Caseys General Stores Inc (CASY) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 FY 2021 Casey's General Stores Earnings Conference Call. (Operator Instructions)

I would now like introduce your host for today's conference call, Mr. Brian Johnson. You may begin.

Thank you. Good morning, and thank you for joining us to discuss the results from our third quarter ended January 31, 2021. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development.

With me today is Darren Rebelez, our 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, performance at our stores and the potential effects of COVID-19.

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 timing of closing and the integration of the pending Buchanan Energy acquisition; our ability to execute on our strategic plan or to realize benefits from the strategic plan; the impact and duration of COVID-19 and related governmental actions; as well as other risks, uncertainties and factors, which are described in our most recent 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.

Now I'd like to turn the call over to Darren to discuss our third quarter results. Darren?

Thanks, Brian, and good morning, everyone. We look forward to sharing our third quarter results with you this morning.

Once again, our team has demonstrated tremendous resilience in a difficult environment. And as a result, we've maintained our strong financial performance 1 year into the pandemic.

For the past year, we've navigated many challenges and complexities. Yet we've been able to continue serving our guests in new ways, from offering curbside pickup and expanded delivery; to refreshing our brand, including a new logo; to launching our Casey's branded products, we are more relevant with our guests than ever. We are here for our guests, and we're here for good.

Our team makes this all possible, and I couldn't be prouder of each Casey's team member. Our 40,000 team members are going above and beyond to serve our guests despite the pandemic and a harsh winter in many areas.

We remain intensely focused on their health and safety, and now that includes encouraging all our team members who are eligible to get the COVID-19 vaccine. To support vaccinations, Casey's is providing a wellness bonus of $50 to team members that complete the full dosage of the vaccine. As availability and access increases, we're optimistic that more of our team members will be vaccinated in the coming months.

We're also here for good in our communities. During the third quarter, Casey's completed an in-store giving campaign, in partnership with PepsiCo, to raise funds for organizations providing assistance to veterans and their families. As a veteran myself, I know the great sacrifice that these families have made and the challenges they face.

This year's campaign raised over $1.4 million that benefited 2 outstanding organizations, Children of Fallen Patriots and Hope For The Warriors. Each of them received over $700,000 from the giving campaign that occurred in November. These funds will allow the charities to have an even greater impact on the lives of veterans and their loved ones.

Thank you to our vendor partners, each Casey's team member that made the donation ask in our stores and especially to our guests who truly do good when they shop at Casey's.

Now let's discuss the quarter's results. We finished the third quarter with diluted EPS of $1.04, an increase of 14% from the previous year. The results are particularly impressive given the challenges the team faced with the COVID resurgence during the quarter. Fuel profitability remains a primary driver of the increase, along with inside same-store sales, which were up 2.1%.

The team also remained nimble throughout this turbulent time, and was able to reduce same-store labor hours 5%, after adjusting for the store reset and COVID-19-related pay, as we continued to actively adjust operating expenses in real-time to the circumstances.

I would now like to go over our results and share some of the details in each of the categories. During the third quarter, we continued to experience a favorable fuel margin environment. Fuel gross profit was up 37% compared to the prior year, with a fuel margin of $0.329 per gallon. The fuel team did a tremendous job balancing volume and margin when considering wholesale fuel costs rose approximately 45% throughout the quarter.

A steady rise in cost throughout the quarter is the most challenging fuel margin environment to operate in, and the team responded by delivering yet another solid performance. I'm also proud of their performance relative to industry volumes and profitability in our geography. Same-store gallons sold were down 12.1% compared to the prior year due to the continued traffic disruption from the pandemic. We currently have 74% of our fuel volume under contract, and our fleet card program has over 8,900 accounts, which is a 3% increase from the second quarter. Commercial sales represent about 12% of our total fuel sales.

Same-store inside sales were up 2.1% for the quarter, with an average margin of 39.6%. We continue to see larger basket size offset by lower inside guest traffic. During the first half of the quarter, the company performed a significant store reset at over 2,200 locations. The reset involved moving interior shelving to improve traffic flow as well as adding shelf space vertically to expand selling space. Not only will this enable us to more effectively roll out our private label program, we believe this will optimize category flow and adjacencies with existing SKUs and has allowed us to add more variety within existing categories. Initial results from the reset are encouraging. We did see grocery and other merchandise sales improved throughout the quarter following the reset.

Alcohol and packaged beverages continued to perform well, and tobacco was positive for the second quarter in a row. Same-store sales were up 5.4%, with an average margin of 30.7%. The margin is still adversely impacted by both pack size and mix shift among the categories, along with the one-time impact of discounted merchandise no longer carried from the store reset.

Same-store sales were down 5% in our prepared food and fountain segment. The average margin for the quarter was 60.6% versus 60.2% from a year ago. Self-serve items, particularly those sold during the breakfast daypart, like bakery and coffee, continued to be hampered by lower guest count. The COVID resurgence experienced during the first half of the quarter amplified this as more people were at home from work or school.

Whole pizza pies continued to outperform, with same-store unit sales up 17%. Margins benefited from a modest cheese price improvement, partially offset by sales, particularly in the morning daypart.

I would now like to turn the call over to Steve to go into some detail on the financial statements. Steve?

Thank you, Darren, and good morning.

Total revenue for the quarter was $2 billion, a decline of $240 million or 11% from the prior year. This was due to the decline in retail sales of fuel of approximately $275 million, driven by the lower number of gallons sold and the lower retail price of fuel. The average retail price of fuel during this period was $2.12 a gallon compared to $2.40 a gallon 1 year ago.

Total gallons sold for the quarter were down 9.5% to 518 million gallons. Total inside sales were up 3.8% to $888 million. Grocery and other merchandise sales increased by $42 million, while sales of prepared food and fountain fell approximately $10 million. Please note that all reported figures are favorably impacted by approximately 2% more stores operated on a year-over-year basis.

Lottery ticket sales are not included in inside sales. Rather, we record our net commission and other income. Lottery ticket sales have performed well throughout the pandemic, especially in the third quarter, where 2 very large jackpots drove guest interest. If we had recorded them as part of our same-store sales, our year-over-year performance in the third quarter would have increased inside sales by approximately 380 basis points.

Casey's had gross profit (which we define as revenue less cost of goods sold, but excluding depreciation and amortization) of $540 million in the third quarter. That's an increase of over $43 million from the prior year. This is primarily attributable to higher fuel gross profit of $46 million, offset by a decline of $5 million of prepared food and fountain gross profit. Inside gross profit margins were 39.6%, a decline of 200 basis points. Grocery and other merchandise margin was 30.7%, a decline of 220 basis points. Prepared food and fountain margin was 60.6%, which is an increase of approximately 40 basis points from prior year. Grocery and other merchandise margins continue to be pressured by a mix shift both within categories as consumers continue to purchase larger pack sizes as well as across categories as lower-margin products like beer and tobacco outperformed. The company also discounted certain merchandise in conjunction with the store reset that Darren previously mentioned.

Prepared food margins did modestly benefit from a favorable cheese cost comparison. Our cheese costs were $2 a pound this quarter, and that compares to $2.17 for the same quarter a year ago or about an 8% decline. This represented a 60 basis point improvement in segment margins for the quarter.

The company has locked in approximately 60% of its volume through April, and at current prices, expects a modest year-over-year margin benefit from cheese in the fourth quarter.

Total operating expenses were up 9.8% to $414 million. There are several factors driving this increase. First, the increase from operating 36 more stores than a year ago is $7 million. The company also incurred $11 million in COVID-related expenses, $10 million in incremental long-term and short-term incentive compensation costs, and $3 million in labor costs associated with the major store reset we've already discussed.

Our store operations team did an outstanding job managing labor during this challenging environment with same-store labor hours down 5% when we adjust for the COVID sick pay and the store resets.

Interest expense was down 13.6% to $11.5 million, due primarily to the refinancing of our senior notes that we completed in August. The effective tax rate for the quarter was 21.3%, which is comparable to the prior year.

During the third quarter, the Work Opportunity Tax Credit program was extended through December 31, 2025, and that drove a positive discrete adjustment to our tax rate in the quarter. The company generally receives approximately $5 million to $6 million in annual tax savings from this credit, and the prior year third quarter rate was similarly impacted by an extension of the same credit last year.

Net income increased 14% to $38.6 million. Adjusted EBITDA for the quarter was $127.4 million compared to $120.4 million a year ago, and that's an increase of 6%.

Our balance sheet continues to be very strong. At January 31, cash and cash equivalents were $389 million, and we have the full capacity available of our $475 million in lines of credit.

During the quarter, the company amended our existing credit agreement to include a $300 million term loan that will be used to finance the pending Buchanan Energy acquisition once it closes. Our leverage ratio stands at 1.8x, and we have no maturities of significance until 2025.

At the March quarterly meeting, the Board of Directors voted to issue a dividend in the amount of $0.34 per share.

The company generated $7 million in free cash flow in the third quarter, which we define as cash flow from operating activities of $111 million, less purchases of property and equipment of $104 million. This compares to negative $33 million in the prior year and was driven by both higher earnings and improved working capital performance.

Capital expenditures were less than the prior third quarter, but construction efforts are accelerating from the COVID delays that we experienced at the start of this year. Our year-to-date free cash flow performance continues to be favorably impacted by higher earnings, stronger working capital performance, (which is primarily from fuel prices and the deferral of social security payments under the CARES Act, but also from a proactive effort to extend our payment terms) as well as lower purchases of property, plant and equipment. We do expect free cash flow to be negative in the fourth quarter due to the timing of capital spending.

The company has opened 27 new-to-industry stores so far this year and completed the acquisition of 3 additional stores. We have 23 stores currently under construction. We continue to believe we will finish the year with approximately 40 newly constructed stores opening.

As we disclosed previously, Casey's and Buchanan Energy received a Request for Additional Information from the Federal Trade Commission. We continue to cooperate with the FTC, and we do not expect this review to have a material impact on the acquisition or the anticipated economics and synergies.

Given the current uncertainty brought on by the pandemic, we are still going to refrain from providing guidance on future results. The fourth quarter is going to be an especially challenging period to model given the pandemic hit that occurred mid-quarter last year. That being said, we do expect profits in the fourth quarter to be lower than prior year, due to the unusually high fuel margin the business achieved last year as well as the unusually low operating expense the business incurred as we drastically reduced store operating hours due to the imposition of lockdowns. We expect our fourth quarter OpEx will exceed the year-over-year percentage increases of the second and third quarters by several hundred basis points because of these comparisons.

While our volumes in the first part of the fourth quarter have experienced a double headwind due to the widespread winter storm in mid-February, and the continuance of the COVID-19 pandemic, we expect very strong improvement for the second half of the fourth quarter as we begin to lap the negative traffic patterns of the prior year period.

I'll now turn the call back over to Darren.

Thanks, Steve. First, I'd like to congratulate the entire Casey's team for delivering impressive results in the third quarter during turbulent times.

The fourth quarter got off to a very challenging start with extreme cold temperatures and high snowfall totals impacting much of our operating territory. As of this call, our quarter-to-date year-over-year same-store fuel gallons sold are trending down mid-teens. Fuel margins remain favorable and are trending around $0.30 per gallon currently.

Inside sales quarter-to-date are down low single digits. The prepared food category is under the most pressure and is trending down in the low double digits. Grocery and other merchandise is trending positive in the low single digits. The quarter-to-date figures just disclosed excluded the impact of the extra day in February 2020 due to the leap year.

While we experienced a challenging start to the fourth quarter due to the temporary impacts of both weather and continuing COVID-19 restrictions, we're excited for the late spring and summer months. With vaccine distribution already started and projected to ramp throughout the next 2 quarters, and weather in our geographic footprint warming up, we're excited about more guests being able to visit our stores and experience the refreshed assortment.

The improvements we've made to our digital guest engagement capabilities should enable us to retain guests that were drawn to our whole pizza pie business. We will also be ready to deploy effective promotions through our reward program to drive business when regular commuter traffic returns for work and school.

The team continues to execute our long-term strategic plan, and we continue to stand by our commitments we made last year. I'd like to go a little deeper on one of the pillars of the plan, reinventing the guest experience.

Our Casey's Reward program just celebrated its 1-year anniversary. The program is very popular with our guests, and we now exceed 3.3 million members. We've recently completed customized promotional campaigns to targeted cohorts based on their purchasing history. We're excited for what the future holds for this effective digital guest engagement, and we're confident we can have an impact on guest behavior moving forward.

We also continue to expand our third-party delivery services. We added 120 new stores to bring our total to 700 sites using DoorDash. DoorDash has provided incremental delivery orders as over 60% of orders were outside of Casey's delivery hours. In addition to DoorDash, Casey's is piloting Uber Eats, with an expected launch in the first quarter of the next fiscal year.

Our private label program continues to outperform initial expectations. I previously mentioned the store reset we did to drive inside sales, including private label products. After the first month of the reset, the Casey's brand was the most popular non-tobacco brand sold throughout the chain. We're thrilled with the guest response, but we'll continue to add products to the program so long as they meet these 3 requirements.

First, the product must have a lower retail price compared to the competing national brands. Second, the penny profit for each item must be higher compared to the competing national brand. And last and most important, the quality of the product must be in line or higher than the competing national brands. Adhering to these criteria is proving to be very effective thus far.

Private label sales were 2.5% of grocery and other merchandise sales throughout the third quarter. And by the end of the quarter, we're in excess of 3%. The Casey's brand has already grown to be the #1 guest choice in bagged jerky, packaged bakery and nuts and seeds, an amazing accomplishment in such a short amount of time, and shows the power our brand holds beyond our traditional prepared food program.

Due to the progress made with our digital guest engagement, we are positioned well to retain the guests we've attracted to our whole pie business during the pandemic. Over 59% of our orders are placed digitally, whether it be via our app, website or DoorDash. Our Casey's Rewards is assisting with the strong performance of our private label offerings by offering double points as we introduce new products, and we have expanded our segmented promotional campaigns by targeting pizza activity. Offering bonus points to new whole pie purchasers proved effective, and we experienced good conversion on campaigns targeting pizza slice buyers to increase purchasing frequency.

In closing, I just want to pass on my appreciation to the entire Casey's team for continuing to execute our long-term strategic plan and delivering fantastic third quarter results. We're looking forward to a steadier future as vaccine distribution becomes more widespread and believe our business is well positioned both financially and strategically to take advantage of pent-up demand.

We will now take your questions.

(Operator Instructions) Our first question comes from Karen Short with Barclays.

I wanted to actually focus on the reset a little bit better. You mentioned in the prepared remarks that, obviously, it was an effort to improve traffic flow, but you talked about an increase in vertical square footage.

So wondering if you could give a little more color on how much vertical square footage you actually added? And then to try to quantify that in terms of the actual increase in percent of shelf space, I guess? And then I had a separate follow-up.

Yes, Karen, this is Darren. We did do the reset for a couple of reasons. The first was to orient our shelving in such a way that it improved traffic flow and promoted impulse purchasing and adjacent purchasing. So goal #1 was to get the right products in the right place within the store so that as people were walking by, they would be [impelled] (corrected by company after the call) to buy other products. And we've seen improvement in our add-on purchases and conversion rates as a result of that.

At the same time, we did raise the heights of the gondolas. It was about 12 inches that we raised. And what that did essentially was allow us to add about another 250 items to the assortment. So roughly 10% increase in SKUs. And at the same time, we refreshed the entire assortment. So we were able to get more new products into the assortment and get rid of some of those stale items that have been there for a while and it just weren't selling and being unproductive.

Okay. That's helpful. And then I actually wanted to switch gears to fuel for a second. Obviously, you called out the rising wholesale environment. But the thing, I guess, for you, is that your turns have decreased pretty meaningfully over -- during the COVID period. So I'm actually wondering if you could give an update on how many days of inventory you have in the ground on fuel? Just to try to get a sense of how much you actually might be even benefiting from a rising wholesale environment with the weak comps given the weak gallon comps?

Yes. I wouldn't be prepared to give you the days of inventory, but we do manage that very closely and try to time our purchases such that we don't walk into the teeth of a rising market.

Now that being said, frankly, it's been unavoidable because the wholesale fuel market has been rising literally ever since the end of October through today. And so there's only so much you can do to time those purchases and try to manage that inventory. But at a certain point, it almost doesn't matter anymore because you've got to get back in stock. So our fuel team does a nice job of managing that in the short run, but ultimately, in this type of environment, there's not much you can do.

And that's why this is always such a challenging environment to operate in when you have a protracted, slow, steady, rising wholesale environment.

Our next question comes from Ben Bienvenu with Stephens.

I also want to follow up on the store reset around the grocery and other merchandise margin impact. Any quantification you could give us for the impact to the third quarter margin? And should we expect that impact to be discrete to 3Q? Or will any of that bleed into 4Q as well?

Yes, Ben, this is Steve. We had several million dollars of inventory adjustments across the supply chain, stores and warehouse related to the reset in the quarter that would be discrete.

For sure, the resets are largely finished. We continue to have year-over-year margin pressure just because of mix changes, right? So as there are larger pack sizes being purchased, especially in the alcohol and tobacco categories, and generally speaking, as those 2 categories, which are lower margin in the first place, continue to outperform, that puts some pressure on the margin.

So with current trends, I think the mix pressure continues, but the several millions of dollars that we took in the third quarter specific to the reset should be discrete.

Okay. Great. And then on the operating expenses. You noted your expectation for 4Q. I suspect it's partially reflective of bonuses for vaccinations as well, incentivizing your workforce to get vaccinated. To the degree you have visibility, and I know labor hours will be a key component of this as you look for traffic normalizing as we head into fiscal 2022, but where do you think is a reasonable expectation around operating expense growth for your business? I would assume at a lower rate than your in-store gross profit dollar growth, but any sort of barometer you can give us on what you think is reasonable as some of these COVID costs start to abate as we move forward?

Yes. We continue to believe that in the medium term, consistent with the Investor Day communication that we had, right, we're going to choose to grow operating expense generally at a lower rate than the EBITDA the company is growing. So we're trying to grow EBITDA at an 8% to 10% CAGR over that medium term, and we feel good about that and operating expense should be a couple of turns below that.

And so if you think of if we're adding 3% to 4% more new stores each year, that's going to increase operating expense by a comparable percentage. And then the rest of the organization, we would expect to grow a couple of percent and keep the entire thing south of that 8% to 10%. And as the COVID-related expenses start to dissipate, hopefully, going forward, that will make that a little bit easier. And obviously, the company's performance has generated quite a bit of incremental incentive compensation year-over-year on the long-term and the short-term side, and we would not normally expect it to be at that level.

Your next question comes from Bobby Griffin with Raymond James.

First, I wanted to touch on the fuel side again. Very solid margins, actually only down modestly from the second quarter despite the rising wholesale environment. So is it just -- are you guys just getting a larger benefit from procurement and all the work you've been doing there? Or any -- can you just help us unpack some of the drivers there?

And then as a second part of that, when do these contracts that we've been moving towards renew? And then how is that renewal process? Is there any risk associated with that? And the benefit won't be as large if you have to renew during this rising period of wholesale prices?

Yes, Bobby, this is Darren. Yes, I think that there's a combination of factors that have really led to the margin. You touched on the procurement piece of it. And certainly, we're at about 74% of our volume under contract now. So that number has continued to rise throughout this year. And so as we get more volume under contract, we realized more benefits. At the same time, the team has done a really nice job of managing pricing and managing to strike that right balance between volume and margin. And so I think you've seen based on OPIS data, we've outperformed from a volume standpoint in our geography and at the same time, capture these margins.

With respect to the contracts, they all have different terms. And so there's a number of them that have a 1 year term, but we signed those contracts at varying times throughout the year. So we don't have any sort of bubble, so to speak, of a number of contracts expiring on any given time.

With respect to renewing those, their renewal process can be pretty straightforward. We can negotiate with the current provider. We can put it out to RFP with a number of providers, depending on the geography. And the fact of the matter is we're a pretty attractive customer. We're -- we pay our bills. We have a solid balance sheet. We're very low risk from that perspective. And the fact that we sell unbranded fuel versus branded fuel gives us a lot of optionality because we're not tied to any major oil companies' brands. So there's not a debranding cost associated with switching suppliers to be able to capture the best cost.

And I guess, secondly for me, just on the private label growth, pretty nice uptick for just launching the products and stuff. Has the early success changed kind of how you think about the ultimate penetration or how the team thinks about what products you might have permission from the customer to participate in from a private label standpoint?

Bobby, it's a good question. I don't know that it's really changed our perspective, but I think we've learned a lot. And frankly, the level of adoption that we've received from the guests on our products has really exceeded our expectations.

And I think as we've reflected on why that is, I think there's a couple of reasons. Certainly, those 3 areas I mentioned before around our private label strategy, having a lower retail price, that benefits the guest; higher penny profit for us, that benefits us; and then a higher quality product, which also benefits the guest. Having that combination is really powerful. And so the guests have received it well.

But I think probably what we didn't fully appreciate as much was the strength of our brand with respect to prepared foods gave us outsized credibility, I would say, with other categories. And so when we introduced packaged bakery or meat snacks or nuts and seeds, there's an expectation of high-quality products at a reasonable price from us in our brand, and so people immediately gravitated to those, and so it's accelerated.

So I would say that it's certainly given us the confidence to continue to accelerate in this path. And we'll see what the ultimate mix is as we continue to go. But our private brands team is small but mighty, and they've done tremendous work in a very short period of time, and they have a great pipeline of new products that will be coming over the next several months.

Your next question comes from Bonnie Herzog, Goldman Sachs.

I just wanted to stick with this topic. Some of your comments that you just made on the private program are very interesting. And I did want to just verify something. You mentioned you saw the improvement during the quarter, but just trying to get a sense of how many weeks were you able to measure? I mean, when was it essentially finished being implemented?

Yes, Bonnie, I would say we kind of declared the rollout finished in January of the initial slate of products. So we began the resets in November. And that was about a 6-week process.

And while we are resetting the stores, we're also kind of filling the pipeline and the warehouses with inbound product. And so all of that product was coming in different stages depending on the manufacturers.

But in January was when we really kind of officially introduced the new assortment, the new year, new look and feel for Casey's, new private brand products. So really, in this quarter, we only experienced about a month worth of benefit there.

Okay. That's helpful. And then based on your previous comments, it sounds like it's not only maybe a margin lift, but more importantly, a comp driver and larger basket size from this short period of time. Is that sort of what you're seeing with this program or expecting to achieve?

That's certainly our expectation, yes. And the -- and there's a couple of things that drive that. One is just the re-merchandising of the stores itself to improve the adjacencies within the store, just -- and the placement of the product in the store. And then certainly, the value proposition around our private label is much stronger than the national brands. And then the third piece is just expanding that assortment by about 10%. Really, all of those things should come together.

And we have seen the benefit of that in that grocery category. Now the thing I'd just clarify is this was really kind of a center of store activity. So when you look at grocery and general merchandise overall, that category also includes beverages, includes alcohol, include cigarettes. So we kind of take that out, and the benefit has been really seen in that grocery subcategory.

Our next question comes from Paul Trussell with Deutsche Bank.

I appreciate the quarter-to-date color you've provided. Just wanted to maybe dig a little bit deeper into that on how you're thinking about the weather impact. And also just what other items should we really be keeping in mind as we think about kind of modeling out each of the business segments in this fourth quarter?

Yes, Paul. I'll touch on that briefly. I'll let Steve take you through some modeling stuff. But it was cold here. And I think Brian had mentioned to me, he's probably -- he'd never heard so many native Iowans whine about the weather as he had this year. It was a tough November, about double the amount of normal snowfall, negative 20s before windchill around here.

So frankly, nobody was wanting to get out of their car and go anywhere if they can avoid it. So yes, it was a challenging February. We've seen that reverse once the weather broke. And so look, you have tough winter sometimes, and this is just kind of the way it works. So you're not going to hear me talk much about weather on a normal course. We fully expect that it will rebound, and we'll have a good fourth quarter.

And I'll let Steve talk about the modeling.

Yes. It will be a tale of 2 cities in the quarter. So the first half, probably through the end of this week, is about when we lap the real lockdowns. We'll be negative, exacerbated by the weather, as Darren mentioned, for sure. And it will be an almost violent improvement for the rest of the quarter just because of what happened last year, and it will put us into a strange situation where it's certainly possible the quarter numbers end up being positive by the time you average the negative first half and the very positive second half. But because of the fuel dynamic that we referenced earlier, right, where -- for a short period of time, I think margins were close to $0.60 a gallon last year, and we ended up printing $0.40 a gallon. Overall profitability won't reach the prior year level because obviously, fuel is not running at that rate.

Got it. That's helpful. And then just also bigger picture. Just maybe talk a little bit more about how you are positioning the business going forward when we're kind of all back out and about and vaccinated. How do you plan to really hold on to these new customers that you've acquired while consumers are staying home and ordering pies? How are you thinking about the loyalty program and promotions to really drive that engagement and activity back inside of your stores?

Yes. I'm really optimistic about that. We have a lot of tools at our disposal that, 12 months ago, we didn't have or 15 months ago, we didn't have.

We -- if you remember, it was January last year, we had -- we were just getting started with rewards, now we have 3.3 million members and growing. And we had another 300,000 rewards members in the third quarter. So that number continues to grow. So that gives us a really strong base of people to engage with and to influence behavior with, and our team is getting much more nimble about how to recognize different cohorts of guests and their purchasing behavior and being able to feed them differentiated offers that drive performance. So we certainly have that.

We have curbside. We've expanded our DoorDash relationship. We mentioned that we're going to accelerate with Uber Eats in the first quarter. We've got the store resets that we just completed. And our prepared foods team is filling the pipeline of innovation.

And so as I've mentioned before, that takes a little time and heavy product development, consumer insights work. But that work is ongoing right now, and we expect to see some innovation coming from that team throughout this year. And so all of those things, I think, will come together, certainly, to help make that relationship between our guests and us a little more sticky.

Our next question comes from Chuck Cerankosky with Northcoast Research.

Going back to the resets a little bit. Did you address the fresh categories at all? And did you add any entirely new categories as you went through this process?

No, Chuck. We really didn't add any new categories at this point, although we significantly expanded categories. So a lot of the salty snacks increased space; meat snacks doubled in space; nut and seeds nearly doubled in space; packaged bakery, we really shifted away from some of the national brands in favor of our own private brand. And then reduced space in some of those slower moving categories, like automotive and pet and paper and that sort of thing.

But at this point, we have not introduced new categories, but the category management team is working hard on what's next from that perspective.

And then I was wondering if some of the customer traffic flow was designed to do anything to help prepared foods?

Nothing really to help prepared foods at this point. Prepared foods is somewhat of a separate exercise. And like I mentioned, the culinary team is working on the innovation front from that standpoint. But what we did do is make sure, as part of this reset process that we had, the center of the store categories or those grocery categories in the proper adjacencies to impact impulse sales.

So I'll give you one easy example, is making sure that, that packaged bakery product was merchandised adjacent to the coffee, where that has the highest affinity and impulse rate. And so I think part of the strength we've seen in that category, where it's up nearly 40%, is a combination of the value proposition of our private brand product in addition to positioning it next to the coffee where there's the highest likelihood for an impulse purchase.

Our next question comes from Irene Nattel with RBC Capital Markets.

If I could, can we just come back for a moment to the personalized offer? Really intrigued by some of the things that you're talking about in terms of identifying cohorts and personalized offers.

But can you tell us how I, as a consumer, receive that? Like what type of personalization, what level? And sort of how far along that process are you?

Yes. We're in the early stages of that process, Irene. And what we've done at this point is we've identified what we call a cohort of guests. So a group of guests that have similar purchasing behavior.

And so we look at that guest and see what it is they're buying. And then what it is they aren't buying it, but are more likely to buy. So a simple example is somebody who comes in during the week and buys a slice of pizza for breakfast or lunch, but doesn't buy a whole pizza on a Friday or Saturday night. But we know they like our pizza, we just haven't got them into that other occasion.

So our team will put together a differentiated offer. And that can be fed through the rewards program, and they'll get that via text or via e-mail based on how they've opted in on the rewards program. And they'll receive that offer, and then they can go and redeem that in the store. So they may get double points. They may get dollars off. They may get a buy 1 get 1. And so the team is actually testing different offers to see which one has the most effect.

And so far, kind of, I guess, what's been the uptake on that? Or what's been the lift when you do that?

Yes. We're not really going to share the details of that. But suffice it to say, we've had some that have done really well, and so the team will double down on some of those. And frankly, some of those things don't work out as well, and we won't do them again. But that's all part of the test and learn process that our team goes through when we're assessing these offers.

Our next question comes from Matt Fishbein from Jefferies.

Now that we're beginning to have some clarity around the timing of stimulus checks, do you have any sense of what the business impact was from the previous rounds of stimulus? Whether you think they had like an impact on gasoline prices at the pump or the inside sales the last time? Interested in your perspective there.

Yes. Matt, this is Steve. We don't have hard data on exactly how the earlier versions of stimulus necessarily impacted us directly. I mean, clearly, our view is that when there's more disposable income or discretionary spending power in the system, we're going to benefit from that just like anybody who's consumer-facing would do that for sure, and some of the categories that have shown some strength here, alcohol, lottery, et cetera, right? There is -- seems to be a historical correlation to discretionary spending on those categories.

As you look forward, right, I think we would stand by the fact that more discretionary income in the system is not going to be a bad thing for us or for our space necessarily, though I don't think we could, in good faith, tell you we can quantify exactly what the impact would be. But a general tailwind for us is certainly our expectation.

Great. Appreciate that. And can you give us an update as far as timing goes for the Joplin distribution center opening? I think the last time we heard it was like the middle of the calendar year?

Yes. Joplin is beginning to wrap up. We'll -- we should take possession of the building here in the next month, and we'll probably start delivering, call it, end of May, early June.

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

Wondering just again on the reset, if you could go back and just clarify, would the grocery and general merchandise margin -- how would it have been without the reset? And was there any impact on comps or just general traffic in the store?

Yes, Kelly, this is Steve. Clearly, it was a tough quarter on the margin, right, that we printed. There's no doubt about that. A couple of points. The comp in the prior year was the highest comp that we had, had in the third quarter in that particular segment for a couple of years. So the prior year was about 100 basis points higher than kind of a normal third quarter run rate. So that does not flatter the comparison that we had as a general rule.

There was a little bit of disruption, to the last part of your question, in the stores. We didn't close the stores for long periods of time. It doesn't take that long. But for sure, we've got people in there, obviously, moving product around, et cetera. So we haven't quantified what that impact is on traffic necessarily. We tried to minimize it as much as we could. And so we wouldn't expect again that, to the earlier question, to increase or to impact the margins going forward. But it certainly had a modest traffic impact as we rolled through all of the stores.

Okay. And I guess just in terms of the next several quarters, just as you think about the pizza category and prepared foods, in general, just what you're expecting in terms of the promotional environment in that category over the next several quarters?

Yes. We're -- frankly, it's a little bit hard to handicap right now in terms of what competition is going to do. We haven't seen necessarily any uptick in promotional activity, but we're on the brink of cycling over last year. So I think we're going to have to see on that.

What we're focused on is just continuing to grow that whole pie business and get some recovery in our slice business. And that -- the recovery in the slice business is a bigger priority, frankly, which really doesn't compete with most of the other pizza players out there. So we're more focused on trying to get that traffic back into the store, particularly in the morning daypart to recapture that business. And so we think that will start to come around, particularly as the vaccine becomes more widely distributed and if people return to more normal routines.

Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

So my first question is about your digital sales, which were up 95%, as you called out in your press release. Just wondering if you guys could talk about transaction size versus transaction volumes for that? And just wondering how much of your overall sales are coming from your mobile app? And then I had a separate quick question.

Yes, Anthony, the -- about 59% of our orders that -- for our prepared food came through a digital means, so that would be app or website. And then another 4% or so, it's about 55%, another 4% or so from DoorDash. So 59% of that total.

And we see about a $2 per check uplift in those digital formats versus a phone-in order, let's say. So roughly 10%.

Got it. Okay. That's very helpful. And then my other question. So as far as your costs -- you mentioned cheese costs, you have locked those in through April, I believe. So as far as other input cost, can you just talk about that? What are you seeing as far as trends there as to how we should think about that?

Anthony, just clarify for me, I'm sorry, the question is just specifically related to cheese. Cheese costs? I just want to make sure I understood.

No, no. No, no. I know you already addressed the cheese cost. I was just wondering if you could comment on your other input costs, things like coffee or meats and stuff, anything else as far as input supply costs?

Yes. There's nothing out of the ordinary around supply cost inflation. We've got contracts for most of the center of the store goods that we purchased, that we will deal with normal course price changes as a result of those. I don't think there's anything that's changing on that. There's nothing notable coming through in terms of some of the other commodities that would significantly provide margin pressure or headwind for us one way or the other as we look forward, at least, over the next couple of quarters.

I think the larger issue we continue to deal with from an input cost standpoint will just be ongoing wage pressure, right, as we continue to cycle through multiple states and our geography are already on graduated minimum wage kind of increase paths. And though we don't pay at the minimum wage very often, it creates compression further up the chain as those go. So I think the wage pressure for us and everybody in the service industry is probably the most relevant kind of ongoing costs that we will continue to look to manage through both productivity and pricing actions.

Our next question comes from Brian McNamara with Berenberg Capital Markets.

Bobby alluded to this earlier with his question as well, but fuel margins remain elevated as we approach a year after the sharp drop in oil prices far longer than most of us had anticipated. Your margins have benefited from your internal initiatives, price optimization and the like. Is there any way to tease out how much of the margin improvement is structural rather than cyclical as we see some of these external benefits normalize?

Brian, I'll let Steve weigh in on this as well. But it's really hard for us to define all of that because you have so many different things going on. You've got the actual execution of retail pricing. You have the different supply agreements that we have, and then you have run-up in commodities or drop in commodities, as the case may be. But certainly, over the last 4 months or so, it's been a run-up.

It's really hard to tell where that all settles out. It does seem that, at least for the time being, that there's smaller, less resilient operators who don't have a lot of other options in terms of trying to maintain a certain level of profitability, and frankly, on their part, just to survive.

And so the lever they do have is pulling up the fuel price lever. So I would say as long as we're in an environment where traffic is significantly impact -- impacted by pandemic and people not being able to go to work or school that we're going to see that dynamic persist. And I've said repeatedly, I think that when this all settles out, I think that margins, generally in the industry, will be lower than what they've been through the pandemic, but higher than where they were going into the pandemic, but simply because the underlying cost to operate the business are continuing to rise.

Steve, I don't know if you have anything to add.

Yes. No, I don't have anything to add to that.

Great. And then secondly, as you guys are now equipped with valuable data from your rewards program, what did this data tell you to inform your decisions prior to the store reset? And what is it telling you a few months later as you look to continue to expand your private brands business?

Well, I'd say, really, what we knew going into to the resets is that we were underpenetrated on certain categories relative to what we thought we should be. And frankly, when you look at the assortment itself in the stores, we just -- we had an imbalance of space to, really, gross profit dollars into opportunities. So we just didn't have the growing categories with enough space to be adequately represented and to adequately sell.

And so we fixed that with this reset and then expanded the assortment in those areas. And then -- so frankly, we've got a better, more productive assortment. And then compounding that is that we've rearranged the furniture, so to speak, to put those categories in the optimal place within the stores so that we generate the highest impulse possibilities.

Thank you. Ladies and gentlemen, this does conclude the Q&A portion of today's call. I'd like to turn the call back to Darren for any closing remarks.

All right. Thank you for taking time today to join us on the call, and we look forward to visiting with you again at our fiscal year-end conference call in June. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.