Q3 2024 Caseys General Stores Inc Earnings Call

Participants

Brian Joseph Johnson; SVP of IR & Business Development; Casey's General Stores, Inc.

Darren M. Rebelez; President, CEO & Board Chair; Casey's General Stores, Inc.

Stephen P. Bramlage; Senior VP & CFO; Casey's General Stores, Inc.

Anthony Bonadio; Associate Analyst; Wells Fargo Securities, LLC, Research Division

Benjamin Shelton Bienvenu; MD & Analyst; Stephens Inc., Research Division

Bonnie Lee Herzog; MD & Senior Consumer Analyst; Goldman Sachs Group, Inc., Research Division

Charles Edward Cerankosky; MD of Research, Equity Research Analyst & Principal; Northcoast Research Partners, LLC

Corey Tarlowe; Equity Analyst; Jefferies LLC, Research Division

Irene Ora Nattel; MD of Global Equity Research & Senior Equity Analyst; RBC Capital Markets, Research Division

John Macalister Royall; Analyst; JPMorgan Chase & Co, Research Division

John Russell Lawrence; Senior Equity Analyst; The Benchmark Company, LLC, Research Division

Kelly Ann Bania; Director & Senior Food Retailers Analyst; BMO Capital Markets Equity Research

Krisztina Katai; Research Analyst; Deutsche Bank AG, Research Division

Michael David Montani; MD; Evercore ISI Institutional Equities, Research Division

Robert Kenneth Griffin; Director; Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good day, and thank you for standing by. Welcome to Casey's General Stores Third Quarter Fiscal Year 2024 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead, sir.

Brian Joseph Johnson

Good morning, and thank you for joining us to discuss the results for our third quarter ended January 31, 2024, I'm Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, Board Chair, President and Chief Executive Officer; and Steve Bramlage, Chief Financial Officer.
Before we begin, I'll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company's supply chain, business and integration strategies, plans and synergies, growth opportunities and performance at our stores.
There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including, but not limited to, the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of the conflict in Ukraine and related governmental actions as well as other risks, uncertainties and factors, which are described in our most annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website.
Any forward-looking statements made during this call reflect our current views as of today with respect to future events, and Casey's disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation of non-GAAP to GAAP financial measures referenced in this call as well as a detailed breakdown of the operating expense increase for the third quarter can be found on our website at www.caseys.com under the Investor Relations link.
With that said, I would now like to turn the call over to Darren to discuss our third quarter results. Darren?

Darren M. Rebelez

Thanks, Brian, and good morning, everyone. We're thrilled to discuss third quarter once again demonstrated the strength of the Casey's team and the resilience of our business model.
Now let's review the results. Diluted EPS finished at $2.33 per share, 13% decrease from the prior year. The company generated $87 million in net income, a decrease of 13% and $218 million in EBITDA, a decrease of 2% from the prior year. As we mentioned in last quarter's call and the press release, all of these metrics were comparing against to prior year included a onetime operating expense reduction due to the resolution of a legal matter.
This resolution benefited the prior year by approximately $15 million or $0.31 per share. I'm proud of our team members for producing solid third quarter results. As the team navigated a less favorable fuel cost environment than in the past year as well as challenging weather most of our footprint in January.
I'd now like to go over our results and share some of the details in each of the categories. Inside same-store sales were up 4.1% for the third quarter or 9.9% on a 2-year stack basis with an average margin of 41.3%. Same-store Prepared Food and Dispensed Beverage was particularly strong as sales were up 7.5% or 12.9% on a 2-year stack basis with an average margin of 59.6%, up approximately 230 basis points from the prior year. Whole pies performed well in the quarter, and we also saw a strong performance with Hot Sandwiches and Dispensed Beverages.
Margin was favorably impacted by softening commodity costs, notably cheese as well as modest menu pricing adjustments during the quarter. Prepared Food continues to be a key differentiator for Casey's and I'm very pleased with the sales growth and margins. Same-store Grocery and General Merchandise sales were up 2.8% or 8.8% on a 2-year stack basis with an average margin of 33.9%, a decrease of approximately 10 basis points from the prior year.
We saw positive momentum in the category, notably in both alcoholic and nonalcoholic beverages and our private label program continues to be a great value option for our guests with Casey's chips and bottled water performing well in the quarter. For fuel, same-store gallons sold were nearly flat with a fuel margin of $0.373 per gallon. This marked the 11th consecutive quarter with fuel margins above $0.345 per gallon.
Our volume continues to outperform our geographic market as well as OPIS fuel gallons sold data shows the Mid-Continent region down approximately 5% in the quarter. Our fuel team is doing an exceptional job balancing volume growth and margin and the results continue to show it. Operating expenses were up 10.3% versus the prior year, grew 2.5% on a same-store, excluding credit card fee basis.
Our team continues to get more and more efficient operating stores, while at the same time, integrating multiple acquisitions. This is a testament to the outstanding work and maturity of our integration team.
I'd now like to turn the call over to Steve to discuss the financial results for the third quarter. Steve?

Stephen P. Bramlage

Thank you, Darren, and good morning. I'd also like to thank the team for their great work during the quarter. Our results were solid, especially inside the store where we continue to grow sales and expand margin. This was accomplished during a quarter of heavy integration of acquired stores across our footprint. Overall, this was another quarter of effective operational execution and what is shaping up to be a great fiscal 2024.
Total revenue for the quarter was $3.3 billion, a decrease of $3 million or 0.1% from the prior year due primarily to the lower retail price of fuel. Total inside sales for the quarter were $1.2 billion, an increase of $106 million or 9.5% from the prior year. For the quarter, Prepared Food and Dispensed Beverage sales rose by $36 million to $349 million, an increase of 11.4%. Grocery and General Merchandise sales increased by $70 million to $866 million, an increase of 8.8%. Results were also favorably impacted by operating approximately 7% more stores on a year-over-year basis.
Retail fuel sales were down $106 million in the third quarter as an 11% decline in the average retail price of fuel was partially offset by a 6.9% increase in fuel gallons sold. The average retail price of fuel during this period was $2.98 a gallon compared to $3.34 a gallon 1 year ago. We define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey's had gross profit of $787 million in third quarter, an increase of $49 million or 6.7% from the prior year. This is primarily driven by higher inside gross profit of $50.9 million or 11.3%, offset by lower fuel gross profit of $5.3 million or 2%.
Inside gross profit margin was 41.3%, and that's up 70 basis points from 1 year ago. Prepared Food and Dispensed Beverage margin was 59.6%, up 230 basis points from prior year. The category margin benefited from lower commodity costs, specifically cheese which was $2.06 per pound for the quarter compared to $2.30 per pound last year, a decrease of 10% or approximately 80 basis points.
Margin also benefited from a lower LIFO charge than in the prior year as our broader input costs softened, benefiting margin by over 40 basis points. Modest menu pricing adjustments also helps. The Grocery and General Merchandise margin was 33.9%, a decrease of 10 basis points from the prior year. The change was primarily due to lapping favorable vendor funded promotions in the prior year partially offset by a lower LIFO charge and private label continuing to increase its share of our mix.
Fuel margin for the quarter was $0.373 per gallon that's down $0.034 per gallon from the prior year. Fuel gross profit benefited by $3.4 million from the sale of RINs, and that's up $0.5 million from the same quarter in the prior year. Total operating expenses were up 10.3% or $53.2 million in the third quarter.
Approximately 3% of the increase is due to lapping a onetime benefit to operating expense last year from the resolution of a $15 million legal matter. Approximately 6% of the total operating expense increased is due to unit growth and integration spending as we operated 167 more stores than the prior year. Same-store employee expense accounted for approximately 1% of the increase as modest increases in wage rates were partially offset by the reduction in same-store hours. Depreciation in the quarter was $89 million. That's up $10.9 million versus the prior year, and that's primarily due to operating more stores.
Net interest expense was $14.1 million in the quarter. That's up $2.4 million versus the prior year, primarily due to less interest income as we funded several acquisitions in the quarter out of cash on hand. The effective tax rate for the quarter was 24.1%, consistent with the prior year. Net income was down versus the prior year to $86.9 million, a decrease of 13.2%. EBITDA for the quarter was $217.6 million compared to $221.7 million 1 year ago, that's a decrease of 1.9%.
Our balance sheet remains in excellent condition and we have significant financial flexibility. On January 31, we had total available liquidity of $1.1 billion. Furthermore, we have no significant maturities coming due until our fiscal 2026. Our leverage ratio, calculated in accordance with our senior notes is 1.6x. The third quarter tends to be our seasonal trough for cash flow generation. For that quarter, net cash generated by operating activities of $123 million less purchases of property, plant and equipment of $150 million resulted in the company using $27 million in free cash flows, and that compares to a generation of $27 million in the prior year.
At the March meeting, the Board of Directors voted to maintain the quarterly dividend of $0.43 per share. During the quarter, we repurchased approximately $30 million of stock, and we have $310 million remaining on our existing share repurchase authorization.
Investing in EBITDA and ROIC accretive growth investments remains our primary capital allocation priority -- but currently, given our low leverage levels and strong cash flow, we are repurchasing more shares than in the past. We have had an excellent unit growth year so far, especially with M&A.
During the third quarter, we closed on a transaction to enter our 17th state in Texas. And through the end of the quarter, we have built or acquired over 125 stores. As we prepare to finish fiscal year '24, we are reaffirming all of our fiscal year guidance, as outlined in the third quarter press release. And before we get into our fourth quarter experience to date, just a reminder that February had an extra day due to the leap year, and that will equate to an approximate 100 basis point increase to both same-store results and total OpEx for the fourth quarter.
Our results for February, excluding the impact of the Leap Day were as follows: inside same-store sales are near the top end of our annual outlook range. Fuel gallons were near the low end of the annual outlook range. CPG was a touch below the mid-30s. Please note that February tends to be seasonally low in terms of fuel profitability and that this February's result is a couple of cents per gallon higher than the same period last year.
Current cheese costs are modestly favorable versus the prior year. And one last comment on total operating expenses. We expect to finish the year at the high end of our annual outlook range, and that will be driven by some discretionary fourth quarter year-end charitable contributions as well as incremental incentive compensation expense due to the company's strong performance.
I'd now like to turn the call back over to Darren.

Darren M. Rebelez

Thanks, Steve. I'd like to thank the entire Casey's team for another strong quarter. You may have seen we recently added a new team member, our new Chief Pizza and Beer Officer, Nebraska native, Joe Cruz. Joe was selected from over 500 applicants and we're thrilled to have him.
Now the hard work begins as he's busy tasting our handmade delicious pizza and our refreshing ice cold beer pairings, which you can follow along with on our social media channels. Our team members across the organization continue to execute our strategic plan extremely well and the results are proving that the hard work is paying off.
We continue to roll out programs and make the stores run more efficiently including the launch of our digital production planner. This tool allows us to use our robust data and analytics capabilities to give team members the technology to manage food production more effectively in order to reduce waste and save team members' time.
Casey's brand, both with private label and our prepared food offering continues to prove to be our strength in the industry as evidenced by our robust inside same-store sales, both in the quarter and on a 2-year stack basis. This allows for strong guest support for food innovation. And in January, we rolled out a refreshed chicken sandwich and Cheeseburger that guests are already gravitating towards. Just another example of guests trusting that Casey's will deliver.
Our Prepared Food program continues to drive strong results and gives us a unique competitive advantage in the industry. The commitment of our team members in stores to serve guests with high-quality products at a great value has translated to results. Our private label program continues to shine as we saw positive growth in units and gross profit versus the prior year. More and more guests continue to join Casey's Rewards as we have over 7.7 million members today, as growth in the third quarter was accelerated by our 24 days of Casey's campaign.
With help from the continuous improvement team, our store operations team continues to operate the stores more effectively and efficiently. With their efforts, we had another quarter reducing same-store labor hours, marking the seventh consecutive quarter of same-store labor hour reduction while increasing both guest satisfaction and team member engagement scores. There's more to come, as we're excited about what's in the pipeline for the next 12 to 18 months regarding store simplification. We look forward to giving our team members even more tools to make a great guest experience.
On the fuel side of the business, we performed well despite lapping a highly profitable quarter last year. Wholesale price movement was less favorable, but we still posted a $0.373 per gallon margin while outpacing our geography on fuel gallons sold. We're positioned to thrive in this environment with our team and the capabilities that we've stood up.
Regarding store growth, we're off to a great start on our commitment to add 350 stores by the end of fiscal 2026. Our 2-pronged approach of new store construction as well as M&A allows the company to ratably grow without reaching for acquisitions. As we approach the end of fiscal 2024, I'm proud of how we started our 3-year strategic plan. I'm extremely excited about the outlook of the business.
Now that the world and our industry has evolved to a more normalized post-pandemic environment, our unique business model is proving to be both highly differentiated and resilient. We have abundant growth opportunities on the horizon and the team and balance sheet to capitalize on them. This gives me great confidence in our team and our ability to execute the strategic plan. We'll now take your questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Ben Bienvenu with Stephens.

Benjamin Shelton Bienvenu

I want to ask first about the results in the Prepared Food business. Very strong same-store sales results, very strong margins. I'd love to hear a little bit about the composition of the same-store sales growth that you saw during the quarter, how much is ticket versus traffic.
And as you look forward to some of the new product innovations that you have in store and the store simplification, what impact you think that might have on the Prepared Foods business versus the rest of the business more broadly?

Darren M. Rebelez

Yes, Ben, this is Darren. Sales were driven by a few things. We had real strength and old ties, old ties were up about 11% in the quarter. Our bakery products as well were up about 11%, and then we saw apps and side items up around 9%. Sounds pretty good.
Overall, when you look at the inside sales mix. I was really happy with how inside work out this quarter, it struck a really nice balance. We're up about 2.2% in transactions and about 1.9% in check. So really, you see some -- a little bit of modest inflation, but you also see the strength coming from driving traffic to the stores. And that's really a good spot to be in from that perspective.
With respect to innovation, I'll tell you, I think we're really starting to hit our stride and this quarter had some impact of that with our chicken sandwich and our burger platforms. The culinary team did a fantastic job of basically rebuilding those products and up-leveling the quality of all the ingredients, changing the builds, making those more compelling and adding a new crispy, spicy chicken sandwich, which really resonated well. And in doing that, up leveling that quality and also negotiating better cost of goods, we were able to raise price by about $0.50 a unit and the velocity has accelerated, almost triple digits. And so we're really seeing some nice results there. And so that innovation can really not only have an impact on the velocity but also have an impact on the margin at the same time.

Benjamin Shelton Bienvenu

That's great. My second question is also on the Prepared Foods segment, but more as it relates to the margins and in particular, the cost of cheese. Steve, I think the last update that we got is that you were 80% locked for the balance of the year, so that would be the fourth quarter. Spot cheese costs are down considerably. Is there anything that you can share with respect to how you're thinking about forward buying your cheese needs for fiscal '25 and what potential benefit that might afford for Casey's?

Stephen P. Bramlage

Sure. Ben, as it relates to the fourth quarter first, we're now about 90% locked for our fourth quarter buy. And so I think we got a lot of visibility into that. I would expect us to be something like 5% or 6% to the good on a year-over-year basis for the all-in cost of cheese, that would compare to about a 10% or so benefit that we had in the third quarter, so favorable, but modestly less favorable as we enter into FY '26 we will continue to be opportunistic as we think about how we can forward buy cheese on a favorable basis.
If we get an opportunity to forward buy it so that we'll have -- we can lock in deflation. On a year-over-year basis, we take advantage of that, and that's what our sourcing team is focused on. And so we certainly are not locked into the level that we are for FY '24, but we will continue to take advantage of that opportunity going forward. When we get to the end of the fiscal year this year, we'll give some more forward visibility as to exactly what those positions are entering FY '25.

Operator

Our next question comes from the line of Anthony Bonadio with Wells Fargo.

Anthony Bonadio

So it looks like OpEx growth in Q3 came in quite a bit below what you guys had guided to last quarter. Can you just talk a little bit more about what drove that upside versus what you guys were planning? And then maybe more broadly, what you're doing on the cost side that's looking for now?

Darren M. Rebelez

Yes, Anthony, I'd say we had another really strong quarter on OpEx, and that was -- the favorability was really driven in the stores with labor management and the stores continue to perform exceptionally well in taking unproductive labor hours out. And that's -- it's somewhat of a virtuous cycle as we make the job in the stores more simple for people to execute.
It takes less hours to do the jobs but it also reduces turnover. When you reduce turnover, you reduce over time, you reduce training hours and people get more productive in their jobs because they stay in them longer. And so we're seeing all of those things happen and then the great side benefit of all that is team member engagement scores go up. Overall satisfaction scores go up, both of which are the highest we've ever seen in our company. So everything is working pretty well on that. But the primary driver was labor hour reduction.

Anthony Bonadio

Got it. That's helpful. And then I just wanted to dig in on fuel margins a little bit. I realize there's sort of a price element to the softness we're seeing of late. But I also know you guys have a uniquely good read on the health of the marginal operator, given you're looking at a lot of these chains as potential tuck-in deals. Can you just maybe talk a little bit more about what you're seeing there as we sort of look to assess the impact on fuel margin breakeven for those players.

Darren M. Rebelez

Yes, with respect to fuel margin, and other operators. I mean we are seeing other operators as we look at stores that we're acquiring, we'll see operators that are taking more fuel margin. The fuel margin will be higher than it was prior year. But in many cases, their EBITDA is lower than it was in the prior year. And so what they're having to do is raise price on fuel, take more margin.
They're chasing off gallons in the short term, and that math works in the short term, it doesn't work over a sustained period of time, and that's still not enough to cover the losses that they're experiencing in the cigarette category or the inflation that they're experiencing in OpEx because typically, these smaller operators are over-indexed to tobacco and they don't have any scale to negotiate better services agreements with service providers that ultimately impacts our OpEx. So that's kind of what we're seeing on that front.

Operator

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

Bonnie Lee Herzog

I had a question about your inside sales were really quite strong, which is great, and you're executing very well. But I guess I was wondering if you're changing your strategy a bit in terms of what you earn at the pump versus maybe driving traffic in the store.
I guess I'm asking because your fuel margins were strong, but they have decelerated sequentially this year. So -- is this more a function of a shift in strategy on your end or maybe just some industry pressures? And then if it's the latter, can you give us a sense maybe of why industry margins have been declining over the last few months?

Darren M. Rebelez

Yes, Bonnie, I would say, first, there is no change in strategy for us on fuel. And we've been very consistent in that, we always strive to maintain a balance between volume and margin and try to optimize gross profit dollars in that equation.
And if you look over this past fiscal year, we've -- every quarter has been either favorable or positive by 30, 40 basis points or negative about 30, 40 basis points, it really toggles within a pretty tight range around flat. And we've had good margin. This quarter, obviously, the margin was lower than prior year. The prior year margin was over $0.40 a gallon. We've never really had a goal to achieve any sort of margin, frankly, it's really to maximize those gross profit dollars. So no change in strategy.
We were actually really pleased with the fact that when we look at the Mid-Continent data from OPIS that we're about 500 basis points better than the industry from a volume standpoint, we're still north of $0.35 a gallon on fuel margins. So we like that math especially when it maintains traffic into the store, we have positive traffic in the store, which is where all the real margin is, and that's our true strength and differentiator. So the model is working exactly as we would ascribe it to work.

Bonnie Lee Herzog

Okay. It definitely makes sense. And then just maybe a quick follow-up on that because Darren, I think you mentioned that you've made some modest retail price adjustments. So would love to just hear a little bit more color around this. And what I'm talking about is about the pump and then your ability to maybe take even more pricing in the future in the context of sort of what you just said.

Darren M. Rebelez

Yes. We took some modest pricing in Grocery and General Merchandise. The tobacco pricing, I'd set aside and you know how that works, Bonnie, it's a quarterly cadence. We pass on those cost increases to the guest.
Outside of that, as we turn the page on the calendar year, we had some cost of goods increases primarily in some of the non-alc beverage categories, we were able to pass those on. But by and large, this was not a real inflationary year compared to the last several that we've experienced. And like I mentioned before, we had a really good balance in the quarter of driving traffic to the stores and storing that check just a little bit vis-a-vis inflation or mix to get to a pretty good outcome at a little over 4%.

Operator

Our next question comes from the line of Bobby Griffin with Raymond James.

Robert Kenneth Griffin

Congrats on a good quarter in a tough wholesale environment. I guess, first up for me, I want to maybe switch gears and talk a little bit about the recent M&A. I think you guys have acquired about 145 stores over the last 12 months, more of the tuck-in side versus the bigger, larger acquisitions like you did with Bucky's a couple of years ago. Can you maybe just talk a little bit about how the integration is going on with some of those? Any interesting learnings from these recent ones versus kind of times in the past? And then maybe -- I know it's early, but just touch on how the expansion in Texas is going.

Darren M. Rebelez

Yes, Bobby. Yes, it's been a real active M&A environment recently, and our M&A team is doing a fantastic job with a lot of these tuck-in acquisitions. That being said, we're also having discussions on larger potential deals, but we just haven't gotten anything over the finish line yet. So more to come on that.
But yes, I'd say -- we've done so many of these now, these, I'll call them, under 100 store size acquisitions. Our integration team has really got a good process down, and they're really efficient and effective at doing that. And I think we learned how to get our Prepared Foods into these acquisitions more quickly. Historically, this has taken us a long time to do.
And to the extent that some of these stores that we acquire have some level of kitchen space available. We've -- our team has gotten really effective at getting equipment in early and getting the food into the stores quicker, which obviously accelerates the same-store sales capture and the synergy capture in those acquisitions. So yes, I think we get a little bit smarter, a little bit better on every one that we do.

Robert Kenneth Griffin

And then, Darren, just on the whole pie growth, I mean, 11%. Just curious can you unpack a little? Or do you have any details on what is driving that? Is that the carryover from just obviously adding Thin Crust as part of like we haven't fully lapped that yet, I believe? Or is Casey's pricing versus peers in the core markets just becoming more compelling on a whole pie basis, given your size is getting bigger or anything else there to maybe talk about what's driving that growth?

Darren M. Rebelez

Yes. Bobby, I think it's a combination of things. Certainly, the Thin Crust has helped. It's about hanging in there at about 12% of the mix now and a good portion of that was incremental. And we won't lap that until June. So we definitely have some favorability there. We've also seen really strong growth in single topping pizzas and that tends to be more of a value play.
And one of the interesting things we're seeing as we dig into our guest insights, we're finding that although we're not really overly exposed to the lower income consumer, about 3/4 of our just make over $50,000 a year. That other cohort that makes less than $50,000, they are spending more money on Prepared Foods. And they're finding that value proposition really compelling. And so it's been an interesting dynamic.
I mean, the other income cohorts are also going to Prepared Foods, but the fastest growth is coming from the lower income demographic as I think they try to find that right value and quality equation. And frankly, when you look at a lot of the other pizza players, a lot of them are franchised and a lot of those franchisees have taken a lot of price. And when we compare our numbers to any of the other publicly traded pizza competitors, but we stack up really well in relation to them.
I think that's because of our ability to maintain that right value equation in that space, and we're seeing the growth as a result of it.

Operator

And our next question comes from the line of Michael Montani with Evercore ISI.

Michael David Montani

Just wanted to ask, if I could, to discuss a little bit the inside margin outlook into the fourth quarter. So if we went to the midpoint of the full year guide, it suggests that there could be some pressure coming up there, in terms of less expansion for sure. So I just wanted to kind of get a sense how to think about that.
And then secondly, I guess, to the extent you have visibility on input costs and pricing, do you think we're seeing kind of a bottoming of this inflation at this point? And potentially, there could be some uptick there? Or how should we think about that?

Stephen P. Bramlage

Yes, this is Steve. I'll try to start with that. I think as we sit here today, halfway through the fourth quarter, I don't think there's a radical change and the experience we've had around input costs broadly vis-a-vis what's happened here in the last couple of quarters, as we mentioned on an earlier question.
Cheese may be a touch less favorable for us in the fourth quarter on the prepared food side of the business than it was, but it will still be favorable year-over-year, broadly speaking in Prepared Food -- we continue to have year-over-year deflation usually disinflation at worst on most of the commodity categories with the exception of beef. And so I do think we continue to have a tailwind that's likely to stick with us here for a little while on those categories. And then on the grocery side, that's a contractual business for us.
And so as Darren had mentioned earlier, most of those prices reset for -- most of those input costs reset for us at the beginning of the calendar year, and we were able to make retail price adjustments accordingly. And so I would expect us to be in a position to preserve the grocery category margins pretty consistent with what we've seen here for most of the year as we finish out this year.

Michael David Montani

Got it. And then if I could sneak one more in just on the LIFO front. How should we think about that into the fourth quarter?

Stephen P. Bramlage

LIFO is -- it's just reflective of what our input costs ultimately are and the way the accounting rules have us make adjustments to inventory balances. And so generally, the direction of LIFO charges will follow what's happening with input costs. And so with the exception of tobacco, where we consistently are going to be taking LIFO charges because we're consistently getting price increases.
Generally speaking, LIFO will be less of a headwind on a year-over-year basis for us as we continue to see deflation on the Prepared Food side. And so I would expect LIFO as we sit here today, probably to consistently be modestly favorable on a year-over-year basis for us as we finish out the fourth quarter.

Operator

Our next question comes from the line of Kelly Bania with BMO Capital Markets.

Kelly Ann Bania

I was wondering if we could just talk about gallons. You're tracking flattish, which sounds like some pretty significant market share gains in your region. Just wondering if you could talk about maybe what's driving the broader decline in gallons. It seems several quarters in a row now. And do you anticipate that, that's kind of the new normal where gallons are kind of weaker across the industry? And is your strategy to maintain flattish gallons there going forward?

Darren M. Rebelez

Yes, Kelly, I think this goes back to what I was saying before. If you look at some of the smaller operators, you got to look at the composition of their business. So if you said gasoline side for a second in the inside of the business, they're heavily leveraged to tobacco. Typically 30% or more of their inside mix is tobacco, ours is about 18%.
And that category is declining, call it, 8% to 10% a year. They don't typically have prepared foods. They don't have rewards. They don't have a lot of scale to leverage. So they don't have a lot of levers to pull to try to offset the inflationary pressures and the decline in the tobacco category and inside overall. So they're raising price on fuel to try to offset that.
But the consequence of raising that price on fuel is chasing away some of those gallons. And we're able to have a more balanced approach to that because we have such a strong inside offering and we do have scale, and we do have rewards and we do have prepared foods, and we have a lot of those other things that they simply don't. So we can make money another way.
And remember, for us, about 70% of our transactions are nonfuel anyway. So we've got a lot of business coming to the stores that helps us offset some of those other areas of softness in some of the other categories. So we're able to afford to have a better balance of fuel volume and margin.
At the same time, there are some structural things that are going on with fuel that would put some pressure on gallons overall. If you just think about fuel efficiency in vehicles overall, with an average car age of about 12 years, every year you drop off the oldest, least-efficient vehicles in the fleet and replace them with the newest and most efficient vehicles that have been made. And so there's always going to be some pressure on gallons consumed in the industry.
And so we kind of feel that in that type of environment, if we're flat to slightly up on gallons, and we have strong margin, that's a really good balance for us, and we convert that fuel traffic into store traffic, which is where we have the strongest margins and the most profitability.

Kelly Ann Bania

Thank you. Also just wanted to ask with store simplification. I think you mentioned 7 quarters in a row in same-store hours declining. Just curious if you can talk about how much more opportunity is there? It sounds like there's more to come, but maybe you can just give us some color where the opportunity is.

Darren M. Rebelez

Yes, we do think there is some more to come. Frankly, whenever you start off on an issue like this, you go after the low-hanging fruit first. So I think some of the big chunks that were available to us, we've taken.
So it gets a little more challenging, and we have to get a little more sophisticated. But we've got some good initiatives in the pipeline from workforce management tools to some process changes that really we think will make a difference. But I think overall, where we'll see the real benefit is just simplifying the work in the store, giving the store back some slack hours is what we call it, where we don't necessarily take hours out, but we've eliminated work, which makes the job of the team members in the stores easier.
That has a positive impact on turnover with less turnover, you spend less in training, you spend less on over time, you get more productive in your job. All of that helps to reduce labor. So we haven't given any guidance on what that's going to look like over the next couple of years, we'll probably get a little sharper on that in our next quarter when we give guidance for fiscal '25. But suffice it to say, we still think we have more opportunity there, and we'll continue to go after that.

Operator

And our next question will come from the line of Irene Nattel with RBC Capital Markets.

Irene Ora Nattel

Just coming back to the recent fuel margins, I think that sort of investors are just struggling a little bit to understand why we've seen this sort of more recent compression in recent weeks relative to prior weeks. So I guess my question for you is, are you seeing anything fundamentally different in the competitive set and in the way they're asking that would play into those -- that sort of slightly lower trend to our fuel margins? Or do you think it's just more a seasonal issue?

Darren M. Rebelez

Yes, Irene, we're not seeing anything dramatic. I mean competitors ebb and flow in their behavior and we always react to that and they do the same with us. So -- but I'm not seeing any wholesale changes in anybody of any scale that would make a difference.
And I would just remind everybody that -- yes, our margins were a little bit thinner than they have, and we're talking off of $0.40 a gallon though. Nobody at least I know of is really banking on $0.40 fuel margins being the new normal. And so the fact that we ended up at $0.37, I think, is a pretty good outcome -- no, it's not $0.40, but it's definitely a pretty good outcome.
And I think this time of the year, in general, as we start to go into a refinery turnaround, that supply starts to get a little bit tighter, the cost curve goes up, I mean, since the beginning of the calendar year, wholesale costs have risen $0.50 a gallon. Now what we do know is that at some point, that curve is going to inflect and the cost curve will come down as the refineries come back online.
And as that cost curve comes down, margins tend to widen out. What we don't know is when that curve is going to inflect. It could inflect next week, and we'll have a nice 6-week run before the end of the quarter of widening fuel margins. It can inflect in 4 weeks from now, and we'll only have 2 weeks in the quarter. At the end of the day, it's not going to matter because the curve will run its course and we'll make the margin that we're supposed to make.
The timing of it and when it lands neatly into a quarter or not is really anybody's guess at this point. But to get back to your original point, we're not seeing anything structurally different with fuel margins at this point.

Irene Ora Nattel

That's really helpful. And then just coming back to sort of the consumer behavior. You called out that sort of your lowest 25%, it is sort of -- you're seeing better results on Prepared Food. But just wondering sort of more broadly speaking, what you're seeing around consumer behavior? And any sort of heightened sensitivity around promotional or spending or anything like that?

Darren M. Rebelez

Yes, Irene, really, overall, I think I'd have to say that the consumer has proven to be pretty resilient. We're not seeing a lot of real changes. We tend to see changes in fuel when times get tied, they'll switch to more heavier ethanol blends, they'll buy less premium. We're not seeing any of that right now.
We've seen good growth in our private brands. That was up 5.5% same-store in the quarter, but not a huge shift. Like I mentioned, the lower income cohorts are doing what you would expect lower income cohorts to do, which is gravitate a little more towards value or Prepared Foods and our private label satisfy that need. But with the other income cohorts, they're continuing to spend like they have been. And so we're not really seeing anything different at this point.

Operator

Our next question comes from the line of Krisztina Katai with Deutsche Bank.

Krisztina Katai

My congratulations on a good quarter. So I had a follow-up question on Prepared Foods and some of the recent launches, thinking about Thin Crust, the 4 new sandwiches. So if you could just talk about the value that you see Casey's providing relative to just your broader competition looking also at QSR competition, if you could make any comments about what they're doing from a pricing perspective that could give you an opportunity to gain further market share. And if you could also contextualize for us where you see Casey's market share today in the various dayparts compared to maybe 1 year or 2 ago?

Darren M. Rebelez

Yes, Krisztina, I think with some of the recent innovation, like I mentioned, in the sandwich category, in particular, we were able to take some price. But our price points are still significantly below what you would find in the QSR for a comparable quality standard, I mean, a couple of dollars cheaper.
So we think it poses a unique value and look, the guest is going to buy on quality first and then hopefully try to maximize on price. And I think our culinary team, like I mentioned before, did a really nice job of taking some products we already had and tearing them down to the studs, improving the quality of every ingredient in those builds and making them a better product and then layer in some innovation along with that with a new build.
And it's a good recipe and very much a value. I don't have good market share data in those subcategories right here as we speak today. But I know historically, when we do something like this, we tend to take some share from the largest players. So the last time when we did a similar exercise on breakfast, we saw the most share actually come from McDonald's, believe it or not. And that's primarily because they have the most presence and they're the biggest player. So I would imagine that once we get the data in on the sandwich platform, it may look something similar to that, but I just don't have the data at my fingertips right now.

Krisztina Katai

Got it. That's helpful. And then just a quick follow-up. On private label, I think, Darren, you said that volumes were positive, but did you provide where penetration ended in the quarter? And then just broadly, how are you thinking about new product launches or the number of SKU launches that you're playing over the next 6 to 12 months?

Darren M. Rebelez

Yes. The penetration in the quarter was about where it had been is right around 10% in units and gross profit dollars. Just to remind you that third quarter is seasonally the softest quarter for private label because it's softest quarter for beverages, and we have a big beverage presence with our private label products.
So it's always going to be a little bit less penetrated this time of year than it would be here in the next few quarters. I'm sorry, Krisztina, what was the other part of your question -- oh, new products. We've got a pipeline of about 40 or 50 new products that we're planning to enter into the assortment, we're going to phased in over the next several months, some are being the biggest part of it, not prepared to really discuss the details of any of those, but we're pretty excited about what we got coming this summer.

Operator

Our next question comes from the line of Charles Cerankosky with Northcoast Research.

Charles Edward Cerankosky

In looking at your Prepared Food margins, they've been trending upward. And would you care to comment, can you get back into the 60s. And I'm curious about what the role of redeeming private label rewards is on the Prepared Foods part of your business? And will that hold it back, the margin back.

Stephen P. Bramlage

Chuck, this is Steve. I'll maybe start with that. We're -- I think, first of all, we're pleased with the progress of kind of margin recovery broadly in Prepared Foods. As you know, we consciously have taken a position of trying to improve margins in that category by kind of pricing through the commodity cycle. And so unlike the grocery business that which is contractual.
We've got a lot of commodities. And so when all the commodities went up at the same time, a couple of years ago, we chose not to chase dollar for dollar with price increases at that point. So we raised prices, but not as much as the input costs went up, and we expect, over time, commodities will inflect and ultimately, on the downside as we hold retail prices steady, we'll recapture that margin over the course of the cycle, and that's exactly what's happening right now and our experience, and I think we've got further to go in that direction.
So the 60% number for Prepared Foods, we're close to it now. The high watermark a couple of years ago was a little bit higher than 60%. I would remind you, a couple of things structurally have changed and you kind of hinted at that, right? We did not have a rewards program at that particular point in time and the cost of the rewards program in terms of points that are accrued is a reduction in margin.
It's about a 50 basis point reduction in margin on Prepared Foods as we sit here today. We also did not have third-party aggregator delivery of any significance at the time. And so that previously was an operating expense where we delivered out of the stores. And now it's a cost of product in the fees. And so those things structurally have changed. And so the high watermark probably will -- has been reset accordingly.
But I think we feel good about a glide path to 60. We're on it right now. Input cost remains favorable. And I think we feel good that the approach we've taken has allowed us to maximize gross profit dollars inside the store and then maintain the value proposition. And I would expect we'll continue to run the play in that regard.

Operator

And our next question will come from the line of Corey Tarlowe with Jefferies.

Corey Tarlowe

I wanted to ask about growing organically versus through acquisitions. It sounds as if the environment has become more conducive to grow through M&A, given it sounds like marginal player EBITDA has been a little bit pressured elicited by the cents per gallon and traffic headwinds that these peers are facing. I'm curious to get your view on that and how that informs what your outlook is going forward as you think about growing through those 2 levers organic versus M&A?

Darren M. Rebelez

Yes, Corey, this is Darren. Yes, I first say that we like to strike the balance between organic growth and M&A. We don't ever want to put all our eggs in either one of those baskets because situations can change. And so what we're seeing right now is that the M&A environment is pretty attractive. The cost of construction has gone up.
And so -- and at the same time, the challenges for the smaller operators have gone up as well. And so what we're finding is we're able to buy some assets pretty good quality assets, invest close to $1 million in putting in kitchens and remodeling and fixing deferred maintenance and all those other things. And essentially have a brand-new store for less than replacement cost than it would cost us to build it brand new.
And so we like that math. I mean we look at a lot of things we're assessing valuation on M&A, but one of those checks is replacement cost. And can we build it cheaper than we can buy it and fix it up. And so we stay pretty disciplined on that. So right now, it's been very favorable. We've been able to buy a lot of stuff for below replacement cost all in.
That being said, we're still going to build in the neighborhood of 50 new stores this year. And we have a pipeline of organic growth that continues to build. And if we have a lot of M&A. We always have the option to land bank our real estate and continue on M&A. And then when -- if the M&A market turns a little bit soft, we could just pivot back over to our land bank and continue to grow organically and maintain that steady ratable growth I think people are counting on from us.

Corey Tarlowe

And then just as a follow-up, how are you thinking about leveraging technology to not only improve those same-store hours that you pointed out, but I wanted to ask about AI and your intentions there and how you think that could benefit the business as well going forward?

Darren M. Rebelez

Yes. So a couple of things there. I think the technology, we are using some technology to help on the labor side. More recently, we just launched our digital production planner, which enables us to take what was a manual paper-based process and make that fully automated. So that saves people -- store managers, in particular, time on having to manually do calculations and manually write things down to get to a production plan or for the kitchens to execute against.
So one example, we're also rolling out here before the summertime, a workforce management tool that will allow our store managers to get even more efficient and labor scheduling and deployment and give our team members flexibility from a scheduling standpoint. So that's on the labor side. With respect to AI, we're looking at a couple of different things. Probably the best example we have is what we just rolled out what we call our automated voice assistant or AVA, as we call her, which essentially answers the phones in the stores.
And even though about 80% of our food orders that come into our kitchens are digital, that still leaves close to 10 million phone orders a year where people will call a store and talk to a person in the store to place an order. And as you can imagine, that becomes disruptive during peak periods when people are trying to get food out of the kitchen and they're having to stop and take orders and it's noisy and disruptive. So AVA takes care of all that.
It's AI-driven. We've trained it with natural language processing and machine learning. So when the call comes in, it could take the order, it can suggest to sell, it can help build that order and it goes right into the order management system in the kitchen. So the phone calls are drastically reduced in the kitchen, and makes it more efficient to get the food out. And we're right now at about 11% of the orders that come in are being handled by AVA at this point.

Operator

And the next question comes from the line of John Royall with JPMorgan.

John Macalister Royall

I know we're short on time, so I'll just ask one. Can you discuss any impact you had from weather in January? I know the Midwest got kind of pummeled with some winter weather. You saw fuel comps off a little, but very strong inside the store comp. So I guess I was a little surprised to not see much of a material impact there. Can you just talk through any weather impacts in the third quarter?

Darren M. Rebelez

Yes. It was really a tale of 2 parts. The November, December were pretty favorable. And so we had good inside comps and we had positive fuel comps in November, December. And in January, that turned on us. I think we were on fuel. We were up 0.9% in November, 0.6% in December and down 2.6% in January. And so we ended up down a little bit on the inside, we never turned negative. We were positive 5-ish and 6-ish in November, December, positive, a little bit over 1% in January. Netted out to the 4.1% overall.
So again, I think weather certainly has an impact in this part of the geography, we had about 10 days or so where temperatures didn't get above 0 and the news was telling everybody to stay home and don't go outdoors. So it's not great for business. But I think overall, I felt really good about how we came out of January, considering how tough it was. And ended up with a really strong quarter.

Operator

Our final question come from the line of John Lawrence with The Benchmark Company.

John Russell Lawrence

Yes. Great. Darren, when you talk about -- obviously, you're looking at some larger chains for acquisitions. We've watched you and witnessed all the leverage points in the years past. Can you talk a little bit about how this restructured gas margin in the 30s? How does that affect the math as you look at these larger chains? And just does that give you another leverage point on scale as you make -- as you look at making the chain a lot larger?

Darren M. Rebelez

Well, if I think I understand your question. I mean, when we're looking at these chains, those dynamics that I described earlier are still consistent that most other operators are heavily relying on fuel margin because the inside business isn't as resilient.
For us, when we look at these things, we try to model those based on our experience, not necessarily the experience of the previous owner because we're going to have an approach to how we price fuel, how we secure fuel. Typically, these assets are in our existing geographies or adjacent to it. So we're pretty familiar with the fuel supply and pricing dynamics in these markets and we understand how our stores perform there.
So we don't really put too much stock in how they do it today. We take much more -- put much more credence into how we're going to operate them moving forward and we model it accordingly.

Stephen P. Bramlage

Yes. I think, John, I would add, on the fuel over the last 2 years, we've been talking a lot about sustainability of higher fuel margins in the industry. I think broadly speaking in M&A as a potential buyer, there's a general recognition that higher fuel margins and LTM EBITDAs are more reasonable than they might have seemed 2 years ago just because of the dynamics in the industry and people adjust accordingly.
And then again, fuel margin for the smaller players is often the only lever they have to drive EBITDA to wherever it's going to be. And so I would say it's a little bit more the tail on the dog and that the small operator remains under pressure for all the reasons we've talked about inside the store and with operating expense and they're pulling a lever on fuel that's really to try to help them rightsize what's happening inside and as opposed to having a strategic point of view on what they're doing with fuel within their own business.

John Russell Lawrence

Great. And just one follow-up. You mentioned chips and water on the private label side, what can you say -- how does a brand name in those large categories, the brand name provider respond? And what have you seen as you've grow in those private label categories to the competitive response?

Darren M. Rebelez

Yes. It's a little bit of a mixed bag. In some cases, we have national brand manufacturers that are producing our private label products for us. And others, like you mentioned, with chips, that's not the case.
Look, I think we have pretty candid discussions with them. Our goal isn't to win with private label at the expense of national brands. Our goal is to grow the categories. And so what we do within those categories is we try to offer guests an alternative for something that, in some cases, more affordable or maybe as a flavor profile that the national brand doesn't offer or a pack size that they don't offer.
And so there's a few different things that we do with private label that makes it complementary to the national brand assortment. And I would say in the case of snack chips, in particular, we've had really good growth in our private label snack chips. Our national branded partner has also had really good growth in our stores with their chips. And so this doesn't have to be a win-lose. This is going to be a win-win when we approach it from a category perspective, and that's what we try to do. And so I think it's working pretty well so far.

Operator

This completes our Q&A portion. I will now turn the call back over to Darren Rebelez, Chairman, President and Chief Executive Officer, for closing remarks.

Darren M. Rebelez

All right. Thank you, and thanks again for taking the time today and joining us on the call. And before we sign off, I just want to again thank our team members for all the hard work this quarter and they did a fantastic job. So I hope everyone has a great week. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.