after quarter? Management's short-term goals are always aligned with its long-term vision.

"Being a company of more than 1,600 stores, we can't afford to make quick decisions that may result in a mistake and cause us to back up," Handley said. "A smaller company may have more freedom to experiment. If a decision is made that doesn't lead to increased sales and profitability, smaller chains can pull back. That's not easy for a company our size. We have to be much more diligent and careful in how we operate."

To further strengthen the Casey's brand, the retailer hired the largest employee-owned advertising agency in the United States, Kansas City-based Barkley.

Tackling Expenses

While Casey's General Stores has seen impressive sales and margin growth, like every other convenience-store operator, it faces the challenge of reining in expenses.

For its last fiscal year, Casey's saw operating expenses increase 15.5 percent to $607.6 million. Excluding the $16 million in expenses related to the hostile offer by CoucheTard, expenses would have increased 12.4 percent.

The drivers: Credit card fees and fuel expenses, plus costs associated with operating more stores. The higher retail gas price environment drove credit card fees to a record for the fourth quarter of fiscal 2011, to more than $18 million.

"Wages also make up one of our larger expenses and we continue to manage increases through budgeted hours to meet the demands of individual stores," noted COO Terry Handley. "Credit card fees will remain a concern as long as retail gas prices remain high."

The company also is focused on improving and refining its store operations training program.

"While we are telling the public what they can expect from Casey's through our future advertising campaign, we want to ensure we live up to those promises," Handley said. "We believe our customer service is of the highest quality now, but we know we can make it better."

Long-term, Casey's is seeking acquisitions and looking at new store construction, and will continue to identify existing stores that can be replaced with the larger "O" store design. As the COO noted, "we are constantly looking for those opportunities and performing the necessary due diligence to ensure the proper return on investment."

Managers' Role Intensifies at Casey's

As Casey's General Stores has grown in size and complexity of product offerings, the store manager's role has evolved, too. Bigger stores with larger kitchens mean more area to maintain, additional supplies to track and a greater number of employees to manage.

To ease the strain, Casey's has worked to provide store-level technology solutions to speed up administrative duties. "Managers need more time to be in front of their customers," COO Terry Handley said. "Their job is tough and the hours are challenging at times. We will continue to seek solutions to allow managers to be more effective."

To address work/life balance and improve retention, Casey's offers store managers flex hours, allowing these front-line employees to come in after the store opens if needed. The chain added a second assistant manager position to assist with day-to-day oversight responsibilities. "We wanted another go-to person at each location," he said.

"I was at the store across from our corporate offices the other day at 6 p.m.," the COO continued. "The manager was outside checking pumps, trash receptacles and windshield wash levels. I know that was a 12-hour day for her. But when that kind of person is managing their store, they love the experience and interaction with customers and will do whatever it takes to make the store right."

The management team is analyzing the benefits and ROI of updates to its original "O" store concept, a design that has been tweaked slightly over the last year or so to improve efficiency. For instance, a cooler has been added to the large kitchen area, which already is equipped with a freezer, so kitchen staff doesn't have to access the store's primary cooler area for product.

Casey's is continuing its expansion to new markets as well. Since April, the retailer has opened its first two stores in northwest Arkansas; in Bella Vista and Springdale. It's also exploring moves into Tennessee and Kentucky, while looking for more opportunities in its current markets.

Anticipating the needs of a growing store base is crucial, as Handley said continuing the chain's consistent positive results record literally comes down to attention to details. "We have strong brand recognition and we establish customer loyalty by doing the little things," he said. "We don't require a loyalty program or discount card. People know what they'll get when they come to Casey's."

To advance that message, Casey's is engaging customers through Facebook and exploring other forms of social media. It is utilizing social media to communicate with customers regarding promotional events, new products, customer concerns and other information.

"While it is all new to us, we are quickly learning how it can positively impact our business in the coming years," Handley said. "We can't let our guard down at any time because this is a very competitive industry. Casey's is a passion for many of us — if not all of us — and we're proud of our achievements."

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