Looking for a company that’s managed to carve out a niche in one of the most competitive markets? Read on…
If any industry that can be described as ultra-competitive, it’s the convenience store. Everyone from mom and pop local stores to the mega-conglomerate chains of 7-Eleven and Hess are competing for people’s food and snack dollars. Even Exxon Mobil is in on the act.
Two factors offering little assistance in this highly competitive industry are customer loyalty and pricing power. To remain competitive, profit margins are usually cut to the bone. Likewise, consumer behavior is such that the customer will likely hit the closest store to purchase their good rather than go out of their way to buy from a certain location.
As a result, when it comes to analyzing stocks in the industry, finding a company that consistently delivers great financial numbers and creates lasting competitive advantages is rare.
…But such a does company exist.
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Operating in the Midwest, Casey’s General Stores (CASY:NASDAQ), has found a niche that includes both convenience stores and self-serve gas stations.
Though it uses a common business model Casey’s has been able to tweak it enough to stand out from the crowd.
Consider this: historical performance shows an annual growth rate of 11 percent. Its sales are approaching $8 billion — up from $2.5 billion less than a decade ago. During this same period, profits also continued an upward move, increasing to $181 million.
This leaves the question as to how Casey’s managed to separate itself from the crowd. The business model was tweaked to counter-intuitively focus on a small population demographic. Of its 1,878 locations, 60 percent are in towns with less than 5,000 people. As well, almost all of them are in communities of less than 20,000 people.
The strategy behind the small town approach is that there is less competition, sometimes where the company is “the only game in town.” This is the perspective of Gurufocus.com analyst Micah Martin, who had first hand experience with Casey’s being the only gas station in town.
He continues by saying that at the time there was no competition within four miles, stressing that “the place to go for fresh doughnuts in the morning, pizza on a Friday night, and a cold Coke in the summer” was Casey’s.
While this level of exclusivity is not found in many other Casey stores, the premise is still there. Shift your focus to areas where there is limited competition, and you won’t have to battle head-to-head with bigger, more established convenience stores.
Furthermore, the company has limited its expansion to only 14 states, the majority present in Iowa, Missouri, and Illinois. This presents a future model of significant room for growth and expansion into other states. Over the last several years it has added 50 new locations on average, but its current strategy is to double that number in upcoming years.
Of course, Casey’s must also find a way to attract new customers.
It has gas stations that promote regular business to its locations. But selling gasoline is such a low profit business that while two-thirds of its revenue is generated from the sale of gasoline, it does not help the overall bottom line.
That places the bulk of its profits dependent on its food-related industry segment. Specifically, the areas are groceries and prepared food that have gross margins of 32% and 60% respectively.
In total, the company has net margins of about 2%. According to Morningstar, the net margin for the convenience store industry sits at about 1.4%. And while a difference of .6% may not seem significant, when you consider the extreme competition in the industry, that difference is huge. It acts to separate the mediocre from the outperforming.
Casey also goes to great lengths to protect this seemingly small advantage. Its stores stock popular brands of food and non-food items, including tobacco and automotive supplies. The company is in the middle of a multi-year store renovation project that aims to improving the upscale aesthetics of the store for the customer.
The focus of the changes is aimed at the high traffic areas, such as the coffee bar, beer coolers, sandwich, and fresh bakery sections. Some stores will see these areas expanded. The larger communities of between 5,000 and 10,000 people will be seeing changes in store hours, from their current schedule to a 24-hour service.
These changes will not come cheaply for Casey’s, as the operating expenses of the post-makeover stores can increase to as much as 15 percent. However, according to management, in-store sales of the remodeled stores increases by 20 to 30 percent the following year. This makes the renovations well-worth the investment.
Shifting the perspective into the future, the company will be adding a pizza delivery service. This could give stores a big performance boost. Currently, only about 20 percent of all Casey stores offer this service. Those stores have found that adding a pizza delivery service contributes to a store’s revenue for prepared foods in the area of 20 to 30 percent.
Grocery sales have not lagged either, increasing between 7 and 8 percent for the fiscal years ending in 2014 and 2015.
This has resulted in projections of a consistent better-than-average earnings expansion in the coming years. Analysts current earning projections have Casey’s rising slightly above its historical norm of 11 percent, giving its stock price potential upside of about 70 percent over the next 5 years.
On the whole, Casey’s unique and well-executed business model has helped separate its brand from the rest of the convenience store market. The combination of a solid balance sheet and normal industry debt levels are evidence that not only the stock can perform well, but that it can also be an investment for people who are seeking consistent dividend income.
Current dividend yield is about 1 percent, with shareholders receiving an increased dividend amount every year since 2003. Sure, it doesn’t beat inflation but it’s better than nothing.