Casey's General Stores, Inc

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Casey's General Stores, Inc.

1 Convenience Boulevard
Ankeny, Iowa 50021
U.S.A.
Telephone: (515) 965-6100
Fax: (515) 965-6160
Web site: http://www.caseys.com

Public Company
Incorporated: 1967
Employees: 15,692
Sales: $3.52 billion (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: CASY
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores; 447110 Gasoline Stations with Convenience Stores; 533110 Owners and Lessors of Other Non-Financial Assets

Casey's General Stores, Inc., operates convenience stores in nine midwestern states under the "Casey's General Store" name. The company has changed strategies over the years, shifting from franchising to building to buying, growing the number of its locations. Casey's typically carves out success in locales often deemed insignificant by corporate America. The company has seen and capitalized on the opportunity to bring a broad range of products to communities with few other local merchants.

THE EARLY YEARS: 1967–83

Casey's origins can be traced to Domenic Lamberti, an Italian immigrant and former coal miner who opened a coal- and ice-delivery business on the north side of Des Moines, Iowa, at Broadway and Northeast 14th streets, in 1935. His business developed into a neighborhood grocery store with gasoline outside. (It later became a Casey's.) Donald F. Lamberti, his son, began working in the store, in his words, "about the time my chin could get above the counter." He left his accounting studies at Drake University in 1960 to take over the store when his father became ill.

In 1967 Kurvin C. Fish, a salesman who sold Lamberti his gasoline, persuaded him to buy an Ames, Iowa oil company, which owned four Square Deal service stations. Lamberti provided the capital: $40,000 down on a total cost of $200,000, plus a $40,000 equipment loan from a local bank. Fish agreed to operate the enterprise, which got its name from his first and middle initials. "We talked about calling it 'Lamberti's General Stores,'" Lamberti told a Chicago Tribune reporter in 1994, "but there are a lot of folks who don't like Italians. We wanted a generic name that no one would dislike."

The first Casey's convenience store was one of the four properties, a converted three-bay gasoline station in Boone, Iowa. It opened in 1968 and was, according to Lamberti, "a hit from day one." In its first year the store attained profit margins the partners had projected for the third year. "We didn't call it a convenience store early on," Lamberti later recalled to a newspaper reporter. "We called it just a general store with gasoline." Soon they opened similar stores in Creston, Waukee, and Saylorville.

After Fish's refinery was taken over by Ashland Oil in 1970, financing growth became more difficult, so Lamberti and Fish took two more partners. When they needed more money to expand further, they started franchising stores. According to Fish, "After we had four or five stores, we thought if we built 15 that would be all we'd want. And then after we had 15 built, we thought, well, there are 90 counties in the state and if we put 90 stores in Iowa that would be about all we could ever hope to develop."

Casey's outlets offered products found in grocery stores, except for produce and fresh meats, and many nonfood items not found in a traditional convenience store, such as ammunition for hunters. The company's concentration on small towns gave it the advantage of little competition. Bigger convenience store chains including 7-Eleven and Circle K had abandoned these areas for more profitable major metropolitan markets. Gas stations and fast food restaurants also were becoming scarcer in the rural Midwest, where the population was stagnating or declining.

Lamberti laid great emphasis on keeping Casey's stores spotlessly clean. Speaking to a Des Moines group of financial analysts in 1985, he said, "Surveys show that customers will enter a dirty store and go straight to the item that they need and leave the store as quickly as possible. On the other hand, a customer entering a clean store is more likely to browse and purchase additional needs. Cleanliness is especially important when you're dealing with fast food items."

Interviewed by the Chicago Tribune in 1994, Lamberti said, "We are comparable to the old ma and pa stores, only with a little more structure and discipline.… We don't handle cigarette rolling papers or risque magazines because we don't think small-town America wants us to handle those, and we don't do pinball machines or video games." (However, tobacco products, including cheap, generic cigarettes, represented an important sales segment, and almost all Casey's stores sold beer.) Almost all the stores closed at 11 p.m., both to meet concerns for employee safety and to keep company insurance policies low. (After three employees were murdered during a late-night robbery at a Casey's in Columbia, Missouri, in 1994, the company, which said it had been averaging only seven or eight holdups a year, was prompted to alter its security procedures.)

In 1979, while businesses heavily dependent on motor traffic were reeling from the second energy crisis of the decade, Casey's made the critical choice to expand still further. "We decided to grow as long as the wheels didn't fall off the buggy," Lamberti told a Des Moines Register reporter in 1996. "We built a lot of stores when everybody else was sitting on their hands. Some people were closing down." In that year, Casey's nearly doubled its outlets, growing from 119 stores to 226. Net sales rose from $58.6 million in 1979 to $188.5 million in 1983, and net income from $418,000 to $1.8 million.

In 1980, Casey's established a profit-sharing and stock-ownership plan for employees who had worked at Casey's for 12 consecutive months and were at least 21 years of age. Fish sold his share of the company to the plan shortly afterward. In 1990, when this plan owned about 35 percent of the company's shares, Casey's was matching up to 2 percent of employees' salaries with stock shares.

A 55,000-square-foot distribution center was opened in Urbandale, Iowa, in 1983 to serve the chain and was furnished with a state-of-the-art computer system. The company owned its own trucks and trailers and hired its own drivers. An in-house printing and graphic arts department was established the same year. At the end of 1983 there were 191 company-owned and 215 franchised stores in eight states. Net sales came to $188.5 million and net income to $1.8 million. A breakdown showed that while gasoline was the chief sales item, its profit margin was far lower than that for grocery and general goods, reflecting Casey's strategy of drawing customers first to the pumps, then into the stores to buy higher-profit goods.

COMPANY PERSPECTIVES

Through the years, Casey's success has been attributed to our clean stores, restrooms, and the friendly employees who pride themselves in customer service. Casey's customers have come to know that inside each store they will find dedicated, helpful, and well-trained employees, exceptional prepared food items, and a clean environment in which to shop.

CASEY'S GOING PUBLIC

Casey's went public in October 1983, offering about one-quarter of its outstanding shares of common stock at $15 a share. Proceeds from the offering enabled the company to fully purchase three subsidiaries engaged in the operation of its stores. Casey's also decided it would not issue any more franchises, although existing franchisees could continue building and opening new stores. Long term debt was $12 million at the end of 1984 and represented 41 percent of total capital, but an additional stock offering in 1985 allowed the company to reduce this debt.

Gasoline sales provided about 60 percent of sales volume and 30 percent of the company's gross and net profits in 1985, when sales reached nearly $250 million and earnings $1.3 million. In 1984 Casey's began making and selling fresh carry-out pizza in a small number of its stores. By the end of 1985 pizza was available in 85 stores, and the following year the stores started selling by the slice as well. The recipe was never changed, and by the end of 1994 Casey's was, according to one reckoning, the nation's seventh largest retailer of pizza. A company commissary began preparing sandwiches in 1986 for sale in the stores.

A typical Casey's of the mid-1980s was a white barnlike metal structure with a red roof. The newer buildings were 36 by 54 feet and included space for pizza and homemade doughnuts. Each detail of the store, including a preset layout of merchandise, refrigeration, and counters, was planned in advance, with energy efficiency a prime concern. Typically there were three gas pumps outside, with two hoses each. Start-up costs, including construction, inventory, and land, averaged $250,000, about half the price of the typical convenience store, mainly because land costs in the countryside were lower. For many years Lamberti chose the building sites personally, with the biggest considerations being the traffic count, population in a 15-block area around the site, and the need for the company's product mix.

In 1985 Casey's began installing high-quality, noncorroding fiberglass gasoline storage tanks in all new store constructions. Older steel tanks were replaced with new fiberglass tanks or retrofitted with fiberglass lining. By contrast, and to Casey's competitive advantage, many mom-and-pop gas stations closed because they could not afford to comply with the stricter federal and state directives that began to be imposed in this period to combat underground storage tank leaks.

During the late 1980s Casey's line of goods included beauty aids, school supplies, housewares, pet and photo supplies, and automotive products. Videotape rentals were available in 94 percent of the company-owned stores in 1989. Introduced in the mid-1980s, Casey's own takeout fried chicken was in 36 percent of the stores in 1989, but its popularity dwindled in subsequent years.

GROWTH AND RECORD-SETTING

By 1990 start-up stores were costing Casey's from $350,000 to $400,000 each and were about six feet longer, providing room for an office and facilities for the handicapped. The average store did nearly $800,000 worth of business that year. Food items continued to total about one-quarter of revenue at the average store. Sandwiches and baked goods had become standard fare, although not every store had a kitchen area. About 4 million pizzas and 40 million doughnuts were being made a year, as well as about 45 million coffees in containers. Gasoline operations accounted for 45 percent of sales volume and 24 percent of gross profits, with most of the stations open 18 hours a day, seven days a week.

KEY DATES

1935:: Domenic Lamberti opens a coal and ice delivery business in Des Moines, Iowa.
1960:: Founder's son takes over food and fuel business.
1967:: Donald F. Lamberti buys oil company owning four service stations.
1968:: Service station is converted into first Casey's store.
1979:: Casey's nearly doubles number of stores during risky times.
1983:: Company completes public offering; stops issuing new franchises.
1985:: Environmental regulations prompt upgrading of underground storage tanks.
1993:: Casey's ranks 15th on Forbes list of most profitable U.S. food distribution companies.
1996:: Casey's General Stores opens 1,000th location.
2001:: Company is charged with gasoline price gouging in wake of September 11 terrorist attacks on the United States.
2006:: Company buys first large chain.

Fiscal 1990 ended with $500.7 million in net sales and $8.3 million in net income. The number of stores had grown to 769, of which 566 were owned by the company and 203 by franchisees. Long-term debt was $31.2 million. In that year Casey's began paying cash dividends and moved its corporate offices from leased space in West Des Moines to a 36-acre, $19.2 million complex in suburban Ankeny, where the distribution center had grown to 140,000 square feet. There was a separate vehicle maintenance center for the company's 70 trucks. The site also included a daycare center for employees' children and a full scale company store for training purposes where new employees were brought in for two-week training periods before assignment to specific locations. "Successful business is probably 5 percent strategy and 95 percent execution," Lamberti said in 1994, "and I think that can be taught to about anyone."

In 1990 an association representing 180 Iowa fuel merchants challenged Casey's policy of drawing customers into its stores by offering gas outside at low prices. The group, in a federal class-action suit, charged Casey's with "predatory pricing for the purpose of destroying and unreasonably restricting competition in these small markets." This suit was dismissed by a district court judge in 1994, but the dealers immediately filed an appeal. Casey's denied the accusation but did not reverse its policy of offering the lowest fuel prices in any given setting. It was restricting its gas profit margin to about 11 cents a gallon in 1996.

At the end of 1993 Casey's stock price reached an all time high of $24.50 a share, and the company authorized a two-for-one stock split, the third time it had split its common stock since going public. Forbes ranked Casey's as the 15th most profitable company in the food distribution category that year. It was named convenience store chain of the year by Convenience Store Decisions magazine for its "well-documented ability to parlay an impressive living out of small towns that don't even get on the search routes when most other operators are looking for new corners to conquer."

Casey's growth rate slowed between 1990 and 1994. During this period it added 107 new stores, fewer than half the number it built between 1985 and 1989. "They are growing intelligently and methodically at about 20 percent growth a year," an investment analyst said in 1995. "They don't want to get into a position of overextending." Casey's nevertheless had identified 4,000 small towns within its operating area that might be sites for expansion. The Ankeny warehouse was said to be big enough to handle supplies for another 500 stores. For every store opened, Lamberti estimated in 1992 that three full-time and nine part-time jobs were created.

Casey's dedicated its 1,000th store in Altoona, Iowa, in 1996. By this time the typical Casey's cost $680,000 to open, but the price remained a bargain compared to big city costs. Casey's was still benefiting from inexpensive, low turnover labor and from lack of competition from supermarkets, gasoline stations, and other convenience stores in its targeted areas. Acting as its own wholesaler, the company also was able to purchase goods at deep discounts and control product quality. The store design for the mid-1990s called for an air conditioned 40 by 68-foot building that included 500 square feet for kitchen space. All featured the company's bright red and yellow pylon sign and facade. Most were open from 6 a.m. to 11 p.m.

Casey's announced record earnings for the seventh consecutive year in 1995, but the company's stock immediately fell from $22.50 to $19 a share because analysts had expected profits to be even higher. "This is the first time in probably several years where the numbers didn't meet or beat expectations," said one securities researcher. Revenues came to $954.8 million and net income to $26.8 million, with a record 65 company-owned stores opened. The company's long-term debt was $81.2 million at the end of the fiscal year.

Each Casey's typically carried more than 2,500 items in 1996. Snack centers selling sandwiches, doughnuts, fountain drinks, and other fresh food items were in 99 percent of the stores, and pizza was available in 92 percent. Gasoline accounted for 56 percent of net sales. Wholesale revenue, from sales to franchised stores, came to 7 percent of the total. In 1996 franchisees were paying Casey's a royalty fee equal to 3 percent of gross receipts, excluding gasoline, and a royalty fee of $.018 per gallon of gasoline. They also paid a fee for rental of Casey's sign and facade. At the end of 1996 Casey's owned the land at 711 locations and the buildings at 738 locations. It was leasing the land at 90 locations and the buildings at 63 locations.

The nation's sixth largest convenience store chain in the early 1990s, Casey's was the third largest in 1996. At the end of 1996 (the year ended April 30, 1996) there were 983 Casey's stores, including 182 franchised units, in nine states. All were within a 500-mile radius of company headquarters in Ankeny, Iowa, with most in Iowa (312), Illinois (235), and Missouri (222). About 72 percent were in areas with populations under 5,000 and only 6 percent in communities of over 20,000.

Annual sales exceeded $1.1 billion in 1997. Revenues were $27 million. A changing of the guard came in May 1998. Longtime company veteran Ronald M. Lamb succeeded Casey's chairman, Lamberti, as CEO and president.

AN UNSETTLING START TO THE
NEW CENTURY

The economy started slowing as the new century began, putting pressure on the convenience store industry. However, the reaction to a bigger trauma by some of its stores created a secondary problem for Casey's.

Illinois Attorney General Jim Ryan charged Casey's with violation of consumer fraud law after gasoline prices were raised to $5 per gallon in the wake of the September 11, 2001 attacks on the United States. Casey's quickly responded with apologies to customers and offers of refunds. The company subsequently agreed to a fine of $30,000 to settle the price gouging lawsuit: $25,000 for the American Red Cross and $5,000 for the Illinois Consumer Education Fund. The state also mandated refunds. Other firms also faced charges.

Meanwhile, the small-town convenience store operator continued to keep pace with changes in the industry. Casey's "invested heavily in technology and systems" to improve profits, the Business Record (Des Moines) reported in September 2002. The addition of a pay-at-pump option improved profit margins on gasoline even as year-over-year total gallons sold remained roughly steady.

The company was in the process of equipping all stores with scanners linked to headquarters to facilitate rapid re-pricing of cigarettes, a move necessitated by price swings caused by manufacturers' rebate and promotion programs. Casey's planned to extend the system to cover all its products.

Satellite dish communication with stores facilitated the exchange of complex data, improving distribution efficiency. With more precise knowledge of an individual store's gasoline and product needs, product and gasoline delivery costs fell.

"The company is also beginning to dabble in the sophisticated and potentially complex world of hedging, which could allow it to protect itself financially from the volatile price swings of gasoline and other commodities the company buys on a large scale," Michael Lovell wrote for the Business Record (Des Moines). Casey's had locked into a beneficial yearlong contract for cheese. Rival QuikTrip, though, had a ten-year jump on Casey's when it came to hedging gas prices.

With cost control measures helping gross profits outpace operation expenses, Casey's began formulating plans for "more aggressive" store acquisition, according to a June 2003 Oil Express article. Lamb planned to continue the franchise buyout as well as acquire smaller chains in areas in which they were not yet operating.

The $2.4 billion operation considered itself unique among its peers in terms of distribution: the Ankeny warehouse supplied 90 percent of store items. Moreover, the vertically integrated Casey's delivered 70 of its stations' gasoline with company owned tankers. Casey's headquarters boasted an employee-operated daycare center. An in-house construction crew handled plumbing, electrical, and other repairs for Casey's stores.

Casey's prided itself on store upkeep. The Business Record reported in a 2004 article, Casey's replaced about 20 stores per year, usually on the same site, adding more gas pumps or square footage. Another 70 to 80 stores were remodeled annually.

More people began driving to those convenience stores during 2003. Industry sales climbed into mid-teen double-digit growth, recovering from a three-year slump. Yet supermarkets and national discount stores were encroaching on the niche's territory.

"We do not fear the Wal-Marts or the SuperTargets or anybody else that has gasoline, because we compete in price and always have," Lamb told the Business Record in August 2004. Casey's, furthermore, had brand confidence. The company turned down national restaurant chains' offers to co-brand their products.

All stores were equipped with kitchens, preparing popular pizza and doughnuts from scratch. Prepared foods, while producing just 8 percent of sales, yielded 26 percent of total gross profits, according to a June 2005 U.S. Business Review.

On the other hand, Casey's franchised stores were never big revenue generators for the company. Many of the franchisees, who came aboard during the period spanning the early 1970s to the early 1980s, were ready to exit the business. The ongoing buyback program changed the makeup of the company. In 1990, the company had about 225 franchisees; at midyear 2005, the number was down to 34.

The move appeared to be a win-win situation for Casey's and the franchisees. Acquired stores yielded substantial revenues more quickly than new stores for Casey's. Small operators were relieved of the pressure put on them by rising wholesale gasoline prices and declining profitability of cigarette sales.

As gas prices fluctuated even more wildly, larger operations felt the pain. Customers more actively shopped for the lowest price per gallon, buying higher margin items where they filled up. Casey's worked to maintain its average markup of 10.5 cents per gallon, barely covering credit card fees and overhead, according to a 2006 Forbes article. Only 2 percent of Casey's gasoline sales came from higher margin premium versus 7 percent industry-wide. (The chain had decided to steer away from gasoline futures or options, buying on the spot market.)

The other big draw, cigarettes, also needed some support. The combination of smoking bans, rising state taxes, and decreased manufacturer fees for shelf space, prompted Casey's to action. The company affixed tax stamps on the product, reducing cost to customers. The stores also reconfigured racks, offering more cheap smokes. The point-of-sales system used to determine which cigarette brands to cut also was applied to other products. Red Bull shoved aside candy, for example.

The company also added more prepared foods, to take advantage of high gross margins. In addition, lottery tickets returned from a 14-year hiatus, in fiscal 2006. While Casey's retained just 5 percent of sales, they were lures for customers similar to gas and cigarettes.

Casey's fiscal 2006 earnings per share from continuing operations reached an all time high of $1.25. Despite the ups and downs of sales and margins, the convenience store chain exceeded same store target sales of gasoline.

In January, Casey's had acquired 49 Gas'N Shop sites. The purchase marked the company's first experience with integrating a large chain. Then in September 2006, Casey's added 33 Iowa-based HandiMart convenience stores, bought from Nordstrom Oil Co. for $63 million. Burdened with relatively low debt, according to Private Placement Letter, Casey's moved to issue $100 million of notes to fund that and future purchases.

Robert Halasz

Updated, Kathleen Peippo