Caseys General Stores, Inc.

Good morning, and thank you for standing by. Welcome to the fourth quarter full year 2023 Casey's General Stores earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead.

Good morning, and thank you for joining us to discuss the results from our fourth quarter and fiscal year ended April 30, 2023. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Garrett Rivelas, President and Chief Executive Officer, and Steve Bramlage, Chief Financial Officer. Before we begin, I'll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity, and related sources or needs, the company's supply chain, business and integration strategies, plans and synergies, growth opportunities, and performance at our stores. There are a number of known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements. including but not limited to the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine and related governmental actions, as well as other risks, uncertainties, and factors which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and cases disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. A reconciliation of non-GAAP to GAAP financial measures referenced in this call, as well as a detailed breakdown of the operating expense increase for the fourth quarter, can be found on our website at www.caseys.com under the Investor Relations link. With that said, I would now like to turn the call over to Darren to discuss our fourth quarter and fiscal year results. Darren?

Thanks, Brian, and good morning, everyone. We're looking forward to sharing our results in a moment. I would like to start by thanking our 43,000 CASES team members for their tireless efforts and contribution to a record fiscal year. As I reflect on the three-year strategic plan that we set out in January of 2020, I'm extremely proud of what we've been able to accomplish. CASES is at the heart of the communities we serve. Our teams give their all, and this shows in the positive guest feedback we receive, the delicious food we make, and the impact we have on our communities. In fiscal year 23, Casey's, along with our generous guests and committed supplier partners, enabled over $5 million of donations. These dollars provided meals, school supplies, new playgrounds and equipment, disaster recovery needs, and services helping veterans and their families. I'd like to offer a huge thank you to our team members, our guests, and our nonprofit and supplier partners that make this all possible. We are proud to do so much good across so many communities. Speaking of good, in early May, we launched an upgrade to our rewards program that's bringing more good to our 6.5 million loyal members. The enhanced Casey's Rewards experience includes a refreshed app design that makes it easier than ever for Casey's Rewards members to track their points, redeem them for rewards, and see how much money they've saved by shopping with Casey's Rewards. The program recently celebrated its three-year anniversary, And what guests love most about our loyalty program is the way they can choose to receive their rewards. Whether it's Casey's cash to help pay for pizza night or extra cents off when filling the family vehicle, members have the flexibility to decide what works best for them. We look forward to continuing to grow membership and participation. Now let's discuss the results of the past fiscal year. Fiscal 23 was a record year for diluted EPS, finishing at $11.91 a share, a 31% increase from the prior year. The company also generated a record $447 million in net income and $952 million in EBITDA, an increase of 19% from the prior year. Inside, same-store sales were up 6.5% or 13.6% on a two-year stack basis, with strong results in both prepared food and dispensed beverage, as well as grocery and general merchandise, with theme store sales up 7.1% and 6.3% respectively. Margins were virtually flat year over year, a tremendous accomplishment as we managed cost increases with our merchandise partners and commodities while still holding our value proposition for our guests. We saw tremendous results across the board. Pizza slices and alcoholic beverages were very strong. We also had a lot of fun with innovative products like bush light beer cheese breakfast pizza that made a positive impact on sales. Fuel gross profit was up 16%, with total fuel gallons sold up 4%, and a fuel margin averaging 40.2 cents per gallon over the course of the year. Our fuel team continues to do an excellent job maximizing gross profit dollars by balancing fuel volume and margins. The macro environment was especially favorable for fuel margins, with two significant wholesale fuel cost declines during the year. We also had a great year in terms of managing costs. Same-store operating expenses excluding credit card fees were up only 2.8%, impacted favorably by a reduction of same-store labor hours of 2.3%. Guest satisfaction scores still improved, which is a testament to our store simplification and store leadership teams. They've been effective at freeing up unproductive and more expensive labor hours, which enables our team members to better serve our guests. During the fiscal year, we also did a tremendous job with unit growth. We built 34 new stores and acquired 47 more, which demonstrates our ability to grow the business both organically and via M&A. We met our annual and our three-year growth targets despite challenges with permitting, as well as delays in construction materials and equipment due to supply chain disruptions. We're successfully integrating the 222 or 228 new units from fiscal 2022 and are meeting our synergy targets from those new stores. All of this wouldn't be possible without our store development, real estate, and integration teams working seamlessly to grow our store base. We're extremely confident in our ability to continue to build and buy new units. We believe consolidation will continue to occur in the industry while rising financing costs are reducing the number of potential buyers. Our private label program continues to be popular with our guests, and we ended the fiscal year above 9% penetration in the grocery and general merchandise category in both units and gross profit. We currently offer over 300 SKUs of private label products, which we believe is a tremendous value proposition for our guests. These record-breaking financial results are a strong reminder that our business model is resilient in all parts of the economic cycle, and that Casey's has a unique ability to provide value and quality to our guests. I'd now like to turn the call over to Steve to discuss the fourth quarter and our outlook for fiscal 24. Steve?

Thank you, Darren, and good morning. Before I jump into the financials, I'd also like to acknowledge the entire Casey's team. The excellent financial results for the quarter, the year, and the three-year strategic plan are significant accomplishments for the entire organization, and it would not have been possible without the hard work and dedication of all of our team members. Total inside sales for the quarter rose 8.4% from the prior year to over $1.1 billion, with an average margin of 39.6%. For the quarter, total grocery and general merchandise sales increased by $66 million to $810 million, which is an increase of 8.8%, and total prepared food and dispensed beverage sales rose by $21 million to $314 million, an increase of 7.1%. Same-store grocery and general merchandise sales were up 7.1%, and the average margin was 33%. an increase of 50 basis points from the same period a year ago. Sales were particularly strong in our non-alcoholic and alcoholic beverages, and we experienced a favorable mix shift in these categories as single-serve grab-and-go items outperformed. Energy drinks sold exceptionally well, driving non-alcoholic beverages up over 13% in the quarter. Ongoing private label growth also assisted this category. same-store prepared food and dispensed beverage sales were up 4.9% for the quarter. The average margin for the quarter was 56.8%, down 10 basis points from a year ago. Bakery as well as hot food performed well in the quarter. Margin was adversely affected by a higher LIFO charge than prior year, which had an impact of roughly 50 basis points. And while we did experience some cost pressure in bakery and proteins, Cheese costs were down 6 cents per pound from the prior year to $2.20. This had an approximately 20 basis point benefit to margin. During the fourth quarter, same store fuel gallons sold were flat with a fuel margin of 34.6 cents per gallon, down approximately 1.6 cents per gallon compared to the same period last year. Fuel margins varied widely in the quarter. For example, We experienced low 30 cents per gallon in both February and March, but in April, CPGs were closer to 40 cents a gallon. Our flat same-store sales outperformed our relevant OPUS geographic data by over 200 basis points. Retail fuel sales were down $207 million in the fourth quarter, due primarily to an 11% decrease in the average retail price from $3.77 last year to $3.36 a gallon. This was partially offset by a 2.4% increase in total gallons sold to $636 million. Total operating expenses were up 6.3%, $31 million in the fourth quarter. Approximately 1.5% of the increase is due to operating 69 more stores than a year ago. Approximately 2% of the increase was related to same-store operations. Finally, approximately 1% of the change is related to an increase in the accrued costs for variable incentive compensation due to strong financial performance. Same-store employee expense was flat as the increase in employee wage rate was offset by a 3.3% reduction in same-store labor hours. The company also benefited from a $2 million reduction in credit card fees due to the lower retail prices of fuel. Depreciation in the quarter was up modestly as we put a large number of stores into service late in the quarter. Net interest expense was $12.8 million in the quarter, and that's down $2.5 million versus the prior year. This reduction was aided by rising interest rates on our cash balances. And as a reminder, only 15% of our debt is floating rate. The effective tax rate for the quarter was 22.7% compared to 17.8% in the prior year. The increase is primarily driven by a one-time benefit in the prior year from adjusting our deferred tax liabilities for a corporate rate drop that was enacted by the state of Nebraska. Net income was down slightly versus the prior year to $56.1 million, a decrease of 6%. And EBITDA for the quarter was $166 million, and that's essentially flat with the prior year. During the quarter, we've refinanced our credit facility with an unsecured $1.1 billion facility that includes an $850 million revolving line of credit and a $250 million term loan, each of which have a five-year maturity. It's an excellent outcome for us in what was a challenging banking environment during the quarter. And that speaks to the quality of Casey's as a credit risk and to the strength of her balance sheet. At April 30th, we had $379 million in cash and cash equivalents on hand. And with the recent refinancing, we now have an additional $875 million in undrawn borrowing capacity on existing lines of credit, giving us ample liquidity of $1.3 billion. Furthermore, we have no significant maturities coming due until our fiscal 2026. Our leverage ratio, as calculated in accordance with our senior notes, is 1.8 times EBITDA, and we continue to have ample capacity to make good strategic investments as they present themselves. For the quarter, net cash generated by operating activities of $245 million, less purchases of property and equipment of $175 million resulted in the company generating $70 million in free cash flow. We continue to see delays in the delivery of vehicles, and construction times remain elongated, thus deferring some of our planned capital spent into fiscal 24. At the June meeting, the Board of Directors voted to increase the dividend to $0.43 per share per quarter, and that's a 13% increase, marking the 24th consecutive year that the dividend has been increased. We will continue to remain balanced in our capital allocation going forward, focusing on driving EBITDA growth with ROIC accretive investment opportunities in front of us. The company is providing the following fiscal 2024 outlook. Casey's expects the following performance during fiscal 24. We currently expect inside same-store sales to increase 3% to 5%. We expect inside margin improvement to approximately 40% to 41%. The company expects same-store fuel gallons sold to be between negative 1% to positive 1%. Total operating expenses are expected to increase approximately 5% to 7%, and that's inclusive of adding 110 stores in fiscal 24. As a reminder, this is inclusive of non-recurring operating expense benefits from FY23 regarding a legal settlement. Net interest expense is expected to be approximately $55 million. Depreciation and amortization is expected to be approximately $340 million, and the purchase of property and equipment is expected to be approximately $500 to $550 million. The tax rate is expected to be approximately 24% to 26% for the year. Consistent with our past practice, we're not guiding to a CPG figure, nor are we providing EPS or EBITDA. But for model calibration purposes, fuel margin in the mid-30s, along with flat retail prices of fuel compared to fiscal 23, would result in a flat EBITDA year over year. Our first quarter-to-date experience is as follows. Inside same-store sales are consistent with achieving the midpoint of our fiscal 24 guidance. Same-store gallons sold are near the low end of our fiscal 24 outlook. Fuel CPG margin for May was in the low 40s. However, we're currently in the low 30s. I would now like to turn the call back over to Darren.

Thanks, Steve. I'd like to again say thank you and congratulations to the entire Casey's team for delivering another record year. The results speak for themselves and are a reflection of the hard work of the team and their dedication to executing our three-year strategic plan. In January of 2020, we laid out a plan to reinvent the guest experience, create capacity through efficiencies, be where the guest is, all while investing in our talent. As this plan is now ready for renewal, I'd like to share some of our accomplishments. Our team had to navigate through a global pandemic and the effects therein, including restricted traffic, labor shortages, and an inflationary environment. We adapted to the situation and thrived in it, as you can see with our results. We reinvented the guest experience in several ways, but we really shined with our Casey's Rewards Program. We made a commitment to enhance our brand and drive digital engagement, and we did just that with over 6.5 million members through May of 2023. And this helped drive results, because our same store inside sales were at the high end of our guidance. We wanted to make sure that we created capacity to invest in the business by capturing efficiencies while we grew. The team worked exceptionally hard to make the stores work harder for us, culminating in reducing same-store labor hours in fiscal 23 by over 2%, while keeping team members engaged and guests satisfied. It showed in the financial results, too, as our operating expense CAGR of 12% was lower than our EBITDA CAGR of 14%. We also made a commitment to be where the guest is through accelerated unit growth. We came into the plan with an expectation that we would build more than we bought, but as the M&A environment changed, we were able to remain flexible with our two-pronged approach in over 70% of our new units from fiscal 21 to 23 were via acquisition. We made a bold commitment to accelerate our growth, and we exceeded our own high standard of 345 new units, ending the three-year period with 354 new stores. As you can see, our business has performed exceptionally well in a challenging macroeconomic environment. Casey's has shown tremendous resiliency and we're positioned especially well to deliver future value to our shareholders through our strategic plan, which is being enhanced with our commitment to technology. This was all made possible by making investments in the talent at Casey's. Our investment in a standalone M&A team drove record growth. Centralized procurement helped keep our shelves stocked at lower costs despite supply chain challenges. Centralized fuel operations allowed us to balance fuel volume and margin, and countless other teams within the organization helped make these last three years some of the most successful in the history of the company. We did all of this and generated cash flow from operations of approximately $2.5 billion, which was considerably higher than our capital expenditures of approximately $1.2 billion. As we reflect on our last strategic plan and our fiscal 23 and beyond, I'm thrilled in Casey's ability to succeed in any macroeconomic condition. We're excited to share our next three year strategic plan on June 27th, as we host our investor day in New York, we'll lay out our plans to continue to grow the business and deliver value to our shareholders. Finally, I'd also like to thank board directors, Diane Bridgewater and Lynn Horak for their amazing contributions to the company over the last decade. Plus their guidance helps fuel Casey's growth and success during their tenures. Lynn has been an invaluable resource to me as the board chair, being a great mentor and advisor since I came on in the summer of 2019. I wish Lynn and Diane all the best in their retirement from the Casey's board in September. We'll now take your questions.

As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit to one question and one follow-up question. Please stand by while we compile the Q&A roster. The first question comes from Karen Short with Credit Suisse. Your line is open.

Hi. Thanks very much and congratulations on a good year. I just wanted to, and also look forward to seeing you in June, I just wanted to parse out on your guidance with respect to in-store margins. Maybe you could parse out a little bit more on the grocery side versus the prepared food side. Obviously, prepared food continues to be pressured. And then I guess within both of those components, talk a little bit about price increases and or branded pass through on grocery and then what you're kind of thinking through on the actual prepared food commodity cost pressures. And then I have one more quick question.

Yeah, Karen, this is Darren. And thank you. Yeah, I'll go ahead and start and I'll let Steve fill in some of the detail. Yeah, we expect to see a bit of recovery in overall inside margin. And we would see that primarily in prepared foods, and we think that's for a couple of reasons. We're expecting the inflationary pressure that we've experienced over the last year and a half to settle down a bit. We're currently experiencing some favorability on cheese costs, as an example, which is, as you know, is a big input to our prepared food and dispensed beverage margin. So that we expect to continue to improve throughout the year. On the grocery and general merch side, we started to see some of that inflation subside. There are still some categories like chips and candy where we're experiencing some inflation. But outside of that, there's been some moderation there. And so we'll still remain diligent in terms of passing on pricing that's appropriate. And on the prepared food side, we'll be a little more cautious on that. on that effort on the commodity side, because we don't want to whipsaw the guests, and we want to make sure we maintain a relative value proposition. Steve, any other color to that?

Just for modeling purposes, I think I would advise that grocery and GM, to Aaron's point, probably flattish, margin-wise, you're over here for all those reasons, and the preponderance of the inside improvement will come from prepared food, and that's both on the cheese side where We're about 43% hedged right now for our fiscal 24 requirements. And at the current cheese prices, we're kind of looking at least for the first quarter down about 10% or so year over year. So we'll get some tailwind there. We'll also be lapping some significant price increases we've had this year. For example, donut inflation this year was 40%. in the bakery category, and we'll lap that during the first part of fiscal 24. So most of the improvement mechanically is going to be prepared food.

Okay, and then my second question is, obviously you're managing OPEX growth extremely well. You know, one of your more rural, I guess I would say, comparisons has had to add significant number of hours to the stores. you know, from a labor perspective. And I'm wondering how you think about that in terms of where you're at in terms of being able to actually meet the guests' needs and whether or not you need to add more labor to the stores, because that seems to be more of a theme even for rural operators.

Yeah, Karen, I think whether you add labor or take away labor depends largely on where you're starting. And for us, we felt like we were always staffing our stores appropriately to meet the guests' needs, and we continue to believe that. But what we were able to identify is that we had some unproductive hours in the stores, and we had some labor or activities, rather, that we were doing in the stores that just didn't need to occur in the store anymore. We could pull that activity out of the stores and move it upstream where we could do it more efficiently. And so we've been on a concerted effort over the last year to do exactly that we've been able to reduce the number of unproductive hours as we would call it and and take those out and in fact our overall satisfaction scores as we measure them through a third party have actually improved while we've done that because we've not only freed up those hours and and taken some of that to the bank but we've also given some of those hours back to the store so they can focus more on the guest experience. So we feel very comfortable with where we're at now. And again, for this next fiscal year, we still have our continuous improvement team in place. We're going to continue to pursue finding more opportunities to operate our stores more efficiently.

Please stand by for our next question. The next question comes from Anthony Bonadio with Wells Fargo. Your line is open.

Yeah. Hey, good morning, guys. So I just wanted to ask about the gallon guidance. You're guiding the flattish same-store gallon growth, despite what optically looks like a pretty easy compare. And you're lapping what I would assume is some level of demand elasticity last year on our gas prices. Plus, you've got the loyalty program. Can you just talk about your assumptions there and maybe why you're not more constructive?

Well, Anthony, yeah, with the gallon guidance, I mean, there's a lot going on right now in the world, and you're right. If you just look at the first quarter last year when gas prices spiked over $5 a gallon, there was a bit of demand destruction there, but then things fell off and got a little bit more normalized. It's been a little bit choppy. As we go into this year, obviously there's a lot of macroeconomic headwinds going on that could have an impact on gallons to the negative. At the same time, we do think that because we've outperformed our relevant benchmarks in our geography, we think we have some potential to grow gallons as well. So we're trying to be appropriately conservative. We've given ourselves some room to grow gallons in the guidance and also are being somewhat pragmatic about the fact that if we go into recession and and the economy changes, that we could see some softness. It's just a little bit too early to tell, so that's how we landed on the guidance that we did.

Got it. And then on that 3% to 5% inside same-store sales guidance, as we continue to see disinflation and deflation in some categories, can you just dig in a little more on the underlying components of that growth and specifically how you're thinking about contributions from price and unit growth within that forecast?

Yeah, for the inside of the store, we're expecting to see still good growth on the grocery and general merchandise side, probably a little bit softer on the prepared food and dispensed beverage simply because of what we're cycling. You know, we've been up over 13% on two-year comps, and so this would be the third year in a row that we're cycling really aggressive comps. We're not expecting a lot on the pricing. side from inflation, particularly in prepared foods. We took a lot of price last year to cover commodity costs. And so we're trying to maintain more of a relevant value proposition for our guests, especially as the economy starts to tighten. On the grocery and general merch side, we're still going to see some inflationary impact from tobacco. And that's just kind of normal course. And like I said, we're seeing some inflation in some categories, but we're also seeing that moderate. And in fact, When we look at alcohol in the beer category in particular, we're expecting that to be a little more price competitive this summer with some temporary price reductions from the manufacturers. So that could be actually a little bit deflationary.

Please stand by for our next question. The next question comes from Ben Benvenu with Stevens. Your line is now open.

Hey, thanks very much. Good morning, everybody. Morning. I want to ask first on the unit growth, 110 units that you're citing for the year, is that all organic? Would any inorganic be, you know, an augmenting agent to that assumption? And then I guess along those lines, could you talk a little bit about kind of the phasing of the unit growth and the pipeline visibility that you have there?

Yeah, Ben, with the unit growth, 110 units for this year, as we model it out at the beginning of the year, we kind of think that's an even split between organic and M&A. And now, having said that, a lot can happen in 12 months in the M&A world. So I'll leave myself a little bit of wiggle room based on potential transactions that could occur. That mix could change. But we feel very confident in the 110 units regardless of how we do that. And from an organic standpoint, we feel very good about our pipeline. And we've got the sites identified, and it's just a matter of building them right now. We're on a better cadence this year, I would say, than we were last year. We're feeling better about the supply chain. The permitting component of that equation is starting to get a little bit more rateable. We feel a little better about the cadence of growth throughout the year on the organic side. On the M&A side, we feel really good about our pipeline, and we're having a lot of good discussions with potential sellers. The timing of those tends to be lumpy, as you well know, so it's hard to pigeonhole those into any type of quarterly cadence, but we definitely feel good about the pipeline on both organic and inorganic, and we're confident we'll be able to easily get to that 110 number.

Okay, great. Maybe revisiting operating expense growth. The 5% to 7% range is much better than you guys have delivered over the last several years, understanding that there have been a number of external challenges to getting back to this kind of more normalized growth. When you think about the factors that contribute to either the 5% or the 7%, what are the variables that are the swing agents in that guidance range?

Yeah, Ben, I guess the first thing I'd tell you is we have made an organization-wide commitment to controlling operating expenses and being very disciplined about that. And so that is a, as I said, that's an organization wide effort. And I think you saw the results of that effort in this past fiscal year. So you can expect that kind of effort from us moving forward. Um, having said that, I think in terms of the components of when we look at our GNA, we're essentially keeping GNA flat for the year. And so, um, that's a, that's a big step in the, in the right direction. Then from a store standpoint. We have our continuous improvement team, like I've mentioned before, that's doing a lot of great work. And so we expect to continue to see a reduction in same-store labor hours this year as we did in the previous year. And on the rest of the equation, we expect to be able to continue to pursue opportunities to leverage our scale and our purchasing power to drive more efficiencies in the business. Steve, anything else you want to add?

The other piece around, you know, employee wage rates, we will, we're going to continue to obviously pay people competitively and be on market. And so our average wage rate right now in our stores, excluding our managers, is a little over $14 or so an hour. You know, we feel like that's on market broadly across our stores. our footprint, but we're certainly going to, you know, we'll remain very competitive in that space. And to Darren's point, it's, um, that's not the source we're going to, we're going to control necessarily around store rate. It's more of the efficiency side.

Yeah. And then I just add one other thing. Um, and we've mentioned it before on previous calls, we've, we've also made a concerted effort around controlling our turnover and reducing our turnover. And we've had really good success in that over the year. And, um, This past quarter was no different. And, you know, in the quarter we saw a 20% reduction in overtime hours, 20% reduction in training hours. And so we expect to continue to work that turnover down. And as a result of that, we'll lower some of those training costs and overtime hours as well.

Please stand by for our next question. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

All right. Thank you. Good morning. I had a quick follow-up question on fuel gallons, which, you know, trended negative in May. You guys called that out. So just hoping for, I guess, a little more color on what you're seeing from the consumer in terms of, I guess, traffic, fill-ups, et cetera. And I guess, you know, really what the key drivers of, you know, the recent pressured volume are. growth have been, and how does that compare to the industry in the broader Midwest? Are you taking share, for instance?

Yeah, Bonnie. On gallons, I guess I could start with fourth quarter. Our gallons were flat in the quarter. By the mid-continent opus data that we saw, gallons were down about 2.5%. for that same three-month period. So from that perspective, I would say that even though we were flat, we're probably taking share versus some others in our geography. One of the dynamics that we're seeing that's impacting gallon volume is a softness in diesel fuel volume, and that's really a result of what we've seen happen in the economy over the last few months with softening retail sales. Construction starts kind of slowing down. And so you're just seeing less trucks on the road. So we saw a reduction in our diesel volume, low single digits. And now that's only about 14% of our fuel mix. But when it's down, it does have an impact. Now, on the gasoline side, we are seeing a bit of an increase. So when you mix all that out, it came out flat in the quarter. But that's what's really driving some of the softness right now that we're seeing.

Okay, that's helpful, Culler. And then I wanted to ask a little bit on your private label business. You highlighted that you now have over, what, 9% of your gross profits in units is private label, which is great, so congratulations. And then hoping you could maybe frame for us how that is or your position there relative to the industry average and maybe ultimately what the real opportunity could be and how you're thinking about private label in the context of your guidance this year. And then maybe touch on any key category calls for the consumers trading down more. I think you highlighted beverages, but any others? And then in the context of that, I'm just curious to hear from your perspective about the SNAP benefit changes and what impact that may have had on your business or the consumer in your stores. Thanks.

Yeah, the private brand growth has been phenomenal, really. And we're still very bullish on that. Over the course of the year, we saw about 31% growth, actually in the quarter, 31% growth in private label over last year. And as you mentioned, our unit share is just under 10%, and our gross profit dollar share is just over 10%. So we're really um, really feel good about the contribution that that's had. That's about, and that mix has grown about a hundred basis points from the same period last year. So everything's kind of working in the right direction on, on private label. Um, the categories is probably been the best or, um, or chips. In fact, we saw over 80% growth in chips and took about 500 basis points in share in the most recent quarter in our chip category. And, um, And we're also seeing a lot of good success in bottled water. But what I tell you is that I think the price increases that we've taken from the national brands over the past year have really put a spotlight on the value proposition for private brands. It's really widened that price delta between the two. And so as consumers get a little more penny-pinched, they're starting to look for those private brands, and so that's why you saw the mix increase. We expect to add another 40 items into the assortment over the course of the next calendar year, and we'll continue to grow that business. Steve, I don't know if you have any breakdown of private label contribution.

Yeah, I mean, listen, we consistently obviously see private label contribution of many multiples of improvement from a margin standpoint. I think we're running, if our category nationally is running in the low 30%, private label will be closer to 50%. Contribution on a lot of those items varies by overall category profitability, but it certainly is quite a creative category in general for us to continue to push.

Please stand by for the next question. The next question comes from Bobby Griffin with Raymond James. Your line is open.

Good morning, everybody. Thanks for taking my questions. I guess first, guys, it's more of a high-level question, but, you know, over the last couple years, there's clearly been a lot of changes that have happened in the industry. You've had a period of rising wholesale prices, period of big falls in wholesale, COVID, etc., I guess so when you and the team look, is there a fiscal year or a period of operations that you feel is kind of close to what a normal EBITDA of this business should be where we could benchmark or where you guys benchmark the next two or three or four years of EBITDA CAGRs off of?

Wow, Bobby, that's a tricky question. I'm not sure what normal looks like anymore, if you put it in the context of the last four years. I don't know. To a certain extent, I would just fall back on what we've done historically and say we've grown EBITDA at an 8% to 10% CAGR pretty consistently over a long period of time, and that's been through a lot of different economic cycles. So, if I were going to anchor on anything, I would say, you know, I think that's a long track record of performance where we've been able to stay in that type of range, really regardless of how the economy is performing. Now, quarter to quarter or year to year, that may fluctuate a bit, but, you know, over a longer period of time, I think that's a pretty safe place to anchor yourself on. And so, I don't see anything on the horizon that will prevent us from continuing to do that. And, you know, we'll talk about this more on our investor day, but, you know, we feel very good about the future. And so I guess that's the best answer I think I can come up with, Bobby. Is that what you were kind of looking for?

Yeah, I mean, that's fair. Yeah, I mean, I agree. It's very tough to predict normal. It's just, you know, when you kind of maybe maybe we best look at it on a rolling three years and kind of, you know, kind of have that historical performance there because there has been such big swings in the fuel side of the business. So, no, that's fair. I guess my second question is back to private label. Just, you know, the performance there has been pretty impressive. It's getting to a point now where it's a meaningful part of the business. Just curious, as we've maybe seen some modest breaks in inflation here. How are the national brands, you know, now responding? Are you seeing them come back to the table given the success you guys have had in private label and come back with more compelling offerings from a price or a promo basis? Or are they, you know, kind of just accepting the shift that's taking place inside your grocery business?

Well, you know, I think, you know, first, I think they've started to moderate on the price increases that they're passing on to us. And so, I think some of that is a reflection of just inflation overall starting to subside. Some of it is a reflection of the fact that our private brand mix has grown continuously. And, you know, we have really good relationships with our major suppliers, and we have great conversations with them about this subject. In some cases they make some of the private label for us. In other cases they probably wish we didn't have it. But, yeah, I think as we continue to have success with it, we continue to challenge each other to find ways to grow the entire pie. Our goal with Private Label isn't to reduce sales in national brands. Our goal in Private Label is to meet the needs of consumers that are looking for more affordable, high-quality options. And so we seek to offer that to those guests, and at the same time, we do a lot of great work with our national brand suppliers to make sure we're satisfying the needs of those guests as well. And so... So yeah, we have good discussions. That's all part of our joint business planning process that we've been implementing for the last few years. And as you can see with our inside sales numbers, it's been pretty successful.

Please stand by for the next question. The next question comes from Kelly Banya with BMO Capital Markets. Your line is open.

Good morning. Thanks for taking our questions. And sorry if I missed this, but I was wondering if you could just comment on traffic versus ticket within the in-store comps and just any color on units versus inflation and mix within the two in-store categories.

Yeah, Kelly, if you look at the composition of our same-store sales last quarter, You know, we were up 6.5%, and inside the same store, about 6% of that was from price, and about half a percent of that was from traffic. And so we feel really good about the fact that we're generating positive traffic, albeit just a little bit, but it is positive, and we're also seeing that dynamic play out in the first quarter as well with positive traffic. So as the pricing changes, kind of moderates as we cycle over some of that inflationary pressure. We shifted our focus more towards driving traffic, and we're starting to see the benefit of that.

Okay, that's helpful. And I think there was a comment about an expectation to continue seeing a reduction in same-store labor hours, but I was wondering if you could be more specific in terms of the magnitude of further labor hour reductions that are embedded into your 5% to 7% OPEX growth outlook for this coming fiscal year?

Sure, Kelly. Good morning. This is Steve. Our 5% to 7% plans at the moment for another 1% year-over-year reduction in same-store labor hours, so that'd be on top of the 50-something that we realized this year. And then, obviously, we'd have wage cuts wage offsetting that, but a 1% same-store labor hour reduction is baked into that 5% to 7% OPEX guide.

Please stand by for our next question. The next question comes from Irene Nettel with RBC Capital Markets. Your line is open.

Thanks, and good morning, gentlemen. Listening to your commentary, it sounds as though you are marginally more cautious on consumer and spending trends and marginally more bullish on the M&A outlook. So I'm wondering if you could just talk a little bit in both those categories about what you're seeing in in the stores, a little bit more around trade down behavior other than private label and the initiatives that you have underway for providing value. And then on the other side, just on the M&A, what you're seeing in terms of valuation expectations and I guess your volume in the pipeline.

Yeah, sure. I mean, I'll go ahead and start with the consumer. I'll let Steve talk to M&A. You know, with the consumer, I think we all recognize that the economy is starting to soften a bit. And so we start to see some consumer behavior from a more macro perspective. When you look at our consumer base, I'll just remind everybody that a couple of things. One, about three-quarters of our consumers earn over $50,000 a year. And that's significant in the fact of the geography that we operate in. The most expensive state we operate in is ranked 22nd in terms of cost of living, and some of the bottom 10 states are in our geography. So $50,000 goes a lot further in our geography than in many others around the country. So with that as a backdrop, what we're seeing from the consumer in our stores is is pretty consistent behavior for that group, that three-quarters of the group that are earning $50,000 or more, not any real significant shifts in buying behavior. With the group that other 25% call it that's earning less than $50,000 a year, we are seeing some shifts, certainly shifting more towards private label, reducing some of discretionary purchases Think lottery and some ice cream novelty, that sort of thing. But they're also shifting those purchases over to more affordable indulgence like candy. We're also starting to see some behavior where they're leaning a little more into our freezer section and buying individual meals. And that may be in lieu of going to a QSR occasion. as well, so we are seeing a bit of that shifting around the store. Again, our traffic has been positive, so we haven't seen any sort of behavior that would suggest that consumers not shopping, and this is one of the beauties of our business model. We sell basic needs for people, and so these are things that people have to have, and so they're going to continue to come. They just may behave a little bit differently, but at this point, it's really been the low-income consumer that's been most impacted.

You know, and Irene, on the M&A side, the pipeline, I think, remains quite robust as we sit here today in terms of the things that we're looking at. We feel good about that. And just a couple of things that are in that mixing bowl. Listen, there's a higher cost of financing, for sure, associated with anybody who does a deal. And I think that's generally a good thing for us, I think. potentially marginal buyers are sidelined quicker. Certainly, non-strategic buyers have largely been sidelined from many of the potential processes that we're looking at where, you know, there's no longer a kind of a cost of financing advantage and they just don't have any synergies to bring to bear. And so, I think it's a smaller pool of potential buyers in general. The operating environment for potential sellers still remains tough. It's tough sledding for a lot of these smaller operators, which is rising costs and the need to reinvest in the business and labor dynamics, et cetera. That remains definitely a tailwind for us in general. I think the industry is still working through valuation expectations. There's no doubt the potential sellers, they want to start with you know, all-time high fuel margins and LTM numbers and 0% financing-driven historical multiples, and that's not the world that we're in. And so you have a little bit of, you know, standoff, at least initially, with that. I think that's starting to break a little bit, but there's no doubt there's still some valuation issues disconnects at the beginning of a lot of the processes we're involved with.

That's really helpful. Thank you. And then just one other question, please, around cheese pricing. You said that you have 43% of this year's needs locked in. Can you tell us at what price? And can you also give us an idea of whether sort of that 43% is time-based? or sort of, you know, prorated across the year, and what are your plans in terms of locking in pricing given where we are today versus where we were three months ago on pricing?

Well, we watch the prices every day, so that this is a big deal to us, obviously, and so if we feel like we can, you know, lock in year-over-year deflation as a general matter, that's a pretty attractive entry point for us to be able to do that. The 43% It is across the whole fiscal year. It's a little bit higher in the first quarter. We're kind of two-thirds or so locked in in the first quarter, and then it progressively goes down from there. Again, I think I said we're about low double digits, 10% to 15% deflationary in the first quarter based on the amount that we've locked, and it probably would be consistent as you go into the later quarters too but you know where this trip ultimately settles is still remains to be seen and so that number can can change but we're certainly in a much better spot coming out of the gate on cheese than we were entering fiscal 23. please stand by for the next question the next question comes from chuck sarankoski with north coast

Researcher line is open.

Good morning, everyone. Darren and Steve, can you address shrink in the quarter and the year and whether that's a component of concern in operating the stores?

Yeah, Chuck. You know, shrink is always a concern in our stores and our business. I would say that so far we have not seen any real shift in shrink. versus where we've been historically. And I know there's a lot of talk out in the industry about shrink, but we just have not experienced that yet in our stores at this point.

Okay, that's great. And the tobacco category, as we look out for fiscal 2024, that continues to shrink in volume. What effect is that having on the grocery gross profit margin

Well, Chuck, you know, what we've experienced is essentially kind of flat sales from a dollar perspective and kind of mid-single-digit erosion in unit volume. And so the pricing that we've been able to pass on has essentially covered the cost increases plus maybe a penny or two a pack. So from a dollar standpoint, it's holding steady, but from a margin rate perspective, it does put a little bit of pressure on the grocery and general merch category. I don't know exactly what that impact is, Steve. I don't know if we've actually done the math on that. But, you know, Chuck, what we've also seen overall in the grocery and general merch category is some margin expansion. And so I think that's a we've been able to offset any pressure from tobacco by accelerating our private label and working closer with our supplier partners on more margin accretive activities that just overcome that drag from tobacco.

Please stand by for the next question. The next question comes from John Royal with JP Morgan. Your line is open.

Hi, good morning. Thanks for taking my question. So can you talk about the recent volatility on the fuel margin side going from the mid-30s and 4Q? And I think Steve said it jumped to the low 40s in May and then snapped back to the low 30s. Can you talk about the drivers of that volatility? It doesn't feel like price has been quite that volatile since the end of April. So any color there would be helpful. Thanks.

Yeah, it's just, you know, John, that We just have had some wholesale cost increases and decreases, and it has been volatile. And then, you know, of course, we're not alone in this. There's a competitive set, and so we have to stay competitive with others in the market. And sometimes that overall dynamic between cost increases and competitive pricing posture allows us to make more margin in some situations and less margin in others. And so... We've had – it's probably been a little bit more extreme, you know, month to month than we would see historically. I would just point you to the last four months, the three months in our last fiscal quarter and then May. Two of those months were in the low 30s. Two of those months were at 40. And so typically the spread is not that much, but I'd say there's nothing unusual in the world that's driving that, just – just continued competitive activity and wholesale cost fluctuations.

That's helpful. Thanks, Darren. And then I noticed you had a pretty sizable working capital draw in 4Q. Any color around that and any portion of that that might be reversible in 1Q or later on in the year?

Yeah. Hey, John. This is Steve. I think From a working capital perspective relative to where we were in the prior years, a lot of our working capital change is just going to be driven by the price of fuel. As the wholesale value of fuel goes up in a particular period, that's going to show up as an increase in inventories for us, and it's going to show up as an increase and payables, and then it's going to go the opposite direction. And so the single biggest impact on our working capital change, both in the prior year, 12-month period, was a big change in the wholesale cost of fuel, and it was the same this year. It just happened to be going in the other direction. There was nothing substantially different happening in the business. We generally, as we add units... are working capital positive, just based on the timing with which we procure fuel and have to pay for fuel and receive credit card payments. And so adding a bunch of units at the very end of the period this year will have a differentiating impact on working capital if we add units at a different pace in the prior year as well.

Please stand by for the next question. The next question comes from Christina Katai with Deutsche Bank. Your line is open.

Good morning. This is Jessica Taylor on for Christina. Thanks for taking our question. I just wanted to go back to vendors and pricing and just get your thoughts on what you're seeing competitively for pricing. Are your competitors looking more, taking more pricing actions? And then from the vendor perspective, if you're seeing any problems

within your negotiations and your joint plannings like any indication that your vendors are looking to drive more units and to price accordingly uh yeah jessica um from a competitive standpoint we do see some competitors still continuing to take price and i and i would say particularly among the smaller operators that that dynamic is is not all that different than fuel, where they don't have a lot of levers to pull, so they're pulling the price lever to try to offset higher costs across the board. So we are seeing some of that. From a supplier perspective, it really depends on the type of supplier and the industry and the category that they're in. I think we're seeing an interesting mix of some suppliers that still believe they have the ability to pass on more price, And so we are seeing a little bit of that. That is certainly moderated from where it was a year ago. We see others, like I mentioned before, in the beer category who are looking to be a little more aggressive this year, and we expect them to be battling over share. And so we're expecting some price offs on that category. So a little bit of a mixed bag from that perspective.

Thank you. And then as a follow-up, I think on the last call, we talked a little bit about pizza and a little bit of – I'm just wondering there if you're seeing any softness in slices or whole pies and how the promotional environment is there. Are you still seeing a lot of promotions from your competitors?

In pizza, we've done pretty well. You know, our slices – The units have actually been growing. Whole pies have been a little bit soft from a unit perspective, but we've taken a pretty significant pricing in that category. But overall, we're just kind of flat to maybe a little bit negative in that category. And that compares pretty favorably to what we see in our pizza competitive set. We are starting to see some more promotional activity from the major – beats the competitors as they all try to get some unit velocity back. We're taking a fairly conservative approach on that. We are doing some promotional activity, but we feel like we're line priced pretty competitively in the base case, so we don't have to discount too aggressively. We have more of an everyday low price approach, and that seems to work pretty well for us.

I show no further questions at this time. I would now like to turn the call back to Darren for closing remarks.

All right, thank you, and thanks for taking the time today to join us on the call. I'd also like to thank our team members once again for their contributions and delivering another record year. And we look forward to seeing everybody on Investor Day on June 27th.

This concludes today's conference call. Thank you for participating. You may now disconnect.