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A Vision Maintained

After a challenging few years, during which Casey's General Stores Inc.'s founder Donald Lamberti retired and same-store sales growth slowed to the pace of a Sunday driver checking out Iowa's cornfields, the chain of 1,369 rural locations is on an upswing.

With nearly all company goals for the fiscal 2005 met or exceeded, CEO Ronald Lamb and the rest of his senior management team — most of whom have been with the company well over 15 years — are confident about Casey's future, as they plan steady growth through acquisitions in the chain's nine-Midwest-state market and, perhaps, beyond.

But don't expect any flashy announcements of new prototypes or great upheavals in the company's longstanding business strategy. Lamberti's vision of operating a chain of mostly small-town stores — 75 percent of them are in towns of fewer than 10,000 people — offering very competitively priced gasoline, high-quality prepared foods and a large-for-the-industry selection of grocery and general merchandise items has served Casey's well.

"For the next several years, we'll tend to our knitting and keep looking for good acquisitions," Lamb said, speaking from the chain's Ankeny, Iowa, headquarters. "I think we will continue to see same-store sales and gross profits increase. Gasoline is an unknown, but as long as we remain competitively priced, I think we'll see gallons continue to increase, too."

The Casey's veteran — he has been with the company for more than 35 years, when Lamberti operated just two stores — has good reason to be optimistic. The company's recent implementation of new store and back-room technology, coupled with a few significant — but not drastic — changes in its offer, is paying off.

While fiscal 2005, which ended April 30, got off to a bumpy start with earnings down in the first part of the year, the fourth quarter was a stunner, more than making up for earlier shortfalls. Same-store gallons sold increased 5.6 percent. Grocery and other merchandise sales increased 6.3 percent and foodservice sales grew by nearly 10 percent. Sales this past May furthered that momentum: Same-store gallons and merchandise sales both grew by a solid 6.5 percent, while foodservice sales jumped 11.2 percent. At press time, June same-store sales were looking solid.

Steering the chain through a maze of hazards experienced by the entire industry — including volatile gas pricing, the reduction in cigarette manufacturer programs, rising costs and increased competition — hasn't been bump-free. Back in fiscal 2003, same-store gasoline gallons were off 3 percent. Grocery and other merchandise sales stalled at an 0.2 percent increase; margin-driving prepared foods and fountain eked out a small 1.1 percent increase.

The next year was slightly better. Fiscal 2004 saw same-store gasoline gallons rise 3.1 percent, though the chain's per-gallon margin dropped a penny to just over 10 cents. Merchandise sales remained flat, with less than a half-percent increase. Still, the chain's strong, 25-year-old foodservice program of pizza, hot lunch and breakfast sandwiches and fresh baked goods saw a solid 5.5 percent jump in sales.

Besting the Challenges

"In the last three years, the fluctuations in gas prices have been much more dramatic in certain markets, which you can attribute to hypermarkets, like Wal-Mart, Costco and locally even Hy-Vee food stores," noted Terry Handley, senior vice president, store operations. "There are more price changes on a daily basis. In the past, our pricing normalized for longer periods of time."

But by pricing at local retail levels, the chain has stayed strong in volume sales. "We haven't seen any change in demand as gas prices have risen, either in gallons sold or in inside sales of grocery or prepared food sales," Handley noted.

Added Lamb: "We haven't veered from our gasoline pricing strategy in 35 years. We will be competitive in our markets."

Casey's pay-at-the-pump technology lets customers pay by credit card (though not debit card yet, which in-store customers may use), including the Casey's MasterCard. Customers paying with the Casey's MasterCard, which debuted last November, receive points toward Casey's gift cards. "It's a quasi-loyalty program," said Bill Walljasper, chief financial officer.

In the area of cigarettes — a core traffic builder, along with gasoline, foodservice and now lottery — Casey's reacted to a fiscal-year multimillion-dollar reduction in retail display allowances and other funds with state-by-state category resets based on the stores' scanning data and with localized pricing adjustments as the market allows.

"With our new technology information, we know what we can do with pricing and stay competitive," Handley said, noting margins on cigarettes increased 30 basis points over the year prior and unit sales were up. "We know it's a declining category as people quit smoking, but we've taken market share from others and we are optimistic we can do that in the future."

In the past, Walljasper explained, cigarette company product recommendations didn't always mesh with Casey's customer preferences. "For instance, in metro markets, you'll see more menthol sales than in rural markets," he said. "We don't want to make decisions on product mix anymore based on manufacturers' data, which is typically based on metro markets."

By January of this year, the same type of data mining that helped Casey's tweak the cigarette category led to new in-store sets and strategic price increases on selected foodservice and other items, such as sports drinks, bottled water and 20-ounce sodas. With many of those products most in demand in the summer, the benefits should be more apparent this quarter.

Planogram changes are supported by Casey's distribution center, first created in 1981 and moved to the current building at corporate headquarters in 1989. Approximately 90 percent of the stores' products are self-distributed. Most traditional direct-store-delivery products, such as carbonated beverages, beer, chips, milk and bread, are still handled by the DSD vendors.

"But within those DSD categories, a number of products, such as Gatorade, make more sense to go through the distribution center," noted president and COO Bob Myers.

Initially expected to have sufficient capacity for 10 years, the distribution center is undergoing an expansion of 98,000 square feet (corporate headquarters is getting another 20,000 square feet.) "This should carry us out beyond another 10 years and 1,000 stores," Myers said.

Initiatives Pay Off

As Casey's entered into the summer selling season, the positive effect of its technology and merchandising efforts were evident. The combination of point-of-sale scanning, handheld bar-code scanners used to track inventory and order from the floor and data-mining software recently implemented is already paying dividends as store sets are refined. Same-store sales were up.

In its first fiscal quarter of 2005, for example, Casey's team used its POS data to pull slow movers in the confectionery category and positioned some of these products in other areas of the store. Same-store sales for the category grew by nearly 20 percent and margins rose over 4 percent.

At press time, a nine-state rollout of lottery that began in earnest in January was 95 percent completed and had contributed more than $1 million in gross profit in fiscal 2005.

"It's definitely building traffic," said Handley. "We're seeing an awful lot of add-on sales when someone purchases a lottery ticket. There will be margin issues on lottery, but it is driving business opportunities, selling cigarettes, pop or pizza, with higher margins."

The chain initially offered lottery in the mid-1980s in Iowa and in other states as it became available, only to pull the service when the customer experience suffered, Handley noted. "The process to sell tickets was hurting wait times and we were limited as to where we could put the terminals. State lotteries' processes are more sophisticated and they have much stronger marketing."

In the area of foodservice — which accounts for 8 percent of store sales, but 27 percent of the chain's gross profit — new items like biscuits and gravy and pecan Danish are proving popular and increasing that category's average gross margin. (See "Casey's Sales Goals," at left.)

One "solid double" for the chain has been its to-go cup — 16-ounce containers that fit in cars' cupholders filled with popcorn chicken, popcorn shrimp or potato cheese bites. Other items are on the way.

"We need to keep the prepared-food category fresh, because we have so much repeat business," Walljasper said, noting Casey's is one of the country's top 10 retailers of pizza and doughnuts, selling more than 10 million made-from-scratch pizzas and 98 million doughnuts and cookies each year. "We'll bring in certain doughnuts at different times of the year, or add new cookies. It's an effort that's been well received."

Through initiatives like these, Casey's has remained one of the most financially stable retailers in the convenience industry. Its long-term-debt to total-capital ratio as of the end of April was 24 percent, compared to some of its c-store peers holding ratios in the 80s, according to Walljasper.

"We have tremendous financial flexibility to integrate technology, take advantage of acquisitions on the rise or any other opportunity that comes our way," Walljasper said.

Store Counts

Until five years ago, Casey's unit growth came through newly built stores. Now, acquisitions play a much bigger role.

At press time, the retailer was deep into due diligence for the acquisition of Gas N Shop of Lincoln, Neb., and senior vice president and secretary John Harmon anticipated closing that deal shortly. "We think there are ample acquisition opportunities in our nine-state area, but will take a look at others, too," he said. "We have identified the chains of 50 or more stores and are seeing if they fit into our business model. But we're likely to buy single stores, too."

The team wouldn't hesitate to expand outside Casey's market, though management isn't aggressively looking beyond Iowa, Illinois, Indiana, Kansas, Minnesota, Missouri, Nebraska, South Dakota and Wisconsin. Even so, though the company's expanded distribution center could support stores in the next tier of states.

"We are very aware of retailers who overexpand," Harmon said. "As long as we are very careful, stick to our niche and use the business model we've used to acquire stores in the past, we don't have to worry so much about overexpanding as we do overpaying.

"We are in good financial shape. But if we bought a couple major chains, we may slow the acquisition activity down for a year or two to make sure we have time to make the transition operationally. But I don't see us growing too fast. If we had the goal of adding 30 stores and we only ended up with 20, no one would be upset, as long as the 20 were good."

The chain isn't shy about closing underperformers, either. In the third and fourth quarters of fiscal 2005, Casey's shuttered 36 stores that did not meet its cash-flow and profitability criteria. "Typically the reason a store closes is a major county road or highway is rerouted around the town and we no longer have the traffic pattern to make the store viable," Walljasper said. "Often we'll relocate on the highway."

Don't expect to see Casey's to become a city slicker, though. "We stick to our core business philosophy," he added, "and at the end of the day, we do pretty well."



Casey's Sales Goals

Fiscal 2005 Fiscal 2005 Fiscal 2006

Goal Actual Goal

Same-store gasoline gallons Up 2% 1.9% Up 2%

Gasoline margin cents/gallon 10.5 10.7 10.5

Same-store grocery/other merchandise Up 2.9% 4.8 % Up 3%

Grocery/other merchandise margin 32 % 30.9 31.5%

Same-store prepared food/fountain Up 6% 8.4 Up 5.5%

Prepared food/fountain margin <60% 60.3% 60.5%

Expansion Buy at least 43 stores, build 15 Bought 29, built 12* Buy 30 stores, build 10

*Also in negotiations to buy up to 58 Gas N Shop Stores, not included in 2006 expansion goal.

Fiscal 2005 Sales GP

Gasoline 67% 24%

Grocery 25% 49%

Prepared Food 8% 27%

Fiscal 2005 ended April 30, 2005.

Store Count

Fiscal 2005 1369

Fiscal 2004 1358

Fiscal 2003 1290

Earnings from Continuing Operations

Fiscal 2005 $42,532,000

Fiscal 2004 $37,897,000

Fiscal 2003 $41,012,000

Sales and Margin by Product

Fiscal Year (000s)

Gasoline Grocery & Prepared Food & Other Total

Other Merchandise Fountain

2005 $1,870,791 $714,012 $204,795 $19,822 $2,809,420

Margin 5.8% 30.9% 60.3% 20.3% 16.3%

2004 1,455,973 665,852 181,997 25,118 2,328,940

Margin 6.8 31.2 60.7 13.8 18.0

2003 1,266,507 642,224 166,628 41,934 2,117,293

Margin 8 31.7 59.5 10.2 19.3

* Continuing Operations

Gasoline Gallons Sold

Fiscal 2005 1.016 billion.

Fiscal 2004 975 million

Fiscal 2003 917 million

* Continuting operations

Information for pie charts.

Fiscal 2004

Gasoline represented 63% of sales and 24% of gross profit

Grocery and merchandise represented 29% of sales and 50% of gross profit

Prepared food 8% of sales and 26% of gross profit.

Fiscal 2005

Gasoline represented of 67% sales and 24% of gross profit

Grocery and merchandise 25 percent of sales and 49% of gross profit

Prepared food 8% of sales and 27% of gross profit

Working captions:

Casey's General Stores saw same-store gallons sold increased 5.6 percent for the chain's February through April 2005 quarter.

Inside the store, Casey's grocery and other merchandise sales rose 6.3 percent for its fiscal 4th quarter, ending April 30, and foodservice sales grew by nearly 10 percent

Casey's employees make the dough every morning. The chain is one of the country's Top 10 retailers of pizza and doughnuts.

Joy — If we don't get IDs with the images, you can check the website to compare photos to make sure we have the right name matched to the photo.

But here are the names/titles:

Team Players: CEO Ron Lamb; President Bob Myers; Senior Vice President, Secretary John Harmon; Senior Vice President, Store Operations Terry Handley; and Vice President, Finance Bill Walljasper.
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