Monday, July 2, 2018

Casey’s General Stores is a chain of convenience stores based in Iowa, with stores across the south and Midwest. Casey’s just filed its annual report last Friday — so today is its turn under the Calcbench microscope to how tax reform is both magnifying and masking its financial performance.

As you can see from the financials below, Casey’s saw annual revenue increase 11.8 percent last year, to nearly $8.4 billion. Alas, cost of goods sold increased even more: 13.7 percent. And this was the second consecutive year where cost of goods sold grew faster than overall revenue.

Further down the income statement, operating expenses grew by 9.44 percent— less than revenue growth (good), but depreciation and interest costs also outpaced revenue (bad). So income before taxes actually fell by 20.5 percent, from $269.67 million last year to $214.4 million this year. See Figure 1, below.

Normally that would leave Casey’s in an uncomfortable situation. Its effective tax rates for the prior two years were 34.1 percent and 35.2 percent, respectively. So if we split the difference and assumed an effective tax rate this year of 34.5 percent, that would lead to net income somewhere around $140.5 million: a decline of about 20.8 percent.

Except, of course, we don’t need to assume any effective tax rate for this year. We have tax reform!

As Casey’s explains in its tax disclosures, last year’s tax reform allowed it to revalue its deferred tax assets and liabilities, resulting in a one-time gain of $173 million. That, in turn, led to a tax benefit of $103 million.

Presto! Casey’s can now report net income of $317.9 million — an increase of 79 percent from last year, even as operating profit fell and the company has more than one expense item growing faster than revenues.

The big question is what Casey’s will do next year, after that one-time gain has ridden into the sunset. The company still has pesky problems with cost of goods sold compared to revenue growth, and other operating expenses within spitting distance of revenue growth, too.

Calcbench users can take that example and compare it to peers, if you follow this sector. Or financial analysts might want to ask about these trends on the next earnings call.

Then again, Casey’s stock has fallen from a high of $127 in January to $96 as recently as June. Maybe they’re already asking.

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