All right. Well, thank you for joining us for our 2024 on-site Analyst Day presentation. Presenting shortly here will be Darren Rebelez, Board Chair, President, CEO, along with Steve Bramlage, Chief Financial Officer. During the presentation, we will not be providing an update to any second quarter financial performance, nor will we be providing any more information on the upcoming Fikes acquisition, other than we still do expect to close this calendar quarter, as previously disclosed. Before starting, I'd like to remind everyone that that presentation and Q&A will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 . Actual results may differ materially from those projected in any forward-looking statement we make today.
The factors that could cause our actual results to differ materially are discussed in the company's most recent Forms 10-Q and 10-K, a filed with the SEC. With that said, I'll now turn the floor over to Darren.
All right, thanks, Brian. Good afternoon, everybody. I hope everyone's well fed. Welcome to everybody online that's dialing in. Appreciate those of you taking time out of your schedule to do that, and of course, for everybody in the room for traveling to Ankeny, Iowa, to see what we had to show today. With that, I'll dive right in and wanted to start by talking a little bit about our strategy map and our strategy. Just a couple of points on this: this is our entire strategy. It's on one page and pretty simple. Not as simple to execute, but pretty simple in concept, and we like to keep it that way.
We like to have it on one page, so there's a great focus on the things that are most important. And equally as important, we don't allow ourselves to get distracted by a lot of things that are happening in the world. If it's not on this page, we're not worrying about it. We're gonna stay focused on the things that, that drive value. And so at the top of that map, you see, you know, one of our primary objectives is to drive EBITDA growth of 8%-10%, and that puts us in the top quintile of the S&P 500, retail set. So we achieve that through a couple of different ways. We have deep guest insights, and we focus on that and try to understand what it is that our guest is looking for from their convenience store experience.
There's a few things that our team has uncovered that they want. Shockingly enough, one of the things they want is convenience, and we have a little saying around here that, the prime directive is, "Thou shall not have an inconvenient convenience store." And so that's what guests are looking for, so we need to make that experience convenient. They also want consistency. They want to be able to rely on us to be able to provide the goods and services that they need when they come to our store. They want craveable food, and hopefully, for those of you that are in the room today and got to go to our Culinary Innovation Center, you got to see that process and how we create that craveable food that our guests are looking for. They also want affordability.
They want to be able to get a good value for their money, and they want to be rewarded for that. And then finally, they just want the right assortment. We have a fairly simple business here. We have small boxes, and if we put the right stuff in those boxes, we're gonna make the sale. If we don't have the right stuff in those boxes, we don't make the sale. So I think you saw for the folks in the room down in the merchandising lab, we put a lot of effort around understanding what our guests are looking for and dialing in that assortment to make sure that when the guests come in, they get what they're looking for. But there's three primary objectives that we're going to leverage to really achieve that top quintile performance.
The first is accelerating our food business, and we'll talk about that in a little bit, growing the number of units, and then enhancing operational efficiency. Now, all of that is supported by an enabling foundation, and when we talk about that, we're talking about technology, supply chain, and leveraging data and analytics for deeper insights to make better decisions for our stores. And none of that can happen without our team, and I'm really proud of the progress we've made in building our team and the evolution that we've made on that journey. So with that, I'll get into a little bit more detail on each of these. But first, let's talk about the EBITDA growth.
What you see here is a depiction of the companies that have been able to achieve that top quintile EBITDA growth over a one-year, one and five-year, one, five and ten-year period. You can see in the one year, there's a handful of names there. About 12 of the 42 S&P 500 retailers were able to achieve that 8% EBITDA growth in a one-year period. That list narrows down to about five if you have to do that over a one-year and five-year period. The hurdle becomes much higher. When you add one, five and 10 years, then you see that list go down to three, one of whom is kind of been struggling over the last year or so and may not make that list if you go to 11 years.
So what you're seeing is a level of consistency that Casey's has been able to maintain over a long period of time in delivering that top quintile EBITDA growth. That's become a little bit more challenging, I think, in the world today, but, I think you saw, and, we'll talk about how we go about achieving that so we can maintain that consistency. We also like to say we have a high say- do ratio. So when we say we're going to do certain things. We put a really high premium on making sure that those things actually happen, and this is a big one for us. This is one that we'll die on the hill for, to make sure that we deliver that 8%-10% EBITDA CAGR that we've committed to the investment community.
Probably the biggest pillar in terms of driving that growth is accelerating our food business. You know, so why food? Why do we focus on food? Well, it's our single biggest differentiator. You know, there's a hundred and fifty thousand convenience stores in the U.S. It's important that we stand out from all the rest if we're going to get a disproportionate share of the business, which is what it takes to drive that kind of EBITDA growth that we're talking about. So food is our differentiator, and I think you've seen through the process that we use to create the food, to the level of execution, that we deliver that in the store, that that is unique in our industry.
There's only a couple of players that I can think of that focus on food like we do, and it gives guests a number of reasons to come to our store outside of the traditional categories, and it makes sense when you think about it. A lot of times I'm asked: "Well, doesn't fuel drive all the traffic into the store?" The answer is no. About three-quarters of our guests come to our stores for non-fuel purchases. Why is that? Most of what we sell is consumed immediately upon purchase, and it makes sense. People eat three, four, five times a day. How many times do you fill up your car with gas? Once a week, maybe? Maybe a little bit more frequently, maybe a little bit less, but about once a week.
So having that differentiated offer inside the store is what really drives the traffic. The second thing is it's the highest margin category we have. It's nearly double the margin of the rest of the store. So not only do we get that additional traffic, but we also get the additional margin benefit, and I think when you look at our margin profile overall for the inside of the store relative to the rest of the industry, you see a notable difference there, and that's driven entirely by that prepared foods business. But we've made a lot of progress over the last several years, primarily on the innovation process, so you got to see today in the Culinary Innovation Center, how rigorous that process is, and that, that is absolutely a process that a restaurant company uses.
I know that from my time in the restaurant industry. Carrie Stojak, our VP of Guest Insights, she used to do that in the restaurant industry. This is a restaurant-level process. This isn't what you see in most convenience stores out there, and it delivers the right outcomes for our guests. So we talked about in that session, and you see here on the slide, our sandwich lineup. Now, three of those four sandwiches that you see on there, we already sold. We just didn't have the right quality of product. So that team went out and tore it down to the studs and started over again. Different protein, more abundant protein, different spices, different bun, different build, down to the pickles. We even changed the pickle on the sandwich. That's how dialed in they got, and now we rolled that out.
We added one more sandwich, and that category in the first quarter was up 85%. 85%, and that's just taking something we already did and just doing it a lot better than we did before. That's what that team is capable of now, and that's how they look at every single product that we make. We also have new platforms. So the Thin Crust Pizza, which we rolled out last year, is a great example of that, where the team identified a gap in the assortment, and we were losing guests because we could see that in a household where some people like thin crust and some people liked the original crust, that there was a veto vote. We actually saw where somebody would come to a Casey's, buy one of our original crust, and then go to a competitor to get a thin crust.
Well, that's nuts. That's crazy. We had them in the store. We're selling pizza, and they had to go two different places, or, or worse yet, they didn't even come at all because they couldn't get a thin crust. So we solved for that. We hit immediately 12% of the mix, which is about the industry standard for that. So we were able to innovate, and now we don't have that defection from that guest that was coming to our store. We've also enhanced our omni-channel marketing. We've got some new leadership in our marketing department. We've really changed the agency relationships now. Now we have a team of agencies that handle media buying, creative, social media, public affairs, communications, and so now that, that integrated team is really able to better communicate the offer and the value proposition of Casey's to the guests.
And then, something that we've always done on the grocery and general merchandising side, but now we've really dialed in deeper on the food side, is what we call joint business planning, and that's where our team sits down with our key supplier partners and really understands what they're trying to accomplish in their business. We share what we're trying to accomplish in ours, and we create the plans together to go execute. And what we're finding on the food side is that we have a lot of really big suppliers out there with a lot of great capabilities that can help us win in prepared foods. They have guest insights of their own, they have culinary teams of their own, they have engineering resources.
There's a lot that they can bring to the table as part of that relationship, and so as we build those deeper ties, we get better outcomes, we get faster innovation, we can drive this business.... The second pillar is growing the number of units. And, you know, if you were to ask Steve about our growth algorithm, it's pretty simple. We grow the number of units by about 4% per year, and we grow the mothership organic growth with same-store sales and margin expansion, everything else, 4% a year. We do that, we get our 8% EBITDA growth, and everything else above that is gravy. So we have tremendous opportunity to grow this business. So when you think about the white space we have available, 90% of our stores are in only nine of the seventeen states we operate in.
So to give one stat that I think is a fun fact, we have 550 stores in Iowa. Anybody know what the population of Iowa is?
Three and a half.
Almost. It's 3.1 million people. We have a hundred—when we close the Fikes transaction, we'll have 170 stores in Texas. Anybody know what the population of Texas is? It's nearly 30 million, over 29 million, so 10 x the population of Iowa. So does that mean we're gonna have 5,500 stores in Texas? I don't know. But to say that we would have 1,000 in Texas, I don't think is a stretch by any means. So we have huge white space. State of Michigan, we have 3 stores. I'm pretty sure we can get a few more in there. Ohio, Tennessee, Kentucky, a lot of these states, we're just getting started, so tremendous white space in our existing geography. We have a flexible approach to development.
So we can do M&A, and M&A gets talked about a lot because that's what makes the headlines, but we also have a really robust organic store growth capability, where we identify real estate where we want, based on the network plan that we've developed, and we go and buy and build stores in those sites. And that gives us the ability to build or buy and continue to grow the stores, whether we have good valuations, because at times, in the M&A world, sometimes valuations get a little bit rich, and it doesn't feel right. We have a better alternative, so we just lean heavier on organic growth. When we have a lot of inflation in construction costs, like we're experiencing right now, but valuations have come back down to earth on M&A, we can lean heavier on M&A.
We can go either way, but we never have to worry about there being a scenario where we can't grow, because we can do either way. Speaking of M&A, we, you know, it adds a lot of value for us. And you know, we have an approach where we primarily focus on smaller deal, tuck-in M&A, and we can do those all day long. And those don't make the headlines, but we're pretty easily now, with the machine that we've built, we can do 50 or 60 of these small tuck-in acquisitions every single year, and it's pretty ratable. And those, we buy at 6x-9 x EBITDA, and, you know, people ask, "Well, how do you get those low?
And then you got these chains you're buying for more, you know, for a higher price?" And, well, when Brian and his team have a conversation with a single-site owner, it doesn't look anything like when we have an investment bank involved and there's, and we're talking to a big chain. They don't know what EBITDA is. They don't. That's not a thing. EBITDA isn't a metric. What they're looking for is, you know, "What do I need to get out of my business so I can retire and spend a little more time on the golf course?" And so we figure out that price, and that's what we pay. When we do the math, then reverse engineer it, comes out to 6x-9 x EBITDA, pre-synergy. So we love that math.
Now, if we had bundled all those together and said, "Hey, we did sixty of these things at-- and bought it at nine times and get five times post-synergy," it'd be great. You'd, you'd read about it more, but we just got to do those one at a time. And then the big deal stuff, that's more opportunistic. The big, the big guys aren't for sale every day. You kind of have to go for those when you have those opportunities, and that's what we do. We have a lot of relationships. We talk to a lot of owners, and, you know, sometimes the time is right, sometimes it's not, and that's okay. We can wait. We'll wait for the, the right time, and then we transact on those as best we can. And then we have some flexible formats.
When we're doing our own organic growth, we have five different formats that we can build. If we're in a small town, we have a format that's smaller box, still has all the offer of a normal Casey's, just a little more efficient footprint, lower cost, that meets the needs of that town, all the way up to an interstate truck stop type of offer that meets the needs of an over-the-road trucker with showers and laundry and those sorts of amenities to meet the need of that guest where they are. The Fikes deal is the thing that's probably been top of mind for most in the last couple of months, and so there's a lot that we like about this deal.
You know, one thing is that it is a really high-quality portfolio of stores, and there was a point several years ago where Fikes was assessing their business, and they decided - they made the decision to stay in the industry as opposed to selling, and so as part of that process, they sold off 50 or so stores, took the money, reinvested it in their existing physical plant. They built new stores, really refreshed the portfolio, and maybe say another word, another way, they did a lot of the work that we would've had to do if we had bought them then, but they did all that, so it's a very high-quality portfolio, average 4,800 sq ft. That's perfect for what we do with our kitchens. Great geography. You can see here on the map, very complementary to where we are.
Even though we did an acquisition in Texas, North Texas, late last year, of all of those stores in Texas, there was one store that was within a seven-mile radius of one of our existing stores. So very clean, very complementary. We've talked about Texas, we like Texas, and so this gave us a running start to expand in that market. Also opened up some additional geography to the southeast in that Florida Panhandle, Florida-Alabama Panhandle, that's very complementary. The stores are run well, they're high volume. They bring with them some other capabilities, like a fuel terminal. So we've talked a number of times about what we call Fuel 3.0, where we move our procurement of fuel capabilities further up the supply chain. That's what Fikes had already. They've been doing this for about a dozen years, or 10 or 12 years or so.
They had a fuel terminal, so this just accelerates that process for us, and allowed us to pick up some knowledge that we're still building ourselves. Moving on to operational efficiency, the third pillar. I hope you got a good sense today in the stores of how we're approaching that. Now, I know we've had a really nice run of being able to control our operating expense, particularly store labor. Last quarter was our ninth consecutive quarter of same-store labor hour decreases. I know I've been asked by some: "Well, hey, are you cutting too deep? Are you cutting into the muscle?
You know, are you gonna have to do what some others have done, and come back and have to reinvest in the labor?" Well, I hope you got a sense today that what we're doing is very strategic and very thoughtful, and very methodical. We're not just hacking hours away. That's not what we're doing. We're identifying where there's inefficiency, and we're removing that inefficiency by either eliminating the work, replacing the work, outsourcing the work, doing something different so that that labor is not there in the store. It is not needed anymore.
We have a continuous improvement team, that this is all they do, is assess processes in the store, talk to our store operators, find out ways how to take anything that we do in that store and make it easier to do or make it so that we don't have to do it at all. And that's been a real big benefit to us, and that's why we believe that's sustainable. We've also made improvements upstream in our supply chain. I think you saw the warehouse today. We've made some improvements there, whether it's pick- to- light or just being more efficient in our transportation operation. We've invested in technology to help us become more efficient, and with that continuous improvement team, we're building that muscle.
We're kind of looking at everything now through the lens of continuous improvement, and finding ways that we can be more efficient in whatever it is that we're doing, whether it's running kitchens in our stores, running the accounting function, whatever the case may be. Finally, like I mentioned before, the team member value proposition, and this is something that has really been an evolution. If you were in our Investor Day five years ago, when we talked about people, what we were talking about is organizing to win, getting the right structure in place, getting the right talent on board, cleaning up our act, frankly, on administration and payroll, and simple things like, you know, blocking and tackling. With this iteration of our plan, now, this is far more strategic. We got all that stuff out of the way.
Now, this is the fun stuff, where we get to grow and develop our people, and we get to motivate our people. And so Chad Frizzell, our Chief Human Resources Officer, was briefing our board in the last quarter board meeting, and he showed a slide with some of the leadership development courses that we have here at Casey's for our leaders at different levels of the organization. There's eight of them. And I asked Chad to put the date on when those actually came to life, and it's been in the last three years that all of those courses have come to life. So our leaders are really getting developed, and that's translating into better leadership in the field, in our stores, in our DCs, around here. And you see the results: lower turnover, higher levels of engagement, the highest level of engagement we've ever had.
Guest satisfaction scores at the highest level we've ever had them, and that's with removing labor at the same time in our stores. So we're starting to get that flywheel turning, where teaching people how to lead, giving them the resources to lead, making their jobs simpler, is starting to impact every facet of the business and make that flywheel turn that much faster. And so with that, I'm gonna turn it over to Steve, and he'll talk some of the finances. Here you go, Steve.
Let me add my welcome, everybody, for coming out to Iowa on a nice, sunny autumn day. I'm just gonna spend a couple of minutes here, reaffirming what we've committed to, both with the investor community and within this management team, and then talking a little bit about how we plan to spend the money. I would hope for those of you who are more familiar with the story, that there's absolutely nothing new that I'm gonna cover. The commitments are the same. We feel very good about where we stand vis-à-vis these objectives. We're five quarters into a three-year plan. I think we generally feel great about each and every one of these, and certainly we're gonna be very, very consistent with how we're gonna allocate the capital the organization's gonna produce.
But specifically on the commitments, just to remind them, you know, when I walk down these, we're almost walking down the way the algorithm works. So the output of the algorithm is the EBITDA growth percentage. That's what Darren talked about, the top quintile performance. We certainly feel like we've demonstrated a pretty good medium and long-term record of delivering this. I realize as the company gets bigger, the numbers have more zeros attached to them to get the same percentage. That has not escaped my attention, and we still feel very good about being able to deliver that kind of growth. And the components of the algorithm to get there, Darren referenced it, right?
It's kinda half and half, and so the store growth, the second row, is half of the way the algorithm gets generated, and so this is the one metric versus our investor day that we had last year or eighteen months ago that we have changed the numbers. So we started off with expecting to have at least 350 new units. Now, in light of the pending Fikes acquisition, which is gonna bring us almost 200 stores, we did adjust this number up to about 500 just based on what we're gonna inherit here shortly.
The reality is we will make a couple of changes with our internal pipeline of building out new stores to be able to remodel the Fikes stores as fast as we can, and so we should land very close to that five hundred. The distribution of the build versus buy will be a little bit different as well, versus what we had set out. We had inherently assumed a 50/50 mix, building versus buying. You know, we will index a little bit more to the buying side just because of all the Fikes units that are coming in here. The other part of the algorithm growth is the mothership, right? That's the 4% or so we need from the mothership, so that's this third row here of same-store sales. There's really two components there.
There's the part of the business inside the store, inside same-store sales for us, and then there's the business we call them the forecourt or outside the store on gallons. Both of these metrics are really consistent as well with what the company's done over the last decade plus. So the inside number, the mid-single digits for us, you know, we're gonna take advantage of a bunch of stuff. There's some price in there, there's some mix enhancement, of course, in there. There's all of the things on the innovation side, on the prepared food side of the business, and in the merchandising that we reviewed earlier today to drive traffic generally through the store. But we feel very good about our ability to deliver this number.
You know, the fuel side, I think if there's a single question we get asked in every single conversation we have, it relates to fuel, right? What's going on with fuel and what's going on with fuel margins? I'll come to margins in a second, but on the gallon side, for all of this math to work, we need the mothership gallons to be flattish, right? And that's pretty consistent with the performance the company's had in the last 10 years as well. Our same-store gallons have been flattish, somewhere around zero, plus or minus a little bit.
We continue to believe, given our geography, given all of the investments we've made in capabilities inside the organization to drive, or to focus on gross profit dollar growth in the fuel category, we can continue to outperform our geography around just same-store gallon growth and have been able to do that so far and feel very good about it. The other part, beyond just the top line for the mothership, is what's going on with margins, right? And how do we drive more velocity on gross profit dollars. So inside the store. Really, today was a great illustration of all the stuff we're doing inside the store to enhance gross profit dollar throughput and margin enhancement.
The growth of the private label portfolio, the investments we've made in strategic sourcing, the joint business planning that we take on with all of our partners. Frankly, the decline of tobacco as a perce ntof the mix and the natural margin accretion that you get from that. All of the enhancement and the innovation we're doing on the prepared food side, all of those things in the bowl are margin accretive, and we're not gonna drop all of those to the bottom line necessarily, right? We will reinvest some of that incremental margin back into things that help us drive more same-store sales growth, and we'll do that on purpose. But we feel really, really good. We have plenty of levers there, and recently, we certainly have benefited.
There's been a lot of momentum on the grocery side of the business for us, right? On the grocery and general merchandise side. And that's allowed us to keep our value proposition in a good spot on the prepared food side of the business, right? So our-- most of you know our prepared food business, highly commodity-oriented on the inputs. That stuff goes up and down. Cheese is probably the most prominent one, and so margins will ebb and flow a little bit in that category, and we allow that to happen because we don't wanna jerk around the retail price point... of the prepared food to a greater degree, and all of the progress we've been making inside the store in the grocery business has facilitated that. And so we tend to talk about this business from an inside gross profit margin percentage.
Think of that as like 40%-41%. We get a lot of questions on what's the grocery margin, what's the prepared food margin? Those are important to us, but they're not as important as that inside blended number. When we expect accretion inside the store, it would be at the inside margin line. You know, the operational efficiency, great examples given in the store today. This is the ninth consecutive quarters that Darren referred to. I think it's fair to say that historically, you know, if the company had a bugaboo over the last 10 to 15 years, we struggled to have this relationship on a consistent basis. I think that's very fair.
I think the last three to four years, we've had much better results in that because of all of the investments that the company has made. We feel really good as we continue to expand the store base. We can keep OpEx growth growing at a slower clip than EBITDA. So most of you know, 25% of our OpEx is non-store related. So distribution centers, trucks, corporate stuff. For sure, we should keep spreading that over a larger store base, right? We definitely don't need to invest linearly on that. And then for the 75% of costs that relates to the store, you take advantage of all these initiatives that we've gone through in terms of making the store operations efficient.
I feel like we've got a lot of traction here, and that we can continue to stay in front of the cost curve, right? From the algorithm standpoint, if we're growing units at 4-ish% and you're trying to get to 8% for EBITDA, that means OpEx needs to be 7-ish% or less. We have several hundred basis points, kind of to absorb OpEx growth and pressure in the mothership, stay on market from a labor wage rate standpoint, et cetera, and then you partially offset that with more efficiency inside the store. Finally, on the cash flow side, we are a very, very light working capital intensity business, and so as operating profit grows, that tends to fall directly down to operating cash flow.
We don't really have a lot of absorption with working capital, so free cash flow should grow, right? As profit grows, there's really not a great reason free cash flow should not continue to grow. We've seen that in the last couple of years. We've committed to continue to make sure that that follows the pace of earnings growth because we understand, as stewards of the company and the investors' money, what we do with that money from an allocation standpoint is one of the most important jobs that we have. And so we take that really seriously, and there's certainly nothing on this page that's meant to be new at all. So how do we think about how we invest investor money? Unit growth remains the first stop on the bus for us. That is unchanged.
It's going a little bit faster than it has over maybe the ten years preceding, but it's still the first stop on the bus. And so if we can find an opportunity to build or buy something that's gonna be EBITDA and ROIC accretive for us, we're gonna spend money on that, right? Fits within the geographic profile of the distribution centers, et cetera, that is for sure where we're gonna spend that first dollar. You've probably heard us say that, of the PP&E that we spend, about 75% of that relates to growth. So we spend about a quarter of our PP&E on what I would call maintenance, so distribution assets, IT assets, store maintenance inside the existing fleet of ships. But the majority of our traditional capital spending is gonna go to growth.
Obviously, if we buy something, it shows up on a different line, and that would be growth related, too. The second point would be leverage. So, our leverage is gonna go up a little bit, as most of you know, when we close the Fikes acquisition here, hopefully in the next month or two. But it'll be brief. We'll land somewhere around 2.4-2.5-ish, depending on the day. And we should be back down to 2 times within 12 months. I think we'll get there for certain. I know we will. Our run rate status quo is a 2 times number, that clearly this business model can carry a lot more than that. We don't think we would be rewarded for that.
We don't think it would be a positive thing for anybody who has money invested in the company. The industry doesn't run higher than that, and there's no reason for us to either. We generate plenty of cash to invest in growth opportunities without needing to permanently take up the leverage of the organization. When we are at two times leverage, we have about $3 billion of kind of borrowing capacity available to us to... At the right moment in time, would we go back up again, like we did with Buchanan or Fikes? We would, but, again, that's gonna be opportunistic. One question we don't get asked very much about is the dividend. Like, almost never. But we take it really seriously. We've increased the dividend 25 years in a row. We're proud of that.
We do have some logic as to what we do with the dividend. We triangulate around keeping the dividend, dividend increase consistent with medium-term EBITDA growth, right? So it's kind of an 8%-10% CAGR over a multi-year period of time, and the payout ratio is gonna be somewhere in that 15%-20% of the prior year earnings, is generally how we will calibrate what's the appropriate amount of dividend to be paying. And then the last stop on the bus, last year was a really good example of it, is as the company grows, I referenced our ability to generate more free cash flow than we have historically. If there's not an opportunistic acquisition available to us, the company is likely going to generate more cash than we can reinvest in a discrete period of time.
And when we find ourselves in that situation, last year was a good example, and we've met the other priorities on this list, we will buy back shares. So we bought back shares last year. We would do so again, if we get ourselves back to two times, and there's no large deal on the table, I think you'll see us buy shares back again, right? We're not gonna do much in the next 12 months because of the leverage, de-leveraging commitment that we have, but we will certainly lean back into shares if and when we find ourselves in that situation, and the board remains very supportive of doing that. Okay? So I'm gonna turn it back over to Darren for a couple of closing comments here before we rearrange a little bit for some Q&A. All right? Thanks.
All right, thanks, Steve. So I'll try to put a bow on this and just kind of refresh everyone's memory. You know, I think there's been a list of things that I think investors have always liked about Casey's, and I don't think anything on that slide would be anything new to most of us. We do have this unique footprint, where a lot of our stores are in smaller towns and rural communities. There's a lot of benefits that come with that, from co-opetition, from cost to operate, from labor pool, et cetera. So we really like that, and we continue to maintain that. I talked about the white space to grow. We have tremendous white space. We can continue to grow in our existing footprint for really years and years and years to come.
Our prepared foods, we also talked about that. That's the crown jewel of the Casey's business, and we take a lot of pride in that. We put a lot of energy behind that, and that's a big differentiator between us and most of the industry that we compete in. The vertical integration has always been important, and I hope through the DC tour today, you got an appreciation of why that is so important to us and how we think that gives us a unique competitive advantage versus virtually everybody else that's out there in our industry. And we talked a little bit about that compounding growth and that ability to drive that EBITDA performance, not just in the short term, 'cause you can do it - anybody can do it for a year.
It's being able to do that consistency over time in a variety of different environments that I think makes us unique and I think has been attractive. Now, a lot of times, what I hear from some is that, "Yeah, that's great. You guys are doing a great job. We love you. That's fantastic, but you're just kind of expensive. You know? You know, the last 10 years, you've traded in a range of, you know, 10x-1 3x EBITDA, and that just... You're kind of at that, that top end right now, and so you're just kind of expensive. I'm waiting for the right point to come in." Well, some people have been waiting for that point for years and years, much to their disappointment, I would say, at this point.
But I think if you look back, I think the operative word in that phrase is historically. And so historically, that was a true fact, that we were 10 to 13 times. But also historically, we didn't have a lot of the things going on that we've spent most of the day talking about either. And so a couple of years ago, we did an investment sentiment survey, and many of you, either in the room or online, participated in that, and you gave us some feedback. And so we took that feedback to heart, and we've done something with it. So you look at OpEx management. Steve referenced this before.
That was the one thing that, that we kind of got feedback on, that historically, we didn't have our arms around that, and then we got feedback in the survey that we didn't have our arms around it. So what did we do? We got arms around it. Pretty simple. You tell us what, what's on your mind, we'll go fix it. And so we did. And so you see, over the last several years, we've had that growth in OpEx lower than the growth in EBITDA, and I think you've seen through a lot of initiatives that we've implemented, that we're doing it the right way, and it's in a sustainable way. I feel very good about our ability to have this under control. We were told that our ROIC wasn't all that great. Well, now we're, we're at 12%, a little bit over 12%.
That is a historically high number for this company. That is different than what you used to look at when we were trading in that 10-13 times. Free cash flow was something that we got criticized for. We weren't generating enough cash for the business we were running. Our free cash flow has almost tripled over the last several years. So we think we've got that dialed in as well. We've expanded capabilities. So we've done all of that, while at the same time investing in digital technology, investing in procurement, in guest insights, in asset protection, in capabilities that this company didn't have before, that enable us to do all the things and achieve the kind of results that we've been able to achieve more recently, and then the M&A side. Now, historically, the company did M&A.
It was always the small tuck-ins, and it was usually at a smaller scale, a lower number. You know, in the last three years, we've almost acquired 600 stores over that period of time. We've demonstrated an ability to integrate larger-scale acquisitions. We have a dedicated team for integration. We have a dedicated team for M&A to find those sources. So we have a capability now to find, buy, and integrate those assets that we didn't have before. So as you think about that investment decision, I think really looking at the right side of this page and thinking, what's different about Casey's now than maybe before? That's what I would point to, is say, "This is a fundamentally different company.
It has all the same things that you always loved about it, and then we've cleaned up some things that maybe you had some reservations about. And I've, in my five-plus years here, I've never felt better about the position we're in than I do right now. So with that, I'm going to take a little bit of a pause. We're gonna bring some chairs up. We'll have the team up here, and we'll be able to answer some questions. I think Andrew's... All right, come on up, guys.
All right.
Okay, pick a spot. Well, I'll go ahead and introduce the team up here. I think for those of you in the room, met just about everybody today, but over here on my right is Nathaniel Doddridge. He runs all of our fuel operation. You know Steve Bramlage. Ena Williams, to my left, is our Chief Operating Officer. To her left is Chad Frizzell, who's our Chief Human Resources Officer, and at the end is Tom Brennan, our Chief Merchandising Officer. So, with that, I will open it up to Q&A. Christina.
Sure. Thanks, Christina Contando, thanks. So I had a two-part question on your food strategy. It's something that you've been very successful at. Obviously, four years have passed since you outlined the new process at the Investor Day in 2020. So can you take sort of a progress report in terms of the consumers that were coming-
Can you repeat it?
For fuel only-
Online
... have you converted them? Two, is that those customers that have been buying food from you, is their spend per the category or their frequency increasing? And I just wanted to tie it in in terms of what the food strategy might look like 12-18 months from now, as you think about anything that might be coming up down the pipeline.
Okay, for those online, I'm gonna try to repeat that. So it's the question was related to the food strategy, how that's evolved, how we're seeing consumer purchasing habits inside of that, and did I leave anything out?
18-
12 to 18 months from now, what does that look like? Tom, I'm gonna let you take that one.
Yeah, do you want me to-
Yeah.
Yeah. So, what I would tell you is that, you know, as we've continued to drive more relevancy through better innovation and through new platforms, we definitely are seeing more people engaging with the food platform. This is complemented by our growth strategy from a unit standpoint, right? So as we go into markets where Casey's is a newer brand, we are also seeing some traction with guests in those new markets. And so we're always gonna be thinking about, and we talked about it during the session where we were in the Culinary Innovation Center, right? So we want to deliver what our guests are looking for, but we want to do it in a way that's efficient for the stores, that's efficient for distribution centers, and quite frankly, is efficient for our marketing message.
And so we want to be, you know, as broad as we need to be to satisfy the optimal number of guests while we continue to grow the business. And so I think we've been very effective in doing that. We highlighted Thin Crust, which launched, of course, two summers ago and was highly incremental to the pizza category. And then, of course, this past March, we launched our new sandwich lineup, which Darren pointed out, right, three of those four sandwiches, right? We had that offer in store, but it just wasn't good enough. It wasn't Casey's good. And so as we reengineered it, as we took it through our innovation process, we were able to turn that into an offering that had broader appeal, much broader appeal.
I mean, we talked about our Q1 results, 85% growth in that category, and so absolutely, we continue to engage more consumers, more guests in Casey's footprint, to try our food proposition. And then I think as we talked about, also in the innovation center with each of the groups, so five years ago, or a little less than five years ago, at our Investor Day in January 2020, we talked about. I talked about how we were gonna build out that process. And in fact, as we've demonstrated, that process is up and running today. It's running so efficiently to the point now where we have more product ideas than we have windows to put them in.
And so that gives us, just even greater runway as we continue to develop, our overall approach to not only just our existing menu, but think about new platforms, right, particularly as we go to new geographies. So we really, really like our prospects to continue to pulse in appropriate innovation, while at the same time also having an eye for continuous improvement of our existing menu. And so we feel really good, about where we've come in the five years, but we feel even better about where we're gonna go in the next five.
Yeah, John?
Hey, Darren, can you talk a little bit about on the fuel side? I understand the strategy of the gallons and the mix and the margin. You got three stores within a half mile of here.
... and you were 284, 289, then across the street were 299. Can you sort of unpack that a little bit and just help me how we get there?
I'm gonna let Nathaniel unpack that one.
No, that, that's, thank you for paying attention to the retail fuel prices, so I will say, we live in a very dynamic industry, right? Where we deal with, on the fuel side of the business, one of the most emotional, probably, purchases people make, and so you think about traffic patterns, competitor sets. We are uber focused on making sure at the end of the day, that we are attracting the guests we need to attract. I think that's been the challenge over the last few years, is finding that nice balance, because, you know, some might say you should be the same everywhere, but I would tell you that, that customer that's driving by that one location is not paying attention to maybe some of those other spots.
It's really around the optimization of that price, and we're constantly reevaluating what those strategies look like. As you describe, in a market like this, where you have lots of Casey's stores, that's an advantage, but it can also be somewhat of a challenge as you look to see what that balance is, and as we continue to look at optimization of fuel pricing, I think that will continue to be where value is created from the fuel category, because every penny we can make at the end of the day across the chain is $30 million. There is value there with that we can extract, but we're constantly looking for that balance.
Thank you.
Hey there, Kylie Kohi with Jefferies. Thank you so much for hosting us today. I guess I kind of two questions, thinking a little more high level. First one is just kind of on the overall health of your consumer. Any changes that you've seen in the last twelve or even twenty-four months, and any insights there? And then also just kind of thinking about if, you know, new unit growth is, you know, roughly half of the EBIT growth. What would be the biggest risk besides unit growth when I'm thinking about that 8%-10% target? Thank you.
Okay, I'll go ahead and handle the first part of that one with the consumer, and, you know, I'll let you handle the store growth one. With health of the consumer, yeah, what we're seeing is it's a little bit bifurcated right now. And, you know, on the, I'll call it upper income side of the equation, things are largely as normal. Not seeing any change. And where we draw that line is income of $50,000 a year or more would be the upper income. Obviously, below that would be lower income. So for context, 75% of our guests are in that upper band. Okay, so only about 23% are below $50,000 a year. I think for further context, you got to recognize where we operate. We operate in the Midwest, primarily.
The most expensive state that we operate in is ranked thirtieth in cost of living, so we're in a very affordable geography. So that $50,000 goes a lot further in our footprint than it might in some other geographies. So all that being said, in the upper end, we're not seeing much change with the consumer. They're visiting the store as frequently, buying as they have historically bought. On the lower end, we're not seeing a change in frequency of visits, but we are seeing a change in decisions that they are making. In some cases, that basket is shrinking a little bit, so they may forego that one extra item that they might have bought as part of their basket. In some cases, the snacking occasion has shrunk a little bit. We're also seeing some unique behavior shifts within the store.
So, one of the things I thought was interesting when we dug into this is that consumers have been trading out of candy, because candy's been a lot more expensive, particularly chocolate, with the rise in cocoa prices, and shifting over to our fresh bakery products like cookies and brownies, that sort of thing. It's still a sweet indulgence, but about half of the cost on the prepared side as it is on the candy side. And so those guests are looking for that indulgence. They still want to get it. They're just finding a more affordable way to do that. And we'll take that trade all day long because a penny profit is better on our prepared side and the margin's higher. So, we like that math. But anyway, that's some of what we're seeing.
But generally speaking, I think the consumer's hanging in there pretty good.
For new store growth? You can look at it different ways, right? We grow stores by NTI, which is new builds, we build ourselves, or through acquisition. If you can call this a risk, a risk that we would take in building a new store, if it's outside of our core footprint, right? If you look at our major states, the ones that Darren talked about, where we operate the most stores, like Iowa, Missouri, Illinois, we're well-known. Our brand is well-known. The guests know us. We put in a store, we still have a lot of white space, and it hits the ground running. If you go on the outside, where we have fewer stores, it could be a risk of us building that business because our brand is not known.
The good thing about that, and how we take the risk out, is through M&A. If we're going into a new market and there's an acquisition, we can do a full blitz and have more assets in that one area, so we can put media to it. The guests will know us right away because we picked up a large set of assets, and that's how we mitigate some of that risk. Another risk on building new stores is really on the cost side of it. The cost of materials, the cost of labor, we've seen that cost increase quite a bit to build a new store, but to mitigate that as well is M&A.
... So traditionally, on average, M&A is costing less for us to build a store, so we acquire a store, whether it's single site or a chain, and it's already an existing asset. It's a C-store asset usually, and the guest is already present, so we can mitigate those risks that way as well.
When we do that, you know, really, our math right now is we can buy one of those stores, we can put, give or take, $1 million into that store to improve it, put a kitchen in, equip it, rebrand it, the entire thing, and still be $500,000 to $1 million below replacement costs at today's prices, so still very favorable on the M&A side. Who were you? Okay.
Thanks, guys.
Hey, Bobby.
Bobby Griffin from Raymond James. Appreciate the time from everybody and as well as the tours today. I guess two questions on the acquisition.
Mm.
I guess in the initial deleverage period, in the Fikes, post the Fikes acquisition, does that take you out of the market, or does it preclude you from doing anything large if there was a compelling acquisition to come about? And then secondly, maybe on the fuel side, can you talk a little bit about what picking up the fuel terminal does, maybe from a capability standpoint, back across the rest of the network, or what you're most excited about? And just help us understand what that addition, because I believe this is Casey's first fuel terminal, gives the business.
Want to handle the deleveraging?
Yeah. Listen, on the deleveraging, I mean, it's important to us to get back to two, right? I think that's important to the investors, the organization. I think the practical reality is, you know, there's not a lot of billion-dollar targets in our universe. There's even fewer billion-dollar targets that have reasonable expectations that they're worth a billion dollars-
Mm-hmm
... and not worth $2 billion. And our experience has been, you know what? It's a twelve-month process to engage in a conversation and get it across the finish line in the best set of circumstances. So no, I don't think our deleveraging commitment takes us out of those conversations because I think the practical reality is, you know, we're gonna be at the two-point-oh finish line before anything else would actually get consummated of substance anyways. On the fuel terminal?
Yeah. On the fuel side of things, with the acquisition, so as we talked about last year in Investor Day, we said a lot in earnings calls. We have been continuing to build out our capabilities. From the mothership side of things, we went live with our self-supply strategy at the end of July. It was interesting. We went live with our strategy internally, and then, at the end of the week, we also announced that we're buying a fuel terminal. That... A year ago, that wasn't necessarily in the plans, but we are where we're at. You know, we're really excited because similar to the self-supply strategy is it just creates this new view of the business.
And so, every opportunity we have to negotiate, we now have a little bit better glimpse into what is some of the market clearing prices, what our peers are paying for fuel in those markets? And so, with the fuel terminal, with their wholesale business, I think that's another big one, is they have approximately 400 wholesale customers, and so those are a myriad of dealers where we're selling to other retailers. They have commercial accounts. And so again, having other avenues and other levers to pull and other avenues to leverage scale, I think that's the big thing. When we're going to the table now, you know, we'll have, you know, 3.5 billion gallons to negotiate against instead of 3 billion. From a dealer perspective, we'll have new brands like Valero and Chevron.
Those aren't currently in our dealer portfolio, and so it just gives us new avenues to be able to market fuel and to sell fuel. And so, we probably won't be sitting here a year from now saying: Hey, we're in the midstream buying business. But, this will work really nicely, especially given the core of that terminal supplies a large portion of the Fikes' Texas fuel business. And so, you don't have to necessarily rely on finding another third party to come in there and utilize that asset. We have assets that utilize it already. So I think that's the thing, as we think about exciting part of this acquisition, is more visibility, more capability, and more outlets for us to go out and market fuel.
Hey, Bonnie.
Bonnie?
All right, Bonnie Herzog, Goldman Sachs. So maybe a high-level question on the industry. You know, we've seen inside sales for the industry quite pressured, and they've actually turned negative. And I think the last time we saw that, at least according to some of the NACS data, was more than twenty years ago. I think it was back in 2002. So maybe, Darren, I'd love to hear your perspective on that and whether you see more of a structural change or challenges for this industry, or is it really just a lot of the pressures we're seeing on the consumer for a lot of your peers?
Mm.
And then, in the context of that, again, you've touched on this today for us, but maybe highlight why you expect to continue to outperform and really, you know, what some of the advantages you have are. Thank you.
Yeah, I think there's a couple things going on in the industry from a macro perspective that make it a little more challenging for the legacy operators. You know, one of those things is the situation with cigarettes. And so if you look at the cigarette category, that's been in secular decline for decades, literally. But that decline has materially accelerated over the last, I'll call it, two years, and really will continue to do that. Now, with a lot of legacy convenience store operators out there, they were really leveraged to that category. 40%-50% of their sales mix might be cigarettes. So we're a far different mix of cigarettes than that, so we're not overly exposed to that consumer. Now, that consumer, obviously, they're purchasing less.
because they're just because the whole category is in decline. On top of that, that smoker tends to skew lower income. So in an environment where the lower income consumer is pressured, and you're over-indexed to that consumer because of the tobacco category, that's a little bit of a perfect storm in for a lot of players in our industry. And so I think that's a big reason why you're seeing that accelerated decline in some of the same-store sales results that you're seeing. And then, you look at the composition of the industry overall. Two-thirds of the industry, nearly ninety thousand of the hundred and fifty thousand convenience stores, are in chains of ten stores or less. And so you compound that cigarette issue with all the inflationary pressures and everything else that we've all had to deal with, but they don't have scale.
So they can't stand up a procurement department and leverage their scale to offset some of that inflation. They just have to eat it, and so I think that's putting a lot of pressure on. So then they raise prices out of survival. That accelerates a decline in same-store sales results. So there are some of those things going on that I do think are disproportionately impacting a large portion of the industry. Now, all of that stuff accrues to our benefit. It, it helps us. It, it encourages people to sell. It makes the competitive set a little less difficult. It's constructive to fuel margins, and because there's not a lot of levers for the industry to pull. So all of those things set up really well for us as we look forward. Who am I going to?
Okay.
Hi, everyone. Jacob Phillips from Melius Research. So, as you pointed out, there's a lot of investor, not concern, but focus on ROIC and free cash flow. So just wondering how adding the 200 stores could affect ROIC in the shorter term and then over longer term, and then same with all the capital investments that will need to be made, how that will affect free cash flow over the next few years?
All right. Take that.
Yeah. So, you know, from a cash flow standpoint, you know, there's a... For our free cash flow, the way we define free cash flow is operating cash flow minus capital spending. So, there won't be a real big impact on that 'cause the acquisition shows up on a different line. But just in terms of managing total cash, you know, part of the reason we didn't go to-- we just didn't take three hundred and fifty new units and add two hundred, and now we have a total of five fifty is to manage our cash flow outflow, right? So we're targeting five hundred and not five fifty.
So we will resequence some of the capital spending we otherwise would be doing over this period of time, to make sure that, you know, we can move the remodeling of the Fikes stores kind of to the front of the line, right? It helps synergy capture. Obviously, it helps the returns on the capital in the business. You know, I think the practical reality is, right, we have a discrete number of construction resources available to us, and so we need to make sure that, you know, we're managing those folks and those resources in the most effective manner. And so the net of all that is we're gonna spend a little less capital in the mothership than we would have anyways.
One of the things we liked about the Fikes acquisition, Darren referenced the larger store size, right? The fact that the stores are a little bigger than what we normally buy means it's a little easier and a little less expensive for us to remodel them. You have to bump out a wall less frequently. They already have a food program in a lot of those stores, so we're not putting in a kitchen, we're just renovating an existing kitchen. So it's a little bit less expensive touch for us as a result of that. From a return on capital standpoint, our return, our medium-term return on capital expectations for Fikes is no different than what it's gonna be for any other acquisition, right?
It's gonna need to get to double-digit after-tax return on capital by the time we're finished with our integration. So that's probably 3 years-4 years out, realistically, based on the timeline of doing all of the renovations. And so from a company standpoint, I would expect our corporate ROIC to dip a little bit in the first year, 'cause you're gonna add, obviously, debt and assets to the balance sheet, and we will not yet have all of the incremental EBITDA. But we wouldn't be spending the money without an expectation that it's the same as mothership ROIC by the time integration is finished.
Thanks. Anthony Bonadio, Wells Fargo. So I just wanted to ask about joint business planning. Someone mentioned during the tour that you were in the process of having conversations with your vendors on twenty twenty-five. Can you just talk about how those are going as we think about the level of pricing that will be flowing through and then any early reads on the level of promotional activity?
Yeah, I'll take that one. So, yeah, as Chris Stewart, our vice president, grocery and general merchandise, talked about during the Merch Lab tour just earlier today, our joint business planning process is hot and heavy, really August through October, and so we are fresh off of those conversations for 2025 . You know, what I would share is that definitely our key suppliers are looking to-
... over-invest in Casey's, because they recognize the return they're gonna drive for their spend in our stores, given our outperformance of the market broadly, and, you know, of course, in grocery and general merchandise categories, as well as obviously in prepared food, and so that's been a very receptive audience, right? As we're talking about building plans for twenty twenty-five to continue to drive the growth. In terms of pricing, it's a little bit of a mixed bag, right? Certainly, we could go category by category, but in general, I would tell you that, and you heard about it in some recent earnings calls from some of the bigger CPGs, right? They've really pushed the consumer to a point, a breaking point, in terms of the inflation that's come through the system over the last couple of years.
You know, I think that's, in turn, going to lead to additional promotion. And it's not just gonna be in calendar 2025. You should see, right, as we just in general in the market, you know, probably people are gonna be getting a bit hotter on promotions as we go forward. Now, that being said, right, we wanna continue to maintain our value proposition as Casey's, and for us, right, that means delivering quality first, delivering the assortment that our guests want, and delivering value for the money. That doesn't mean we're gonna chase the lowest price, right? 'Cause that's just not how we operate. We wanna make sure that we've got a solid offer for our guests that's driving relevancy, that's driving trips, and keeps them coming back to our brand.
Hi, John Royal from J.P. Morgan. Thank you for the presentation and the tour today. So, my question is just on private label. If you could give a little update on the tiering that you're looking at there, and just introducing that premium level. Anything about profitability there, or anything about timing would be helpful.
Yeah. So, as we mentioned on the tour, so, you know, our private brand refresh initially went live in January of twenty twenty-one, right? So we've had our current offering out there, the current look and feel, the current categories that we plan, you know, for the most part. We've had some recent additions, particularly, namely in liquor, with Frost Trail and with Silk & Gold. But in general, right, the initial refresh is kinda coming up on almost, you know, it's fourth anniversary.
And so one of the things that we're looking at as we continue to evolve as a retailer, and quite frankly, just get more sophisticated in our capabilities, is we recognize that there's white space, in existing categories that we play in today in partnership with national brands, as well as with our own private brand, as well as perhaps new categories that we could move into, that really give us the opportunity, to introduce, you know, a new-look Casey's brand and play in a little more premium space, so we could command a higher retail based on the quality that we're gonna deliver. But at the same time, we also recognize the need, to refresh the existing core assortment.
And so, you know, that's going to allow us, through packaging, through communication, through the look and feel in the store, that we'll, you know, we'll have over the course of the next 12 to 15 months, we'll be able to, you know, refresh that core. At the same time, pick our spots from a premium standpoint, and really let the guest. You know, again, you think about guest insights and all the work that we do there, that's really gonna drive where we go. But we're really excited about the possibilities and what that's gonna mean, in terms of impact to our business unit for grocery and general merchandise.
Thanks. Mike Montani with Evercore. Just had a two-part question. Maybe I could start with Darren. Could you just talk about your value proposition in the marketplace now, both in terms of prepared meals, given some of the QSR competition we've seen, as well as grocery, piggybacking on the private label comment? And then, just for Steve, if you could pick out maybe two or three of the key margin levers that you'd flag, you know, private label, vertical integration. What are the two or three that could give us more confidence there? Because obviously, promotions could be stepping up. You know, that can make folks nervous, so how do you offset that and build margin?
Yeah, I'll go ahead and start with the value proposition. I think, you know, particularly on the prepared food side, I think we've had the discipline, I'll call it, to take price where we've needed to, to offset some inflation, but not get too far over our skis on that price taking. And so we've always maintained a relative value versus our biggest pizza competitors in particular. But even if you go further up the chain with our sandwich offering, you know, when we talk about those sandwiches, you know, we're experiencing 85% growth in an environment where all the other sandwich players are, you know, pushing $5 value menus.
So it's clear to me anyway that we've maintained that appropriate value and quality equation, so there's good value for the money at the right level of quality to keep the guests coming. And you know, we always have the ability to raise price, but I think what's happened in the restaurant industry in particular is that industry to a large degree is franchised. And so although they have big brands, they also have small operators, and those smaller operators are under a lot of the same pressure that a lot of the independent convenience store operators are under. And so they don't have that scale to necessarily leverage, and so they've had to push price in order to just survive. And so I think they've hit that tipping point where it's become unsustainable. The traffic was going down.
We never got to that point. We didn't have to. And so we have a lot of levers in our business that give us the flexibility to offset pressures in one part of the business with some advantages we can leverage in the other. And so that's enabled us to sustain that on really, on both sides of the equation. And as Tom mentioned, you know. And I mentioned before our say-do ratio. That comes into play with our suppliers, in particular. And we've demonstrated a track record over the last several years of building these joint business plans with our suppliers, committing to doing certain activities, and then actually executing on those commitments. And they're seeing the results, and as they get the results, they come back, and they want to invest more. They've got their own P&Ls to run.
You know, I was at the NACS Show, and met with a number of our key suppliers, and if there was one theme that I heard over and over again, is they said: "We are going to invest in you because you guys are winning, and not a lot of other people are. And so we need you to make our year next year." Now, I've been doing this a long time. I don't get a lot of that, but I heard it this year. They need us to get to their numbers, and so that's a great spot to be in. And so we get that support, we get that investment from those suppliers, and then it's up to us to deliver on those, and so that really helps out on that value proposition.
Yeah, I think the starting point for the value proposition is the first lever we have, right? So if we're a 20% value, you know, do we have the flexibility to be a 17% value and still be differentiated if we need to, in a category with a guest? I think we do, and I think we've created headroom for us that, you know, it's kind of like the emergency rip cord on the parachute. We could pull some of that and not really change how we're perceived from a guest perspective. Our strategic sourcing initiative, I think, you know, that group continues to mature. And I...
We still have vendors and contracts that we've really not aggressively renegotiated with, even though we've stood that group up a couple years ago, 'cause you're just working your way through the cycle. Ultimately, I think gives us a lot of flexibility. I would not underestimate the mix shift impact in tobacco and the flexibility that that creates broadly in margin, right? The, the non-combustible products are significantly more accretive than combustible cigarettes, and so by doing nothing other than riding that curve, that creates, incrementality for us, in that category as well. And so, you know, and to Darren's point on being important to, to our suppliers, I think we're, we're much more sophisticated in asking for things that are win-win propositions for, for both of us.
From a supplier support standpoint, I think we've got some excellent business partners, and we've to Darren's point demonstrated quite a bit of success in helping them. And then finally, right, we talked about it with some of the prepared food. Innovation gives us tremendous margin flexibility, right? When we launch a new product, when we upgrade an existing product, we have tremendous ability to reset or recalibrate the retail price point relative to the value proposition. And so the more frequently we can innovate, the more frequently we get to reset that price point at something that makes sense for us. And given the strength of the and the size of that prepared food category, it gives us a lot of margin flexibility to work with.
You know, to that point, you know, we talked about the sandwiches and the success we've had there, and I mentioned earlier, three of those four were already existing sandwiches. Well, when we refreshed, we actually took the prices up. So we invested in the quality, we raised the price, and then people just bought them more because it's a better product. And so before I would argue, we didn't have that the quality-price equation right. We were cheaper, but we weren't good enough. Now, we're more expensive, but we are good enough, and now that value proposition is intact, and that's why we're getting the velocity we're getting.
Irene Nattel, RBC Capital Markets. We walked around the DC this morning, and obviously extremely impressive. Clearly, it provides a margin advantage because you're earning some distribution margin, so if you could talk, expand a little bit on that. But also on some of the key metrics that you're following, improvements that you've made, and how we should be thinking about any future improvements on that distribution piece that might contribute to the margin expansion.
Mm-hmm.
I can take that. So yes, we're self-distributed, and it does give us a lot of advantages, and one of those being that we can get the product to the stores when we need to. We can get it to them in the quantity that they need. When there are issues with our supply chain, and suppliers can't get the product to their stores through McLane or CoreMark, we don't have that issue necessarily, right? We can get it to them.
Mm.
One of the margin improvements, of course, is taking out the middleman. So we don't have to deal with that, right? I know you walked through the DC with Doug, and the Ankeny DC here is one of our older DC. It is our oldest DC, and so we have two newer DCs in Joplin and in Terre Haute. And in Joplin specifically, we have innovation there that we don't have anywhere else. Like, we have a robot that loads the pallets for us, so it takes labor out, so we can see improvements there. And as we look to expand, racking, like, different types of racking that we can use to be more efficient, Doug and team, they've done a lot of work the last-
Mm
... couple of years, just taking efficiency out by process. You don't necessarily have to layer on technology just to be more productive with process. So he's done a great job of doing that as well. So as we go forward, you know, we're still working on productivity and process-driven, and then we can start layering on technology where it makes sense. But right now, there's still plenty of room for us to be even more productive. And in the DCs that we have, we still have capacity, Irene, to even pick up the stores in this current strat plan. So we have plenty of room to grow in our current DCs.
Thanks for the update. Really useful today, helpful from everyone we met with. You've got a nice beachhead in Texas now. It's one of the three big markets. Maybe it's still too early, 'cause you've got to integrate Fikes and stuff, but is there anything different about doing this business in Texas versus all the different brands there, the competition? And is there anything you're learning from your early footprint there to understand? 'Cause that feels like, you know, your last presentation you gave, your footprint where you could grow, Texas can be huge, like you said earlier, if you do the comps. But give us an idea of what you're seeing, maybe early stage, and obviously you'll update once the Fikes deal is done.
Yeah, fortunately, a lot of us have experience operating in Texas, so it's new to Casey's, but not new to most of the people up here. Yeah, I think Texas is a tremendous opportunity for us, but it is different. I would point out a couple things in particular. One, I think, is demographically, as we go further south, and particularly in Texas, a far greater concentration of Hispanic consumers. And so flavor profiles, assortment needs, all very different. You know, a simple example is up here in the Midwest, this is Mountain Dew country, and Pepsi country, and Busch Light country. Now, down in Texas, it's Coke country, Dr. Pepper country, and Bud Light country. So pretty simple, but if you got that equation wrong, you're gonna really stub your toe before you figure it out.
Now, fortunately, we already know that, just like I shared, so we're not gonna make that mistake. But I think as you go deeper into prepared foods, fortunately, pizza travels everywhere, but there's a proliferation of taco and burrito concepts down there that, and fortunately, Fikes actually has that offer in some of their stores, so we're going to learn from that. The competitive set in some ways is very familiar. The bigger players, 7-Eleven is there. We're very familiar with them. QuikTrip with a Q, they're in this market, they're in a lot of markets we operate in, we're very familiar with them. RaceTrac is a newer competitor for Casey's. Again, we're very familiar with them. They look a lot like some of the other guys. So there's no new news there, I guess, is what I'd say.
It's just, we just need to be cognizant of that dynamic and make sure that we show up in the right way. The thing that I think is great is that most of those concepts, competitively, their strategy is more focused on big metro areas and concentrating stores in the big cities. That's really the opposite of our development strategy, and there's a lot of Texas that isn't in those cities, a lot of small towns. I tell people all the time, everything from I-35 to the Mexican border is Casey's country, and everything in that triangle between Dallas, and San Antonio, and Houston is Casey's country, and that's where Fikes is based, right in the middle of that triangle. They're not in the big cities.
So we've got really, that whole state is wide open for us, outside of those metro areas where those competitors are. So I think it's just more of an awareness than anything else. I think we're very aware of what we're dealing with down there, and I think we'll handle it appropriately. All right, well, I don't see any more hands up, so I think we'll just wrap things up. Again, I can't thank you enough for taking the time out of your schedules to travel here. I know this isn't the easiest place in America to get to, but I hope you felt it was worth your time. I think it's... When you live outside of Casey's country, one, it hurts my heart for you, that you live outside of Casey's country.
But it's you hear us talk about these things a lot, and I hope it helps. What you saw today helped everything come to life, and we actually are doing the things that we talk about doing. And for everybody who dialed in virtually, I thank you as well for taking the time and expressing your interest in Casey's. So, safe travels back home, and I hope everybody has a great rest of the day.