Ladies and gentlemen, thank you for standing by and welcome to the First Quarter Fiscal Year 2021 Casey’s General Stores Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today's program, Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead sir.

Thank you and good morning. Thank you for joining us today to discuss the results from our first quarter ended July 31, 2020. I am Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today is Darren Rebelez, 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 needs, the company's supply chain, business strategies, growth opportunities, performance at our stores, and the potential effects of the COVID-19 outbreak. 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, our ability to execute on the strategic plan, the impact and duration of the COVID-19 outbreak and related governmental actions or to realize benefits from that strategic plan, 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 first quarter results. Darren?

Thanks Brian and good morning everyone. We’re really excited to share with you our first quarter results. First, I'd like to recognize our performance is only possible because of the 38,000 plus team members we have who are running our stores, supporting our stores, working in our distribution centers, and creating new ways that Casey's can win each day with our guests. There's no truer reflection of our purpose, to make life better for our communities and guests every day. Thank you to the entire team for your dedication. I also want to share a few comments on something I didn't expect, but in a year of the unexpected here's another one for the list. On August 10, a severe storm known as derecho hit many areas in the heart of the Midwest, in Casey's core footprint with little to no warning. Thankfully, Casey's team members were all safe. However, many of them or our neighbors were set back by damage, power outages, or other challenges from the storm. Across the company, our team swiftly responded to get our stores running so they could stay open and serve our communities in the wake of the disaster. In addition to keeping our doors open and shelves stocked, our teams prepared and delivered hundreds of pizzas to energy crews pulling long days to restore power, and we sent over 20,000 bottles of water to the local chapter of the American Red Cross. Casey's also donated $10,000 to two local food banks to support Eastern Iowa and Central Illinois, the areas where the derecho mostly impacted our neighbors and team members. I'm extremely proud of the efforts by everyone on the Casey's team to support one another, our impacted stores, and our communities. Now, turning to this quarter's results. As you've seen in…

Thank you, Darren, and good morning. After completing my first full quarter with Casey's, I want to remark how uplifting it's been to see the company pursuing its mission as a critical community member after the derecho storm. I've also been very pleased to see how seriously the entire management team takes preserving the financial flexibility of the company during the pandemic, while also ensuring that we're still pursuing growth opportunities that will improve our returns on capital in the future. Moving to the first quarter results, revenue for the quarter was $2.1 billion, a decline of $522 million or 20% from prior year. This was primarily due to the decline in retail sales of fuel of approximately $542 million driven by the lower number of gallons sold and the lower retail price of fuel. Revenue from inside the store sales rose nearly 2% in the quarter to just over $1 billion. Lower traffic was partially offset by larger average basket sizes. Grocery and other merchandise sales increased by $44 million, while sales of prepared food and fountain fell approximately $25 million. Please note, all as reported figures are favorably impacted by approximately 2.5% more stores being operated on a year-over-year basis. We define gross profit as revenue, less cost of goods sold, but excluding depreciation and amortization. Casey’s had gross profit of $623.5 million in the first quarter, an increase of nearly $58 million from the prior year. This is primarily attributable to higher fuel gross profit of $59 million. With a slight offset from a decline in inside the store gross profit of $2 million. Our grocery and other merchandise gross profit increased $20 million, while prepared food and fountain gross profit declined $22 million. Inside gross profit margins were nearly 40%. Grocery and other merchandise margins were…

Thanks, Steve. We previously mentioned that sales volumes improved sequentially throughout the quarter. I think it'd be helpful to share what we've experienced so far in the second quarter. Overall, we continue to experience slow but steady improvement month by month across all areas of the business. For fuel, we have experienced negative same store gallons in the mid-to-high single digits, while fuel margins are above $0.30 per gallon. Total inside sales continue to trend favorably sequentially in the mid-single-digits and we continue to see ongoing improvement in our grocery and other merchandise category, which is trending up in the high single digits. Prepared foods continue to slowly improve sequentially. We're currently trending down mid single digits. We expect operating expenses to increase commensurate with our store hours, returning to pre-COVID levels. We continue to execute on the strategic plan we disclosed back in January. And given the shift in consumer trends brought on by COVID-19, we’ve accelerated the implementation of several initiatives. If you recall, the pillars of our strategic plan to deliver top quintile EBITDA growth are reinventing the guest experience, creating capacities through efficiencies, being where the guest is via disciplined unit growth. All of this is going to be driven by an investment in talent to strengthen the team and add capabilities to the business. With respect to the guest experience, we've made considerable progress to modernize the digital experience for our guests. We recently partnered with DoorDash and currently have their delivery service operating in 584 stores. This move has expanded delivery to more guests, increase the number of days and hours that delivery is available and is reaching new guests that make their dining decisions based on what is available on the DoorDash marketplace. We also recently completed a test of curbside pickup option…

[Operator Instructions] Our first question comes from the line of Karen Short from Barclays. Your question please.

Hi, good morning. This is Kate Howard on for Karen. Thanks for taking our questions. So first, I wanted to talk about the in-store growth margins a bit more. Could you help us understand the puts and takes to prepared food margins and grocery margins going forward? And in the context of grocery margins, you were a bit better than we had expected given the pressure seen last quarter from mix and assuming customer behaviors haven't changed that much. And then what drove the incremental sequential pressure on prepared food?

Yes. So with respect to the margins, we did – we still have the unfavorable mix shifts, but we were able to accelerate sales across the entire grocery and general merchandise, so margins did improve a little bit over what we saw in the first – in the fourth quarter of prior year. With respect to the prepared food and fountain margins, as we were going through the quarter, we did become a little more aggressive in our promotional activity to drive volume, particularly with our whole pies, and so, we saw a little bit of compression there along with a $0.17 increase in cheese cost that put a little more pressure on that margin.

Yes…

Steve do you want any color there?

Yes, I think Kate just what I would add on the grocery side, we've – you know I think our merchandising team has continued to be pretty savvy and asking some of our vendors to help us from a promotional standpoint over the course of the summer, and I think we're using vendor support in that area a little bit differently than we have in the past and that's helped offset some of the otherwise negative mix from larger package sizes, especially in the alcohol category. On the prepared food side, in addition to what Darren mentioned on the promotional side, you know, we continue – as we're dealing with negative year-over-year volumes, the waste in the stores, around a lot of the single-serve items continues to be a challenge for us in getting the right amount of product out for people to choose from in those particular categories, I think that's the other piece I would add.

Okay, great. Thank you. That's really helpful. And then, I also just wanted to ask on the loyalty program, so 2.7 million members in the program currently, can you talk about how the COVID environment has impacted that progress? And, you know, with all this comprehensive data that you're able to capture, how will that shape how you do promotions in the future?

Yes Kate. This is Darren. I'm not sure that we could really draw a good comparison to what impact COVID has had because for the most part, we've operated the rewards program in a COVID environment exclusively. So, this has kind of been normal course for us. What I would say is that, it's been really positive that our digital team has been able to continue to grow the rewards membership base even – throughout the pandemic. And so, you saw that increase pretty rapidly to over a million members early on and then we got up to 2 million. Now, we're over 2.7 million members and it really helps us in a couple of ways, especially with a lower traffic. It gives us the opportunity to reach out and connect with some of our most loyal guests and tailor offers directly to them that get them to come back into the store. We really see that manifest itself in our whole pie business, which has really grown positively, you know, in mid teens versus prior year. So, we continue to learn and test our way through different offers and different activities, but we're seeing good progress there.

Great, thanks so much.

Thank you. Our next question comes from the line of Ben Bienvenu from Stephens Inc. Your question please.

Hi, thanks. Good morning, everybody.

Good morning.

Hey, Ben.

I want to start on operating expenses, really nice progress there. You know you're showing significant improvement. You're helping to take some of the sting out of the challenge prepared food and fountain sales. Can you help us think about how you're managing OpEx? You said that you'd be looking to add some OpEx back as you've seen some sales recovery, but just generally help us get in your head on how you think about that balance and what the appropriate relationship is between the OpEx and the in-store and/or the fuel contribution?

Yes, Ben, this is Darren, I'll start off and I'll let Steve chime in as well. I think, really early on in the pandemic, when things were shut down, we recognized that we didn't need to keep a lot of our stores open 24 hours simply because people couldn't get around. So, we started to restrict our 24-hour operations, and of course, there's a commensurate reduction in operating expense along with that. Also with reduced traffic, our operations team was really nimble in terms of adjusting the in-store hours while we were open to better align with the traffic patterns. Now, as those restrictions have eased, and we're starting to re-expand those operating hours and we're starting to see improved traffic, we're starting to add back those hours commensurate with that volume increase, so really trying to strike that right balance of being appropriately staffed to meet the needs of the guests in the stores. You know, the second thing from an OpEx standpoint in the first quarter was we just had a significantly lower retail price for fuel versus prior year, and so, of course, there was a – there's a commensurate reduction in credit card fees as a result of that. Steve, I don't know if there's anything that you want to add.

Yes, I think I would just – maybe, Ben, just to add on, you know, as it relates to store expense, which is obviously the predominant piece of our operating expense line, the point I would make prospectively is, you know, we had been paying a recognition premium on an hourly basis to the vast majority of our workforce. We finished doing that midway through the first quarter, so from a total dollar standpoint, the wage rate that we pay will actually be coming down sequentially in the second quarter, which gives us a little more flexibility around total hour utilization. And then the other point is, you know, operating expense, it's not exclusively store related costs, right. Our G&A and distribution and logistics compose a portion of that and there's some discretionary attributes of those spending. And so, we're trying to make sure we remain prudent around the discretionary spending on some of the above store categories that we have.

Perfect, thanks for that. Shifting gears a little bit to prepared food and fountain, you know, you've clearly added a lot of new capabilities. You aren’t just standing still waiting for COVID to go away though I know you're eager like all of us for it to go away. I'm wondering though, how it might change your view on what your new stores would look like in the future, given that today self-serve is a pretty central component of how the customer interacts with your prepared food business. Have you considered, you know, having drive-through? Obviously, the customer adoption of digital and delivery, I'm sure, will continue to ramp up, but just is it too early to start to think about how this might change the way the actual offer that you present to the customer looks like?

Yes, Ben, this is Darren. I don't think it's too early to start having those conversations. I think what we've seen is that our guests prefer the self-service model and when we were under self-serve restrictions, we were still selling prepared foods, but in a full-service environment, and it just didn't resonate with our guests as much as when we were able to lift those restrictions and get back to self-service. So, I wouldn't say that I envision self-service going away. I think with the digital capabilities we've added with enhancing delivery with our DoorDash relationship with curbside pickup, I think we've addressed some other capabilities that the guest is clearly asking for. Whether we get all the way to drive-throughs or not, we'll have to have more discussions about that sort of thing in the future, but we got 2,200 stores without them right now. And so, you know, our priority is to make sure that those are able to meet the guests needs as much as we can and then we'll continue to innovate for the future.

Okay, great. Thanks and best of luck.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Chris Mandeville from Jefferies. Your question please.

Hey, good morning, guys.

Good morning, Chris.

I can just start off with the quarter-to-date results that you provided. Can you give us some clarity around what timeframe that runs through? And I suppose I'm kind of curious here how clean they are as we're thinking about the self-service noise that was realized throughout Q1 relative to Q4, maybe where that stands today. You did reference also that the derecho had some impact in early August, but didn't necessarily quantify that. And then, obviously, also, Murphy USA put out a deck this morning suggesting that the Labor Day shift had some influence on trends as well. So, maybe you could provide some – just some greater color surrounding the quarter-to-date trend if you could.

Yes, Chris. The results that I was referring to were through the Labor Day weekend and we did that deliberately because there was a – you know, there was a mismatch on those dates, so we thought it'd probably be a little more informative to all of you to have that reconciled. So, what you see is as of Tuesday, essentially, yesterday, so that should take out that noise. With respect to the derecho, you know, we've kind of viewed that as really not much of an event from a sales perspective. You know, on the one hand, we had some stores that were temporarily closed because of power outages. On the other hand, other stores got an increase in volume because the previous stores I mentioned were closed. So, when you wash it all out, we think we pretty much ended up about where we would have been anyway. So, you know, to make a long story short, like I said, we continue to see slow, steady improvement month-by-month as we continue to get further through the pandemic.

Okay, and then just on the self-serve influence at this point in time, I mean where are we relative to the 200 that you ended the quarter on?

Yes. We're still in that same place.

Okay.

So, you know, I kind of think of it as about 10% of the chain is under some sort of, you know self-serve restriction. And the way to think about that is if you compare those stores comps to other stores that don't have those restrictions, they take a hit of a – you know kind of mid-to-high single digits versus what stores [without] restrictions have.

Okay, that's great. And then I realized you guys always are focusing on gross profit dollars [and sales] and all things considered, you know, the flat year-on-year growth in Q1 for in-store was impressive, but can you return to some level of in-store margin expansion going forward? I guess you've called out how you're thinking about cheese pricing and that may be easing a little bit sequentially in the next quarter or two, but how do we think about the tough grocery margin comparisons ahead and your desire to promote overall in-store?

Yes, I think we do have some margin expansion opportunities inside the store for a couple of reasons. One, you know, we mentioned our procurement efforts that we have ongoing, we're just getting started on that. But we've started with our goods for resale, and so, we would expect to start to see some margin benefit as we work through those planning and negotiating efforts with our supplier partners. We also talked about in our Investor Day that we would be ramping up our private brands capability, and so, that work is underway, and we expect those products to have enhanced margin versus the national brand manufacturers. And then, as we continue to develop the rewards program, we’ll be more targeted in our promotional activity, and so, we won't necessarily have to offer promotions to everybody that walks through the door. We'll be able to target those more towards our most loyal and most frequent guests. So, I think all of those things will point towards higher margins moving forward.

Yes. And Chris, I might add just on the margin opportunity in the store, you know, on the procurement point. The company, historically, really – we didn't focus on trying to use the, you know, the scale of the entire company to influence rates or purchasing price decisions both in direct and indirect spend. And as I think we bring in a team focused on that. There's a lot of opportunity for us, you know, to buy at scale across the footprint as opposed to buy or make purchasing decisions at the store level all by itself. And then, I would also add the, you know, the earlier conversation around vendors and asking partners to help support us in different ways, I think there's an opportunity for us to more consistently do that across the entire footprint as well.

Okay, great. And then maybe just one last one from me, just in light of the fact that COVID delayed some of the new unit growth, I was curious if you had any type of update with respect to the non-fuel format and its launch sometime in the next fiscal year?

Yes, we have a few sites identified in the pipeline. We're still working through the process. We have one that is moving along a little more quickly than the other, but I think we'll probably get that one open in this fiscal year, but we're still working through that process. So, not much more to update on other than that.

Okay, great. Thanks, guys, and best of luck for the rest of the year.

Thanks, Chris.

Thank you. Our next question comes from the line of Bobby Griffin from Raymond James. Your question please.

Good morning, everybody. Thanks for taking my questions.

Good morning.

Good morning, Bobby.

I guess the first question I want to talk on was the M&A pipeline and, you know, we've talked before in the past how COVID could create some interesting opportunities from an M&A standpoint. Just curious have those opportunities started to show up in the pipeline yet? Or do you believe that's more kind of like 2021 once we get past COVID at some point, just any additional color around that?

Yes, Bobby, this is Darren. You know we're having a lot of conversations with a lot of people right now. I think what has happened maybe a little bit in the short-term is that other potential acquisition opportunities are experiencing some elevated fuel margins. And so, they're making money right now at the moment, and so, they're feeling a little more comfortable. That being said, it's a very difficult operating environment after working. So, depending on who the conversation is with and what day you catch them on, some people are more interested in selling versus less. But what we're doing is we're building out that pipeline; we're having those discussions in building those relationships so that when people are ready we are as well and we still believe that in the intermediate-to-long term, there's – the industry dynamics are going to be what they are. And once we get back to more normal, margins will be a little bit tighter. Prepared foods will become a much bigger strategic capability that a lot of these people don't have. Scale is going to matter a lot more and there'll be a lot of opportunities. And so, we'll continue to pursue what might be available today. We've got a great balance sheet and we're in great position to act on those opportunities when they come up, so we're real bullish about it. It just maybe, you know, a bit of a timing issue [as all].

Okay, that makes sense. And when we look at the potential to have cheese costs trends maybe around two bucks in the second quarter and the third quarter, how does that compare to last year? And maybe put that in context versus the headwind that we experienced in 1Q, would that headwind be less on a year-over-year basis or anything there to help us think about that?

Yes, this is Steve, Bobby. We should have a tailwind at current prices in the market. I would expect a tailwind in the second quarter and the third quarter. If you do the averaging right now, we're probably about 7% better in Q2 and Q3 in terms of cheese cost than we were last year if we went around that $2 number. And we had – it was about a 9% headwind in the first quarter on a price – in just looking at price, so we should have a relatively favorable flip here and in Q2 and Q3.

Okay, that's helpful. And then, I guess lastly for me, just kind of – I understand it's hard to kind of bucket these, but, you know, your fuel margin outperformance versus kind of the regional [OPUS] data really accelerated this quarter. Just curious if you think that's a lot of the initiatives you've been working on that we've talked about? Or is there any other dynamics happening in the market between the large and small players? It just seems that from the public results we've been witnessing over the last couple weeks, the large players have really disconnected from the OPUS data in a favorable way.

Yes, Bobby, this is Darren. I would attribute it more to sophistication of procurement and pricing activity. It's been a fairly volatile environment and an unusual time to say the least. And so, I think with larger players that have more centralized processes, have better access to data, and a little more sophistication in how they approach the market, I’d imagine you'd start to see that separation. And, you know, I can't really speak for everybody else, but I can tell you that's certainly the case with our team. Our fuel team has come a long way in the last year and has done a really nice job and I think this pandemic has really put them to the test and I think they've passed it with flying colors as you've seen from the results. So, you know, I think the environment set itself up for favorable fuel margins and our team was able to take full advantage of that.

Okay. I appreciate the details. Congrats again on operating in a very challenging quarter and best of luck going forward.

Thanks, Bobby.

Thank you. Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your question please.

Yes, good morning, everyone, and thank you for taking the questions.

Hi.

So, just wondering – hi, good morning. So within your 16-state operating area, have you seen any notable regional differences in terms of your same-store sales? Or maybe if you could talk about rural versus more of the suburban, just wanted to get a better sense as to the same-store trends whether there's any meaningful difference?

Yes, Anthony, this is Darren. What we have seen is really some separation between the rural and more urban stores, and, you know, really across all parts of the business, fuel, prepared food and grocery and other merchandise. Our fuel has probably – in the rural areas has probably performed the best versus the more urban areas, and then prepared foods has performed pretty well, and then to a lesser extent, the grocery and other merchandise, but again, all of them had performed better. With respect to different geographies that really kind of follow the cadence of where restrictions were and how shutdowns went. So at any given time during that quarter, we might have had better or worse performance based on those restrictions.

Got it. Okay, thanks for that. So, in terms of the centralized fuel prices, it’s obviously a big change from, you know, historical philosophy of being price followers. So, is it safe to say that now with this centralized fuel pricing that you're – for the most part, you're a price leader in [indiscernible] markets or not? I mean, how should I think about that?

No, I wouldn't say we're a price leader in every market. I would say every market is approached differently and that's one of the differences between having this centralized pricing team is that they have good visibility to data and a broader perspective. So, we know how we want to show up in different markets and we play that position. I think the other thing that really helps is that the team is really beginning to understand the knock-on effects of pricing one store and what that implies for another store and how that – how our competitor might respond and how we need to respond back. So, I think being able to have that broader picture and in the context of what's going on in the commodity markets really helps them make better decisions. And so, that's really what we're seeing.

Got it, okay. And then, also had a question regards to the centralized procurement and private label products. So, you know, when should we expect to see the benefits from those initiatives? And is there any way you can quantify perhaps what could be the potential benefit from these initiatives?

Yes, it's too soon for us to quantify something within a period of time, but for some perspective, I mean, we're having conversations with manufacturing partners right now on some of the larger categories. We're literally hiring members for the team. And so, I think we will start seeing results literally in the next several quarters depending on what the category is. As it relates to private label, you know, we have a very low percentage of our store mix, very low single digits private label branded today, much lower than you would expect from an industry perspective. And so, as we, you know, increase the percentage share on the shelves [of a private label] before anything else on the procurement side that clearly will be margin accretive for us. And we're aggressively looking to grow that percentage here over the next couple of quarters in the store by a couple hundred basis points in terms of the share of private label in the store. So, I think over the next four to six quarters, we will very consistently be attacking individual categories or segments that will help our cost of goods.

Got it? All right. Well, thank you and best of luck.

Thanks, Anthony.

Thank you. Our next question comes from the line of Paul Trussell from Deutsche Bank. Your question please.

Good morning, and good quarter.

Thanks, Paul.

Wanted to just circle back to the rewards program along with your DoorDash experience and the curbside [pickup pass], let me just give us a little bit more color from what you have learned, you know, since the roll-out of these programs and what you're seeing in terms of, you know, new customer engagement and kind of repeat, you know, shopping on these apps?

Yes, this is Darren, Paul. Yes, we've learned quite a bit. I'll just give you a couple of stats that might help. You know when we look at our digital business, you know, about 20% of our prepared food and fountain is done via digital. So, we think we have a pretty long runway to go in terms of growing that business. About 80% of the digital orders that we have are carry-out right now. So, although, you know, our delivery business is growing, it’s still only about 20% of our entire digital – our digital business. The – you know, one of the things that we've done more recently is expand that assortment that's available online to some of our top selling grocery items and what we're finding is that we're getting really good adoption there. A lot of the prepared food orders are adding on a grocery item along with that, and so, we're starting to see some bigger adoption there. And then, the last thing I'd say is that what’s really been powerful is not just the rewards program or the online ordering, but it's really the entire offer. So what we find is our most profitable and lucrative customers or guests are the ones that engage in all aspects of the business. So, they either – they go into the store, they shop us online and they buy fuel, so all three of those. They're using our stores very heavily and they're using it from all different avenues and those tend to be the most profitable for us.

That's helpful. And then just in terms of a follow-up [already spoken] a bit to, you know, expenses, obviously going back, you know, rising as you open up store hours a bit more, but just want to better understand as we kind of look forward, to what extent, you know, have you found, you know, more permanent savings, and to what extent, you know, should we think about the ability for this business to, you know, leverage operations on a lower comp threshold and just curious on anything more medium-to-longer term as we think about the cost structure?

Yes, Paul. This is Steve, I'll answer that. You cut out a little bit on us. I think the question was related to longer term, you know, our approach around managing operating expense generally and learning that are applicable going forward. Listen, there's no doubt, focus is the first thing, right? Focus goes a very long way in terms of just paying attention to the hours, but, you know, we are definitely taking a more comprehensive and centralized point of view around, you know, what is the appropriate level of staffing for the type of store for a community that a store is sitting in first and foremost through some technology and systems that we've put in place that we think will help us manage that more effectively going forward. There has been a significant amount of work done in our support infrastructure above the store level. So, if you think of kind of regional and district management structure and [spans] of control there, we've recently under, you know, Williams leadership reorganized our store support management structure in the field, so we think move us towards a more market like structure in terms of giving people a little more responsibility and more opportunities and that also resulted in a net reduction in resources in the field and we feel that will help make it a little bit faster and more streamlined for us to make decisions and get information down to the stores as well.

Thank you and best of luck.

Thanks, Paul.

Thank you. Our next question comes from the line of Irene Nattel from RBC Capital Markets. Your question please.

Thanks and good morning, gentlemen. A couple of…

Good morning, Irene.

Good morning. A couple questions, I'd like to drill down a little bit more on the loyalty side of things. As you think about the personalized offers, to what degree are you currently able to offer those? And, you know, what types of offers are you providing to really help drive that sort of – if you really [indiscernible] the three legs of the stool, the prepared food, the loyalty – the grocery and the fuel?

Yes, Irene, this is Darren. You know, we are still evolving into targeting our offers to individual guests. So, we haven't quite got there yet, but we're building that database and learning as we go, but we are definitely targeting our rewards members more specifically than we would have in the past where we would just advertise an offer to everybody and in really the – central to that is our prepared food, obviously, in our whole pizza business and that's where we've seen the most growth. And then, building on that capability with the expanded assortment of grocery, we're able to bundle pizza offers with other grocery and other merchandise products. And most recently, as an example, we were – over the Labor Day weekend, we were offering a whole pie deal with multi-packs of beer. So, those are pretty complimentary items. We sell them both in our stores and that positions us uniquely versus a lot of the other pizza players who really don't sell alcohol. So, it gives us the capability that differentiates us from our competitors and we can activate that digitally through our rewards program.

That's great, Darren, such fascinating and such obvious promotion actually. And just kind of sticking on the whole subject of the loyalty, when you drill down initially, okay, into the data that you do have, you mentioned something about your highest value customers. Other than the fact that they're your most frequently shopped, are you able to or is it too premature at this point to really able – to sort of create kind of different categories of customers and tie – you know, tie them to lifestyle or whatever, as you think about really the use of the loyalty to drive behavior on a go-forward basis?

Yes, that's the work that's underway as we speak. And we recently hired a lady by the name of Carrie Stojack, who's our Vice President of Consumer Insights and she's got a wealth of knowledge in this space and has worked in multiple different industries, and so, she and our Consumer Insights team will be primarily responsible for building out that view of the guest and those cohorts and helping our digital team to better target based on those guests insights. So that is definitely part of the plan and is work in progress.

That – and when would you be targeting having that sort of being able to take those insights and turn them into actionable, you know [indiscernible] actionable?

Well…

Just give us some idea of how we should be thinking about that?

Yes, well Carrie’s been onboard for about a week now. So, [I’m going to give her]…

Okay.

…give her a minute or two, but I would say, you know, over the next few quarters, as we continue to onboard her and build out that database, we will start to see the fruits of that labor.

That's great. And just one final question, if I might, coming back to the whole issue of procurement and improved procurement, as you start to move down this path, you said you're starting, obviously, with some of the key categories. But have there been any areas that have been identified as well, you know, we've really been leaving a lot of money on the table in this category or that category?

Well, I'll start, Irene, with that. You know, the common place people tend to start is on the P&L, right, in terms of costs.

Yes.

But we spend quite a bit of money on capital, right, and you think of the amount of construction activity that the company does and I think the statement I made earlier around not necessarily using our scale in that category is just as relevant, and so, we spent as much on capital as we do on many of the cost of sale categories. And I think the opportunities for us on the capital spending side around, you know how we build new stores and how we replace equipment in existing stores is quite significant, and eventually, right that works its way to the P&L. But from a cash standpoint, I think that's probably just as big of an opportunity as any cost of sale category that we have.

That’s fascinating. Thank you.

Thank you. Our next question comes from the line of Kelly Bania from BMO Capital. Your question please.

Hi, good morning. Thanks for taking our questions.

Good morning, Kelly.

Good morning. Wondering if you could talk a little bit more about the prepared food and fountain category and just the performance of the day parts? You'd mentioned breakfast a little bit and some of the challenges, I think, are impacting the industry there, but how do we think about, you know, breakfast as a percentage of your mix versus what's happening, you know, in lunch and dinner, just so we can maybe think about how to model that and the drivers going forward?

Yes, Kelly, this is Darren. Certainly our – I guess there's two areas where we're experiencing bigger declines versus others. Certainly in our overnight business where we were not operating 24 hours or we have reduced hours that was probably the most significant decline that we saw. But then certainly the morning day part with reduced commuting traffic was our other biggest part. So, I would say maybe for modeling purposes, you know, the morning day part was down, you know, double versus what the lunch day part and the early evening day part was, and then, overnight was significantly more than that. But I would say, in both cases, we're starting to see some gradual recovery in that as we expand the hours back to more normal hours. But really until we see regular commuting traffic get back to normal, I would expect the morning day part will be under some sort of pressure.

Okay, that's helpful. And I guess just going to the curbside pickup, just curious, as you, you know, pushed that into the stores, are you able to leverage existing labor for that? Do you have to add any labor just, you know, thoughts on executing that from a labor perspective?

Yes, at this point, we have not had to add incremental labor. We've – because we're already doing this carry-out business, we just get a few more transactions per day and we're already preparing those orders, it's just a matter of somebody walking out to the curb. So, we don't anticipate any sort of material impact to labor. It would be a great problem to have. If we grow that business enough then we have to add a little bit, but at this point, and particularly during our testing, we didn't see the need to do that.

Okay, perfect. And then one last one if I can fit one in, just wanted to check and see if there's any different or new thoughts on the multi-week delivery from a supply chain standpoint, especially in light to just some of the changes going on in the environment?

Yes. You know, we did suspend that. We were [up into] 400 stores doing twice a week delivery, then we suspended that when we were in the height of COVID. We are starting to have those discussions about restarting that and I would anticipate somewhere either late second quarter or early third quarter that we would get back to those 400 stores and start that process again.

Thank you.

Thank you. Our final question for today comes from the line of John Royall from JP Morgan. Your question please.

Hey, good morning, guys, and thanks for taking my question. So CapEx was the lowest quarterly level I think you've had in about a decade despite really strong cash flows and I know you mentioned the permitting delays, but what can we expect going forward on the CapEx side? Have you gotten through these delay issues? And so, can we expect the rest of the year to be something closer to normal?

Yes, I'll take that, John. Listen, I – we clearly expect CapEx to accelerate here in the last three quarters of the year. You know, we will be able to finish the 40 stores that we mentioned that we’ll build. We’ll be able to finish those I think because those approvals are largely done. And so, I do expect that CapEx will move at a much faster clip going forward, not necessarily sure we're going to get to where we've been in the prior years because the same issue around new sites in certain geographies will still apply. And so, if we had been building, you know, 50 or 60 stores in the past at a certain level of capital, we won't get to that same level realistically. But I do think the other thing to keep in mind, right, we're building our third distribution center currently in Missouri and most of that spend – the entire project is a little over $63 million. Most of that spend should happen this fiscal year based on the current timeline. So, all-in-all, there probably won't be a significant difference from a total capital spending standpoint on a year-over-year basis, but if we miss, we'll probably miss a little bit on the lighter side than heavier just because of the starting point.

Great, thank you. And then if this is too detailed, I'm happy to take it offline, but there was a pretty sizable working capital draw this quarter, looks like it was mostly driven by payables. Can you talk about the drivers there? And is there any risk of that reversing later in the fiscal year?

Yeah, I'll answer. I'll answer that, now. I mean, it's a noticeable benefit for us in the first quarter. I think we will give some of that back a little bit later in the year. The two biggest pieces on the payable side really relate to fuel payable and grocery payable. So, you think of the way that math works. It's comparing where we ended the first quarter to the end of the fiscal year. And so, on the fuel side, right, the price of fuel was significantly higher at the end of the first quarter than it was at the end of the fiscal year. That's going to give us a bigger payable number, which will show as a source of cash on the grocery side, you know, we're turning our inventory much faster at the end of the first quarter than we did at the end of the fiscal year, and so most of the inventory at the end of the fiscal year had already been paid for. And so the payable number was lower as a result. So, some of that will come back to us. And then on the other piece, that was a source for us is on the accrued side. And so, you've got a couple things there. There's a benefit for the deferral, the Social Security associated with some of the COVID relief in government that's helping us on that front. There's some timing of some of the payables. So, working capital should be a source for us over the course of the year, but not to the magnitude that it was in the first quarter.

Got it. Thanks very much.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Darren Rebelez for any further remarks.

All right, thank you for taking time today to join us on the call. I think our business has shown significant resilience during the pandemic. We remain excited and optimistic about our company's future. I also want to thank all of our team members that continue to serve our guests during these remarkable times. So, thank you everybody and enjoy the rest of your week.

Thank you ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.