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  • Roger S. Conrad

Trimming Some of Our Hedges

By Elliott H. Gue on Nov. 21, 2015

Kings of Convenience

The Dec. 18, 2014, issue of Energy & Income Advisor highlighted two convenience-store operators that stand to benefit from lower oil prices:

  • Casey’s General Stores (NSDQ: CASY), which has generated a total return of 30.9 percent; and
  • Alimentation Couche-Tard (TSX: ATD/B, OTC: ANCUF), which has returned 34.4 percent in local currency terms and 16 percent in US dollar terms.

Although these companies don’t profit directly when gasoline prices tumble, lower fuel costs tend to stimulate store traffic and boost merchandise sales—the main source of industry profitability, as price competition at the pump remains cutthroat. Cheaper gasoline also helps to reduce the number of fueling transactions completed with credit cards, another cost center.

The wealth effect created by lower prices at the pump disproportionately benefits households that rank in the bottom quintile by income because gasoline costs represent a higher proportion of their overall expenditures and their after-tax earnings.

When choosing our hedges from this industry, we focused on names that boast well-designed stores and food-service options that are a draw in their own right and can compete effectively against traditional fast-food restaurants.

A robust food-service platform and in-store merchandising that’s responsive to local tastes and trends distinguish the best-in-class convenience store operators, the names that stand to benefit the most from lower gasoline prices.

We also like companies that continue to diversify their food-service offerings by introducing innovative menu items and adding healthier options to their traditional lineups of sandwiches, soups and pizza.

The fourth-largest operator of convenience stores in the US, Casey’s General Stores primarily serves rural communities, a calculated strategy that limits competition and capitalizes on its locations’ extended business hours relative to larger grocery stores.

The firm’s house-made pizzas have become wildly popular since the chain began baking them in 1984. In fact, Casey’s General Stores has grown into the sixth-largest pizza chain in the US.

This trend has continued to gain momentum, with the company growing its sales of prepared foods and fountain drinks at stores open for at least one year by a robust 10.5 percent in October 2015. Same-store sales of other merchandise ticked up by 7.3 percent from year-ago levels.

Management’s guidance calls for the company to increase its store count by 75 to 113 locations this year and remodel 100 of its existing gas stations.

During the company’s earnings call for its fiscal first quarter ended July 31, 2015, CFO William Walljasper estimated that remodeled stores usually result in a 25 percent to 30 percent increase in sales of prepared foods and fountain drinks and a 10 percent to low-teens uptick in grocery and other merchandise.

However, boom times for convenience stores have made smaller operators less inclined to sell, slowing the steady march of consolidation that traditionally has contributed to Casey’s General Stores’ growth story.

But Casey’s General Stores aims to roll out online order for pizza and other prepared foods at all its stores by the end of the calendar year. Thus far, the company has found that online ordering hasn’t affected the number or pizzas sold, but this technology has increased the number of toppings on customers’ pies and results in an uptick in sales of breadsticks, chicken wings and other sides.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor