Couche-Tard faces another suitor in Casey’s play

Casey’s has excelled in sales of in-store merchandise, the golden goose for convenience stores that might otherwise be left to the vagaries of gasoline sales and their volatile margins.

The Globe and Mail
September 7, 2010

Couche-Tard faces another suitor in Casey’s play
David Milstead


If not Casey General Stores Inc. (CASY-Q43.410.250.58%), then how, and when, can Alimentation Couche-Tard Inc. (ATD.B-T26.66-0.14-0.52%) find a way to maintain the growth story its investors have come to expect?

The question is an ever-more expensive one, as Casey’s, continuing its rebuff of Couche-Tard, said Tuesday it has another suitor willing to pay $40 (U.S.) per share, above the Quebec company’s $38.50 offer. Investors, expecting a bidding war, sent Casey’s shares even higher.

A Casey’s acquisition would boost Couche-Tard’s U.S. presence by roughly 50 per cent and return the company to its big-deal days. After seven years of annual revenue gains of at least 19 per cent, 2008 and 2009 saw top-line growth of just 2.7 per cent and 4.2 per cent, according to Standard & Poor’s Capital IQ.

To be clear, the U.S. convenience store industry is fragmented, and there are numbers of small operators who own up to a few hundred stores. Two of Casey’s geographic competitors are Wisconsin- and Oklahoma-based family-run companies with 350 and 535 stores, respectively, according to Capital IQ.

“I think there are a lot of opportunities,” said analyst Derek Dley of Canaccord Genuity. “The company will be adding a number of stores to its network, whether it’s Casey’s or not.”

Yet Casey’s represents one of the last opportunities for Couche-Tard to pick off a U.S. publicly traded convenience store operator of scale – and one that leads the U.S. industry in a number of performance measures as well.

The Ankeny, Iowa-headquartered company operates almost 1,500 stores in the U.S. Midwest, many in rural communities. The two most prominent public competitors are Susser Holdings Corp., a Texas company with about 500 stores, and The Pantry Inc., a North Carolina company with more than 1,600 southeastern stores.

Casey’s has excelled in sales of in-store merchandise, the golden goose for convenience stores that might otherwise be left to the vagaries of gasoline sales and their volatile margins.

While Casey’s trails The Pantry and Susser in merchandise sales per square foot, according to estimates from the food retail analysts at BMO Nesbitt Burns Inc., its gross profit per square foot easily exceeds the other two chains. It adds up to a gross margin on merchandise of 41.3 per cent in the last 12 months for Casey’s, versus roughly 33 per cent for each of the other two chains. (Couche-Tard’s merchandise margin at its 2,800 U.S. stores is similar to The Pantry’s and Susser’s.) That merchandise success has flowed through to the bottom line: Its return on invested capital – a measure that takes into account both equity and debt financing – is 11.0 per cent, well above The Pantry’s 6.1 per cent and Susser’s 8.1 per cent, the BMO analysts figure. (Couche-Tard is 11.8 per cent.) And its same-store sales, at 6.3 per cent, lead all the operators, including Couche-Tard’s U.S. division.

Numbers like these reveal that Couche-Tard picked a plum target when it began negotiating for Casey’s nearly a year ago. However, the BMO analysts question the fit between the two. In an April report, Karen Short and Megan O’Hara wrote they were surprised at the offer as The Pantry and Susser have a more-similar operating model to Couche-Tard, with outsourced distribution and “bannered,” or name-brand, gasoline sales.

“Given the self-distribution, Couche-Tard would have limited ability to lower cost of product – except possibly through increased scale, and it seems unlikely Couche-Tard would consider bannering the stations – mostly because the rural, Midwest consumer is unwilling to pay a premium for bannered gas,” the analysts wrote.

If a Casey’s deal fails, Couche-Tard can at least fall back on its own positive operating metrics. In its most recent quarter, Couche-Tard’s merchandise sales improved 9.2 per cent year-over-year, with same-store merchandise sales increasing 4.4 per cent in the U.S. and 6.6 per cent in Canada, Canaccord’s Mr. Dley noted.

“Importantly, merchandise same-store sales in both Canada and the U.S. once again outperformed fuel same-site volumes,” he wrote in a recent report. “Given our stated preference for higher-margin merchandise sales compared with fuel sales – as fuel profits are notoriously volatile – Couche-Tard’s improving merchandise offering should translate into steadier earnings growth going forward.”


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