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Casey's General Stores: Plenty of Room for Growth

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Despite reporting lower earnings in its latest quarter, the Midwestern convenience store operator looks well-positioned for growth.

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The US convenience store market continues to grow, but it's highly competitive and definitely not for the faint of heart.

According to market research firm IBISWorld, overall US convenience store revenue is expected to rise 4.9% from 2011 to 2012, which is higher than the average annual growth rate of 2.8% in the five preceding years.

However, the convenience store market remains highly competitive, with the top four companies controlling just one-third of it. Most players are single-store operations that employ 10 people or less. That's because convenience stores remain a business with low barriers to entry and, as IBISWorld points out in its report, smaller operators are able to compete because they're better able to adapt to changing trends and customer preferences than larger chains.

In addition to other convenience stores, operators also compete with a wide range of other businesses, such as grocery retailers, fast-food outlets and even big-box stores like Wal-Mart (NYSE:WMT).

Long-Term Trends Still Favor Convenience Stores

Even so, the convenience store market is well-positioned to keep growing as our lives grow more hectic and time gets tighter. For investors, the key is to zero in on companies that have the ability to change with customers' tastes and diversify away from low-margin gasoline sales. They should also have strong balance sheets that will help them snap up smaller competitors with attractive locations.

One company that matches up well with those criteria is Casey's General Stores (NASDAQ:CASY). Casey's operates 1,700 convenience stores in 12 Midwestern states. That's a fraction of the size of market leader 7-Eleven (PINK:SVNDF), which has 48,000 stores in 16 countries, with 9,460 outlets in North America.

As well, franchisees mainly operate 7-Eleven stores, where Casey's owns the vast majority of its outlets, as well as its distribution center. That makes it better able to adapt to changes in the fast-changing convenience store market.

Casey's also focuses on improving the stores it acquires, particularly by adding kitchens that churn out freshly prepared foods, such as pizza and doughnuts. That's in contrast to many convenience stores, which mainly offer pre-wrapped fare. The company's fresh food lineup also helps it stay on the right side of the healthy eating trend.

Another way Casey's ducks the competition is by focusing on smaller centers. Roughly 60% of its outlets are located in towns with populations under 5,000, and 75% are in communities smaller than 10,000 people. This small-town focus lets it dominate its local markets. These areas are also often too small to attract the attention of major chains.
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