The convenience store has come a long way from its humble beginnings in 1927. That year, Jefferson Green, an employee of the Southland Ice Company in Dallas, realized people needed to buy staples, like bread and milk, after the grocery stores closed. His store was already open 16 hours a day, seven days a week, so he began offering these items.
The idea was expanded to other Southland locations, and in 1928, the company began selling gasoline. The stores took on the 7-Eleven name in 1946 to reflect their extended hours, and the format hit its stride in the 1950s, when suburbanization drove more workers further from the city—and into their cars.
Today, convenience stores are a $123-billion business in the U.S., and the outlets have continued to evolve, peddling all manner of goods, from energy drinks to coffee and prepared foods, including healthier fare like veggie trays and fruit bowls. Sales of these foods have risen as schedules have gotten tighter and today's mobile workforce looks to eat better.
This diversification is helping the best convenience stores lower their reliance on two segments that still make up a large portion of their sales: cigarettes and gas. Smoking rates have declined to just 18% of American adults, while volatile fuel costs have prompted motorists to cut back on unnecessary driving. The move toward more efficient vehicles is another long-term trend that could weigh on gas sales.
How Investors Can Fill Up
Over 8,100 convenience stores have gone up around the country since 2005, bringing the total to around 149,000. According to figures from IRI Allscan, convenience stores were the only retail channel to show both unit (up 1.2%) and dollar (up 2.4%) sales growth in 2012.
Still, the industry remains highly fragmented and competitive, with the top four players controlling a total of just one-third market, with smaller chains and single-store operations comprising much of the rest. Convenience stores also face indirect competition from grocery stores, fast food outlets, coffee shops and even big-box retailers like Target (NYSE: TGT).
For investors, the key is to zero in on chains with outlets in attractive locations and the ability to change with customers' tastes. They should also have strong balance sheets that will help them snap up smaller competitors.
One chain that continues to match up well with the above criteria is Casey's General Stores (Nasdaq: CASY). We last highlighted the company's strong prospects in a December Investing Daily article. Since then, the stock has risen nearly 40%.
Going Where the Competition Isn't
Iowa-based Casey's owns and operates over 1,750 convenience stores in 14 Midwestern states, making it the 10th largest convenience store chain in the country.
Through these outlets, Casey's sells traditional convenience store items, such as gasoline (which accounted for 72% of its 2012 revenue) and cigarettes (9%). However, it also offers prepared foods, such as made-from scratch pizzas, donuts, chicken tenders and sandwiches.
Casey's pizza has a particularly strong following, which has helped turn the company into the fifth-largest pizza chain in the U.S. Casey's has been building on that success by rolling out pizza delivery, adding this feature to 200 more of its outlets in its 2013 fiscal year, which ended April 30. It also converted another 200 of its stores to 24-hour operations.
The location of Casey's outlets helps the company duck the competition: 59% of its stores are in communities of 5,000 people or less. These markets are typically too small to attract the attention of larger chains, and their residents also tend to be more car-dependent than big-city dwellers.
But that doesn't mean the company is taking its eye off of expansion: it continues to branch out into the familiar markets surrounding its Iowa base. In fiscal 2013, it moved into three new states, completing stores in Kentucky and Tennessee and acquiring one outlet in North Dakota. During fiscal 2014, it aims to build or acquire 70 to 105 new stores and replace 20 of its existing locations.
Tasty Prepared Food Sets Casey's Apart
In Casey's fiscal 2014 first quarter, which ended July 31, its overall sales rose 13.2% from a year ago, to $2.11 billion, while diluted earnings per share (EPS) gained 41.6%, to $1.43. These results were well ahead of the consensus forecast of $1.06 a share in profits on $2.03 billion of revenue.
The company saw strong sales across all its businesses. Same-store gas sales (by the gallon) rose 3.2%, with an average margin of $0.221 per gallon, topping the company's goal of a 1.5% increase with an average margin of $0.15. Same-store grocery sales rose 6.1%, with an average margin of 32.7%, again above the company's goal of 32.3%, despite recent cigarette price cuts.
Same-store prepared food sales jumped 11.9%, with an average margin of 61.8%. The company attributed the sales gain to the continued roll-outs of pizza delivery and around-the-clock operating hours. Casey's balance sheet also remains healthy, with $803.9 million of long-term debt and $190.9 million of cash and equivalents.
The stock trades at 21.6 times the $3.28 a share that Casey's has earned in the past 12 months. However, the average analyst estimate calls for EPS of $3.68 a share for fiscal 2014—up from $2.86 in fiscal 2013—and $3.97 in fiscal 2015.
With its smart growth strategy and market-leading prepared food, this Midwestern convenience store chain should deliver healthy gains for years to come.