Casey’s General Stores: A Dollar General Approach to Gas Stations $casy

Pizza, Buc-ee’s, Expansion, and Zyn

The prototypical gas station is a hard business to get excited about. Looked at cynically, success is based principally on selling two products in some kind of decline: gas and tobacco. You sell a commodity product and then try to add some margin on top of that with a mix of nicotine, lottery tickets, coffee and snacks. Things can get more promising if you’re serving truckers (hence Berkshire’s acquisition of Pilot) or if you become a cultural phenomenon (such as Buc-ee’s), but that’s far from the norm. As if things weren’t challenging enough, you then need to grapple with what EV adoption and legislation around nicotine pouches might do to your business.

Location is of pretty serious importance here. Being just off a highway exit brings in a reliable stream of traffic with a greater propensity to buy more than just gas. A city/densely populated suburb storefront is more likely to bring in regulars with a Zyn or Marlboro habit. Rural locations sit in a more challenging position. While there may be less competition, it’s for good reason! Fewer potential customers and greater poverty rates weigh on the magnitude of success gas stations can have in those areas.

Casey’s General Stores has embraced this challenge, opening 72% of all its stores in areas with fewer than 20,000 people. The structural issues present with operating in these regions forced the company to direct a lot of attention toward its food offerings, and more specifically on high-margin ones. Casey’s began offering freshly made pizza in 1984, and today sells it in almost all stores. Its food menu expanded from there, now including items like hot sandwiches and croissants.To top it off, 97% of stores sell bakery items such as donuts and cookies.¹ Management has continually emphasized the size of its pizza business to investors, and as of 2023 Casey’s was the 5^th largest pizza chain in the U.S., at least when measured by number of kitchens. As much as I’d like to imagine the Casey’s C-suite looking at Domino’s stock price performance since IPO and deciding to put further emphasis on pizza operations, that’s fortunately not what occurred. Its pizza business, and management’s focus on higher-margin food items more generally, has been highlighted at least since the company’s 1994 annual report, the first available on the current website:

“It is management's policy to experiment with additions to the Company's product line, especially products with higher gross profit margins. As a result of this policy, the Company has added various prepared food items to its product line over the years. In 1980, the Company initiated the installation of "snack centers" which now are in approximately 99% of the stores. The snack centers sell sandwiches, fountain drinks, and other items that have gross profit margins higher than those of general staple goods. Casey's also has introduced the sale of donuts prepared on store premises, available in approximately 99% of the stores as of April 30, 1994, as well as cinnamon rolls and cookies, and is installing donut-making facilities in all newly constructed stores……. Casey's began marketing made-from-scratch pizza in 1984, expanding its availability to 818 (93%) stores as of April 30, 1994. Management believes pizza is the Company's most popular prepared food product”

There are mixed opinions on the quality of the pizza, but some people do seem to be fanatics, as evidenced by Dave Portnoy getting booed at the Iowa State Iowa football rivalry for his poor review.² High-margin food brings two benefits. The first is that it makes rural gas stations economical. The second is that if your food is good enough people will actually come to your store because of it. A Friday night can double as a night to pick up pizza and fill up your gas tank because you’re at Casey’s anyway. Casey’s concentration on rural locations also means that half of their stores aren’t in an area with other major pizza competitors; one doesn’t have to worry about competitive pressures from Domino’s or Papa John’s if there isn’t one close by!³ This leads into a related point: it’s not a good use of Domino’s time to figure out how to make its four-wall unit economics work in areas with a limited population. Figuring this out would probably require adding something beyond its standard menu items, resulting in further complexity for a profit pool that just isn’t large enough relative to other opportunities. Funnily enough, offering pizza plus gas may be the ideal format to operate in sparsely populated regions.

Casey’s went through a management change in 2019, with Darren Rebelez coming on as CEO. Rebelez was previously President of IHOP Restaurants, and prior to that was COO of 7-Eleven. A new COO (also ex 7-Eleven) and CFO were brought on shortly after. In 2023 management announced a three-year strategic plan, that aims to grow store count, accelerate the food business, and enhance operational efficiency. The third piece of the pillar seems to mainly be about reducing employee hours The second has led to thin crust pizza, revamped sandwiches, and some experimentation with chicken wings in Des Moines stores. Chicken wings can be a riskier endeavour than it initially seems. Ideally, the goal with rolling out new food items is to capture a greater share of customer spending. The risk, however, is that chicken wings end up cannibalizing the pizza business and so drag down overall food & beverage margins. At least so far management hasn’t seen this happen.⁴ The most interesting, and easiest to get wrong, portion of Casey’s strategic plan is the effort to grow store count. The business added 154 stores in fiscal 2024, ~70% of which were via acquisition. In November 2024 (which is part of Casey’s 2025 fiscal year), the company acquired Fikes Wholesale, which operates CEFCO Convenience Stores. This is Casey’s largest acquisition in history and boosted store count by 198, including 148 stores in Texas.

There’s a bull and a bear case to be made around the size and pace of Casey’s recent acquisitions. The bull case is that Casey’s has a tremendous amount of room to grow its store footprint. As of 2024 it was the third largest convenience store chain in the U.S., but that figure’s a bit misleading. Casey’s is just over a third the size of Couche-Tard, which operates Circle K and sits in second place. It’s under a tenth the size of 7-Eleven, which has the number one spot. Moreover, it has yet to open stores in large portions of the country!⁵

Paradoxically, its rural history could be what enables the company to succeed in areas with increased competition. To succeed in low-traffic regions it had to offer good, high-margin food. That’s not something gas stations in busier areas needed to spend time on to make their unit economics work. Murphy’s USA, which sits in the fourth place spot, is a clear example of this.⁶ Most of Murphy’s stores are located near to a Walmart, which means the company had no problem generating traffic and didn’t see the need to build kitchens and offer pizzas made on-site. Casey’s ends up looking very compelling when competing head-to-head against stations like these. This food advantage was acquired over many decades, and it’s not an easy task for a gas-station/convenience store to quickly build a fresh-food menu that customers are genuinely excited about! It's true that Casey’s has been abnormally acquisitive, but management’s taking a smart approach to these acquisitions, and a 2-ish times debt to EBITDA ratio is hardly excessive. 125 out of the 198 acquired CEFCO stores have kitchens, which makes adding pizza both relatively straightforward and an easy to boost margins for a historically protein-heavy chain. Furthermore, there’s natural purchasing economies of scale as CEFCO transitions over to using Casey’s vendors.⁷

The bear case is that Casey’s is straying too far from its roots, and that this makes the future harder to underwrite for management and investors. Historically, the business section of its annual report has included a statistic about the percentage of stores located in areas with fewer than 5,000 people. In 2024 that statistic was changed to the percentage of stores located in areas with fewer than 20,000. That represents some style drift, and could hurt the competitive strength of Casey’s food offerings. Management has said that at the ~50% of locations with national pizza brand competition Casey’s comes out about a dollar or two cheaper. As store mix moves more in this direction there’s a risk that Domino’s, Papa John’s, Pizza Hut etc decide to get more promotional to maintain or take market share. Moreover, until 2021 Casey’s annual reports would brag about installing donut-making equipment in every new store. This no longer appears to be a focus for the company, and at least some stores have now transitioned away from the practice. The pessimistic take on this, especially in combination with efforts to reduce employee hours, is that management is attempting to lower the maintenance opex of the business in a way that will come back to bite them. To top things off, Casey’s paid 11x pro forma adjusted EBITDA for CEFCO, not exactly a cheap multiple! The company’s presentation on the acquisition notes that 40 CEFCO sites are located in the Florida/Alabama panhandle, with plenty of people living nearby. Normally that would be a positive, but perhaps not when your annual report continually harps on the company’s rural nature. Dollar General moving to higher-traffic areas probably wouldn’t be met with much investor enthusiasm!

There is of course also the EV adoption question. While Casey has started putting in charging stations, the company has no stores on either of the coasts. Management has noted that muted electric vehicle uptake in middle America (at least currently) keeps them somewhat insulated from EV trends. A fun question to mull over is how much EV adoption ends up hurting gas stations with strong food brands, particularly when those gas stations are installing charging stations. It’s not clear to me that Buc-ee’s will be all that affected once electric cars really take over the roads. That’s probably less true for Casey’s or Wawa, but still true to a degree.

At ~32x earnings, one wouldn’t necessarily call Casey’s cheap. The counter to that is earnings per share have compounded at ~19% per annum over the past 5 years. Not exactly nothing! The company does have plenty of room to grow geographically, and increasing energy drink/nicotine consumption is a tide that lifts all gas station boats.⁸ The risk is that management is no longer executing the classic Casey’s playbook, and could run into challenges in these more competitive markets.

Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence

1. Pg 5, 2024 Annual Report

2. To be clear, I’m not claiming that Casey’s pizza is world class, nor does it have to be. Wawa wouldn’t claim it offers sandwiches competitive with a local northeast deli, but that doesn’t mean people aren’t big fans.

3. From the Q2 earnings call: “I'd probably remind you that in about half of our stores, we don't even have one of the major pizza competitors. So we're not under any real pressure at all from a pricing perspective in about half of our stores. And the other half, we tend to be $1 to $2 below their standard menu pricing just every day”

4. From the Q3 earning call: “What we're seeing so far is that this isn't really cannibalizing the pizza business. This is actually contributing an incremental, call it, an incremental night per week or an incremental visit from our PS, which is exactly what the goal was.”

5. From the company’s presentation on its Fikes acquisition.

6. That’s not to say Murphy’s stock hasn’t had a specular run since its spin-off from Murphy Oil in 2013. The company is a buyback machine!

7. One way to potentially think about Casey’s is it’s a private equity firm with a credible way to boost margins!

8. Last quarter sales of nicotine alternatives were up 74% YoY, while energy drinks were up 18%.