Casey's General Stores - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good day, ladies and gentlemen. Welcome to Casey's General Stores first quarter fiscal year 2020 earnings conference call. At this time, all participants are in listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. If you require any assistance during today's call, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I'll now turn the conference over to Bill Walljasper, Chief Financial Officer. Sir, you may begin.

Bill Walljasper (CFO)

Good morning, and thank you for joining us to discuss Casey's results for the quarter ended July 31. I'm Bill Walljasper, Chief Financial Officer. Darren Rebelez, 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 factors which are described in our most recent report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and are available on our website. Any forward-looking statements made during this call 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. We will then open for questions about our results. I would now like to turn the call over to Darren to discuss those results.

Darren Rebelez (President and CEO)

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 Casey's team. During my time in the convenience store industry, I've always admired and respected Casey's 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 some time 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 a year ago.

The results were driven primarily by a strong fuel margin versus the first quarter last year, continued operating expense control, and sales 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 and some of the details in each of the categories. During the first quarter in the fuel category, we experienced a favorable fuel margin environment combined with our ability to leverage the implementation of PriceAdvantage, which is our fuel price optimization tool. These factors enable us to achieve an average fuel margin of $0.244 per gallon, up nearly 400 basis points from the same period last year. This drove over a 22% increase in gross profit dollars from the 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 traveled in the Midwest declined. The average retail price for fuel during this period was $2.63 a gallon compared to $2.74 a year ago. Despite the decline in same-store gallons, total gallons sold for the quarter were up nearly 3% to 619 million 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 in the 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 100 basis points, and 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%. 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 e-commerce 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 in cycling over 50th 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 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.

Bill Walljasper (CFO)

Thanks, Darren. 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 one-time adjustment related to the useful lives of our underground storage tanks. Without the one-time adjustment, depreciation would have been up approximately 8.6%. As we have mentioned, there were several one-time items that occurred this quarter. The net impact of these was approximately a 5% 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 one-time 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 the 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.

Darren Rebelez (President and CEO)

Thanks, Bill. Our target this fiscal year is to build 60 stores and acquire approximately 25 additional stores. This quarter, we opened 15 new stores, acquired 4 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 design 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 a 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 are the appropriate areas that we should focus our attention on in the near term. As I reviewed 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. I'm confident that the plan will collectively deliver on this expectation.

With this in mind, I'd 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 2,000 new accounts with approximately 11,000 new cards issued. Although the utilization of these cards ramped up slower than we expected, it has gained momentum recently as we focused 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 in 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-based 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 PriceAdvantage 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're 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 a control group. During the first quarter, we rolled out this platform to the center of our store and will 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 e-commerce 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 guests 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 these 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 a select geography. Building upon what we learned from these pilots, we 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 guests' 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 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 add skill sets to successfully execute on our strategy to drive significant long-term shareholder value. We will now take your questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Chris Mandeville with Jefferies. Your line is open.

Chris Mandeville (Analyst)

Hey, good morning.

Bill Walljasper (CFO)

Hey, Chris. Bill.

Chris Mandeville (Analyst)

Hey, Chris.

Bill Walljasper (CFO)

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 much did that maybe influence consumer elasticity in the quarter, if at all? Yeah. No. To answer your question, Chris, we did not proactively take any price increases to offset that. As you know, we are certainly in a competitive pricing environment in that particular area of the business. We want to make sure that we continue to offer a value proposition to our guests. With respect to the cheese cost, from a comparative standpoint, last year in Q1, it was $1.87 a pound. We are about $1.96 a pound for this quarter.

Just as a reminder, about every 10 cents per pound is roughly about 30-35 basis points to the overall prepared food margin. Currently, to give you kind of perspective, Chris, we're about $2.07 a pound. We anticipate this declining towards the back half of the calendar year. This has always been a cyclical product for us. After these school contracts get in place, we typically see a downward movement and look for opportunities. Okay. As we think about your enhanced fuel procurement practices, can you help us understand what the reasonable assumption to think about when it comes to gallons transitioning over to short-term contracts versus spot buying by fiscal year end? To what extent is that maybe reflected in guidance today? Yeah. I'll give you a little bit of directional comments there.

First of all, 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 11% or 12% of our fuel volume under contract, which is very different, obviously, than a structure than when we were buying on the spot market. Where that goes in the future, I guess, will determine as we kind of progress through the remaining part of this fiscal year. 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 with that. Okay. 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. Just based on what lies in front of you with loyalty, fuel procurement, additional price optimization, and some 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? I probably fall short of giving any type of forward-looking expectation in that regard. I think directionally, you're on the right path. When you start thinking about some of the cadence that we have going forward the rest of this fiscal year and the next fiscal year, Darren alluded to this. We kicked off the e-commerce platform at the 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. As I mentioned just previously, that fuel procurement will start to take off in the back half of the year. We are excited about the direction of the company with all of those to benefit us. Perfect. I'll leave it there. Thanks, guys. Thanks.

Operator (participant)

Our next question comes from Bobby Griffin with Raymond James. Your line is open. Good morning, everybody. I appreciate you taking my questions. Hey, Bobby. I just want to first follow up on Chris's question on cheese and kind of the cost environment inside the store. When we look at the margin guidance for the year for prepared food, can you maybe just give us a little color on what's baked in there from a general cost environment inflation-wise? From a cheese cost, I wouldn't have the expectation of what the cheese cost environment would be. That's taken into consideration. When we formulate that margin guidance, it's a combination of a lot of things, Bobby. It's looking at external or macro issues. Cheese would be one of those issues.

It would also be looking probably more in this case at our promotional activity that we have forthcoming. When you think about some promotional activity that we have coming, as I mentioned in one of the first questions there, it is a competitive landscape for prepared foods. We want to make sure we offer value proposition. Generally speaking, that's 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. Yeah. Bobby, this is Darren I guess.

The only thing I would add to what Bill said is the ability of our digital platform to be able to target that promotional activity towards specific guests 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. That's helpful. Thanks, Darren and Bill. Actually, my next question was right there on some of the exciting things you guys are doing digitally. Can you maybe just expand upon what you're seeing in some of the early learnings from the e-commerce platform or the mobile app that illustrates 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 grasp on what the opportunity is. Yeah. This is Darren again. Yeah, we've seen some pretty positive results so far. Really, across the board, we're having good success in conversion rates. We're 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. Kind of across the platform, we're seeing that growth. As I mentioned earlier, we're about 28% of our orders for pizza are coming online or digitally. We believe that can continue to grow. We're just very early stages in that process. We'll continue to move forward with that. Thanks. I appreciate you guys answering my questions. Best of luck in the second quarter. Yeah.

Thanks, Bobby. Thank you. Our next question comes from Brian Sharma with Stephens. Your line is open. Hi. Good morning, guys. I'm just jumping in. Good morning. Just wanted to ask about operating expense growth. How sustainable is OpEx growth at this level? Yeah. I'll start that one off here. This was one of the lowest increases that we've had in quite some time. Obviously, it's a credit to the store operations team and a continued focus in trying to match our labor hours with the guest experience. You noticed that we did not change anything with respect to the range in operating expense. Obviously, we anticipate going forward an acceleration in comps across the board. With that, we certainly anticipate labor hours increasing to kind of match that guest experience.

When you think about it from a high level, I would probably look at it this way. You look at about a same-store operating expense and that low single-digit unit growth and that 4%. A high single digit is kind of maybe a run rate on a normalized base that you should be thinking about. Okay. Great. Also, just wanted to get your take on the cadence of the prepared foods and the grocery comps. I know you're expecting prepared food comps to lift off as the e-commerce platform kind of progresses. I was wondering if you were able to provide us cadence. Go ahead. You were doing that. Yeah. I'll go ahead and take that. Yeah. Obviously, we're a little bit soft in the first quarter. We saw a sequential improvement throughout the quarter. Again, in August, we saw another improvement.

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. 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. 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. Hey. You mentioned your optimism about your inside store price optimization tool in terms of grocery.

Patty (Analyst)

I just wanted to ask, when do you expect the tool to be fully rolled out? What kind of lift do you think it could contribute on an ongoing basis to comps? More specifically on the quarter, the 3.2% same-store sales that you posted was pretty nicely above street expectations. I wanted to ask if it was above your own internal expectations. If so, how much of that was from category momentum versus price optimization? Thanks. Yeah. For price op, I'll try to answer all those questions. If we do not get that, Patty, please circle back with us. Price optimization inside the store, we did our pilot testing. We noticed a couple of things. We alluded to this.

Operator (participant)

We saw definitely an increase in revenue on a control group, probably more significant than we saw an increase to a greater extent on the margin side. We are anticipating in the back half of the year to see benefit from price optimization inside the store being rolled out in both of those areas. That is part of the sequential movement of comps moving forward. Now, with respect to that 3.2% comp in grocery and general merchandise, one of the things that we were not quite sure of coming into this fiscal year was we were going to be lapping the JUUL product that rolled out last fiscal year. We were not sure if that momentum would continue in the same trajectory that it did last fiscal year. We were certainly pleasantly surprised that the popularity of that product continues to be relatively robust.

Do you have some other questions there maybe to circle back with? No. Actually, 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. Just continuing with the line of questioning around the grocery category, Bill, I think it was in your prepared remarks, maybe 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 categories, please? Ex-cigarettes? Yeah. I'll let Darren take that one. Yeah. Irene. Yeah. That was correct. We did see pretty strong growth ex-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 as we moved through the quarter. Those were really the three main areas that we saw the growth. It was somewhat offset by our cigarette performance. That's helpful. Thank you. The strength that you're seeing in both alcohol and package, is that a result of sort of a deliberate strategy, shift in promotional tactics? Were you able to sort of see any correlation between that and the weather trends during the quarter? 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. We are seeing very strong growth in those two categories, albeit on a somewhat smaller basis.

We're seeing momentum as well with the flavored alternative beverages, like the hard seltzers and that sort of thing within the beer category. On the packaged beverage side, we're just seeing continued strength and energy, although not as strong as it had been in years past. You're going to have to help me, Irene. What was your other question? My other question was just really around weather in the quarter and what impact that might have had. Yeah. Definitely May had an impact on us. You see it in the beverage categories across the board, alcohol, packaged beverage, and in fountain as well. That was our toughest month. Every month got sequentially better as the weather started to improve. There's definitely a correlation there. Yeah.

Irene, I was going to add just on your first part of that question with respect to the beer category. We have also benefited from a couple of state law changes in Oklahoma and Kansas. They are now able to sell a stronger alcohol content beer. That has been a nice boost in those two states for us. That's great. Thank you. I was just wondering if you could give us a little bit more color around the results of sort of the zone pilots. You mentioned some lift to top line, some lift to margin. Which categories in particular do you see it? What kind of differential are you talking about in terms of pricing? Does that make you think a little bit more about perhaps extending to the prepared foods category? Yeah.

It's probably a little preliminary for us to maybe give results of the pilot as we now are starting to stand that up. Probably the best way to characterize that, Irene, is right now when we did that control group, without submitting any specific items, we definitely—I will 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 that's performing going forward with respect to those zones. In some of those cases, some of those zones will be moving pricing up in certain key categories. In some cases, we will move products down. It really depends on the competitive landscape there.

We're anxious to get that kicked off and be able to report like we do every quarter on the progress. That's great. Are you thinking at all about doing something sort of similar with your inside store category—sorry, with your prepared foods categories? Yes. Yeah. We'll certainly do that and update you with the progress 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? Housekeeping. $40.4 million. Okay. Okay. I wanted to just talk a little bit about your guidance on the gas margin front. Obviously, gas margins were stronger than your guidances for the year this quarter.

You're really only early stage in terms of the percent of fuel that you're purchasing on contract. Wondering what your thoughts are on the conservatism with the gas margin for the year guidance. On the contract side, any color you could give on what percent of fuel you think you'll have on contract by year-end? Yeah. Karen, this is Darren. I think with respect to the fuel margin guidance, we had a combination of factors in Q1 that helped us. Obviously, it was a favorable fuel margin environment. 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. I wouldn't want to take that margin and extrapolate that to the rest of the. Thanks, John. Please stand by. Once again, please stand by.

Your conference call will resume momentarily. Okay. Hello. Sorry about that. Karen, are you there now? I am here. You can hear me? Not intentional, Karen, just so you know. Yeah. No worries. You missed a brilliant answer to the question, by the way. I think we caught it. I would not want to extrapolate for the whole year, but. Okay. That was on the fuel margin side. I think you have that answer. With respect to our contracted fuel volume, we expect to have about 28%-30% of our overall volume under contract this year. Okay. My second question was, obviously, you have talked about the 28% online, I guess, in terms of purchases.

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—I know it's early stage—but now that you have this ability to cross-sell on the app. Yeah. 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. We are excited about what the opportunity presents for us as we get fully integrated with all the digital. What would the difference be on the online versus in-store? For the average order volume? Yeah. What is the actual ticket? The difference is going to be about a dollar. The average ticket online is a little over $20, about $21 online. Okay.

You made some comments on areas of expense management opportunities. I was wondering if you could elaborate on that a little bit and 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 with that new DC specifically? Yeah. I'll start with the operating expense. Darren and I can dovetail on the DC question. Probably one of the things that stands out as far as an initiative that we're undertaking is finalizing the time and motion study. This will provide an opportunity because all of our tasks are very replicable across the 16-state chain.

Once we have a better understanding of the time it should take to make a pizza, to take out the trash, so forth and so on, we'll be able to take that information and sit it on top of the scheduler and then be more efficient in the scheduling of our labor hours on a side-by-side basis to match that particular activity of that store. We think that's going to provide probably a better guest experience from a staffing perspective of labor hours on a side-by-side basis. That's one of the things that would stand out in that regard. Now, with respect to the third distribution center, I'll have Darren take that. Yeah. Karen, on the distribution center, essentially what we've got today with our two distribution centers, we started to develop further south in our network.

What's resulted from that is a bit of inefficiency as we try to self-distribute into that geography. As we measure that by the cost per pound to distribute, we started to see that cost per pound going up because we're driving further to support those stores. As I mentioned in my script, we're looking towards the southwest part of our geography to place the third distribution center. That will essentially just create more efficiency as those deliveries to those stores will be far more efficient. It'll take some of the inefficiency off of the other distribution centers, particularly in Ankeny. The Ankeny distribution center is over capacity right now, and we've had to lease some extra space to be able to support the store. Once that distribution center gets up and running, it'll relieve all that pressure.

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? Yeah. But we're not prepared to share that at this point. Okay. Thank you. Our next question comes from Kelly Bania with BMO Capital Markets. Your line is open. Good morning. Thanks for taking my questions. Hi, Darren. 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 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 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. Again, you have multiple questions in there. With respect to traffic, yeah, traffic. We were down slightly. If you look at customer count, excluding commissions and fuel inside the store, we were down slightly and have been down slightly for some time. As you know, we're in kind of an environment here in the Midwest that has been pressured due to a continued downward movement of farm income. However, it has been becoming less of an impact for us. We've been getting better and better with the customer count, and that's part of the process that we moved to digital. That's the question.

With respect to the digital launch, loyalty launch, I'll have Darren take that. Yeah. Kelly, for the loyalty program, I think you asked a couple of things. First, I'll tackle the timing. Like I mentioned in the script, we're about to begin our testing and pilot of that. That's going to be largely contingent on how everything works in the pilot. We anticipate that it'll 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. Suffice it to say, we believe we have a way in that will resonate uniquely with our guests and provide incremental value above and beyond what they might find other places. We feel really good about the platform itself.

We just got to get through the pilot process before we can get it launched. Okay. That's fair. I guess just another follow-up in terms of the distribution. Now, kind of focusing on adding that third DC. I guess, Darren, is there 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. We're continuing to evaluate that as an option. At the moment, given the situation where we're over capacity in distribution centers, we really aren't in a position to start that at this point.

Once we get the third distribution center up and running, we'll be in a better position to perhaps capitalize on that opportunity. Okay. That's helpful. Maybe last one for me. 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 CapEx. I 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. Yeah. We're still in the planning phase of all of that. The things I mentioned last time were just taking a look at how we build our stores today and the opportunity to potentially take cost out without degrading the guest experience.

At the same time, we're taking a look at non-fuel sites as potential fill-in opportunities in geographies where we already operate, but we have pockets of unmet demand. We're assessing both of those opportunities right now. We'll keep you updated on that. Thank you. Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then one on your touch-tone telephone. Our next question comes from Chuck Cerankosky with North Coast Research. Your line is open. Good morning, everyone. Hey, Chuck. Good morning. I noticed you 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? Yeah.

Most of that, Chuck, 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 may close two stores and build a larger footprint. That's a function more of that, not so much as the performance of the stores. Okay. And Bill, looking at the success of the price optimization and fuel, I'm thinking you're going to 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 price has moved up? Is that something that you guys think you have to bite the bullet on to buy back shares? Are you looking at at least offsetting dilution from option grants, etc.? I'll let Darren go ahead and take that one. Yeah.

Chuck, with respect to share repurchases, we have the $300 million authorization that's available for us. We'll always want to keep that option available so we can opportunistically buy back our stock when that becomes an attractive investment opportunity. Our focus is on growth. We're always going to prioritize our growth investments over share repurchases when we can get the attractive returns that we're aiming for. That's really the mode that we're in right now. Again, we have the authorization there. We'll use it opportunistically. Our focus is on investing capital in growth initiatives that'll drive a greater shareholder return. All right. Thank you. Great quarter. Thanks, Darren. Thanks. Our next question comes from John Royall with J.P. Morgan. Your line is open. Hey. Good morning, guys. Thanks for taking my question. You bet. How are you?

John Royall (Analyst)

On CapEx, the 1Q run rate was well below guidance levels, which isn't unusual if I look at 1Q historically. How should we think about the cadence for the rest of the year to hit the $516? Is it a ramp in 2Q and more ratable in the second half, or is it kind of more ratable throughout? Yeah. You're correct. Typically, in the past, we have been a little bit more lumpy in the back half of the fiscal year when it comes 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.

Operator (participant)

We also have an addition going on currently with our corporate facility here as well. I would expect that to move up. I still think that 516 would be a number. That's one we update every quarter as well. Okay. Great. The next question's on the distribution center. Appreciating that you guys aren't disclosing the exact location at this point, when I look at the southwest of your territory and 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 in states where you already operate, like Kansas or Oklahoma, for example? Yeah. I certainly think that 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.

That state is doing exceptionally well for us. We have quite a few more sites going up in that area. A third distribution center will allow us to efficiently expand into other geographies. Great. One last one is more of housekeeping. On the D&A, was the one-time adjustment anticipated when you rolled out the guidance? Just thinking about kind of flat-ish year over year, and the double-digit guidance would imply some pretty substantial increase for the rest of the year. Am I thinking about that correctly? No, it was not contemplated in the guidance. Intuitively, that's probably one of those areas that we could adjust the guidance downward. As Darren mentioned previously, we felt after the first quarter, maybe it was not prudent for us. Look for us to comment on that after the December call. Great. Thank you.

You bet. Our next question comes from Damian Witkowski with G. Research. Your line is open. Hi. Good morning, guys. I have a question on fuel and profit optimization there because I think that's the most advanced program that you have in that initiative. Where are we in terms of just rolling it out and testing it and actually getting the feedback necessary? Meaning, is there still room on the upside in terms of optimizing price by geography? Have you had to roll back any geographies from a competitive response perspective? Yeah. Damian, I think 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. That'll get done here over the course of the year.

I think in terms of the fuel pricing dynamics, I mean, there's a lot going on. It's obviously a very fluid place. As we continue to optimize our approach to pricing in the marketplace, our competitors continue to adjust their position based on what we're doing. That causes us to have to react to that adjustment. I would expect over the course of the next year or so, we're going to see some massaging of that positioning as all of us and our competitors kind of react to the new normal. It will be somewhat of a fluid environment, I would expect, over the next 12-15 months or so. Yeah. I mean, and just in general, I mean, your thoughts on are the competitors happy that someone's actually moving the price up because they need the gross margin dollars as well?

Are they, in most part, trying to steal back market share from you? I have no way of knowing how they feel about what we're doing. Nor would I want to speculate on that. That is going to be competitor by competitor, market by market. We take the position we're going to take. Our position may vary market to market depending on the competitive set. Okay. Just staying on fuel, the fuel being under contract, does that take away the opportunity to sort of when fuel goes down and crude goes down in price and you have typically higher margins, does that at all affect how does that affect your ability to sort of capture that margin during those periods of time? I think there are two different things going on.

When we have supply under contract, then we're going to get to enjoy the downside of that when commodity prices come down. It doesn't in any way influence our ability to price at retail. We can continue to manage how we approach those cost decreases from a retail standpoint to capture margin if we elect to do that. Okay. All right. Thank you. Thanks, Darren. Our next question comes from Chris Mandeville with Jefferies. Your line is open. Hey. Thanks for the follow-ups. You bet. Bill or Darren, just looking at a few new items to prep food. You've got that Midwest Mystery Pizza. Then you've 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? Yeah.

Chris, this is Darren. Yeah. You called out a couple of new food items that 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. That work has yet to begin. We have a lot of work to do on prepared foods from that standpoint. I think in the near term, you should expect that we'll 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 offering. Okay. Bill, one of your peers recently executed on a debt refi. Can you update us on any possibility of doing something similar and potential timing there?

Certainly, I can give you a little bit of color there. As you know, Chris, we have a $569 million bullet payment due next August. We still have make-whole provisions that we need to contend with between now and then. Obviously, treasuries have come down, and the spreads have remained tight. I think we're in a very good opportunity to refinance. We'll begin to start looking at that here between now and the end of the calendar year. More to come there at this point. I don't see any concern on a refinancing risk. All right. Just the last one for me. I saw on one of your latest filings that you've 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 bodies with certain skill sets? And if so, is there any maybe color with respect to what sort of backgrounds 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. No, this was really more of an effort to help facilitate succession planning and transitioning. Because we were at our authorization prior, we're at full capacity from our board. If we had anybody that was intending to retire off of the board, we would have to lose them before we could add another board member.

I think it's a better practice to have some overlap so that those new directors can get up to speed and we can transition more effectively. That's really what this is all about. It's just giving us the bandwidth to do that at the appropriate time. Got it. Thanks, guys. Thanks, Chris. Thanks. Thank you. I'm showing no further questions at this time. I'll turn the call back over to Darren Rebelez for closing remarks. Thank you. I'd like to thank everyone for joining us this morning and close the call by reiterating our key initiatives are designed to position Casey's 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.

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 you for joining. Everyone, have a wonderful day.