Casey's General Stores (CASY) Q2 2018 Earnings Conference Call Transcript

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Casey's General Stores (NASDAQ: CASY)
Q2 2018 Earnings Conference Call
Dec. 12, 2017 10:30 a.m. ET

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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Casey's General Stores (CASY) Second-Quarter Earnings Conference Call. At this time all participants are in listen-only mode, and later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press * and then 0 on your touchtone telephone.

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And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Bill inveWalljasper, chief financial officer. Sir, you may begin.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Good morning and thank you for joining us to discuss CASY's results for the quarter ended October 31. I'm Bill Walljasper, CFO. Terry Handley, president, and chief executive officer, is also here. Before we begin, I'll remind you that certain statements made by us during this investor's call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1985.

These forward-looking statements including statements relating to our possible or assumed future results of operations, business strategies, growth opportunities, and performance improvements at our stores. There are a number of known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, which are also described in our most recent annual report on form 10-K and co-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 CASY's disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. We'll take a few minutes to summarize the results of the second quarter then afterwards open for questions about results.

I'm now going to turn the call over to Terry to discuss our results.

Terry Handley, President and Chief Executive Officer --

Thank you, Bill, and good morning everyone. As most of you have already seen, diluted earnings per share for the second quarter were $1.28 compared to $1.44 a year ago. The quarter started off with strong sales during the month of August. Unfortunately, we were unable to maintain that pace throughout the remainder of the quarter as we experienced softer traffic in the back half of the period which adversely impacted sales.

Year to date, diluted earnings per share were $2.75 compared to $3.14 in the same period last year. In the fuel category, our retail pricing strategy allowed us to achieve an increase in same-store gallons sold of 1.9%, which continues to outpace miles driven reported by the United States Department of Transportation and our publicly traded peers. Total gallons sold for the quarter rose 5.7% to 562 million. The average retail price of fuel during this period was $2.33 a gallon compared to $2.10 last year.

During the quarter we experienced an increase in wholesale fuel cost volatility, primarily due to the hurricane activity. As a result, the average fuel margin in the quarter was $0.197 per gallon. Year to date, the fuel margin was $0.195 per gallon, which is at the high end of our annual guidance. The second-quarter margin benefited from the sale of renewable fuel credits, commonly known as RINS.

During the quarter, we sold 17.3 million RINS for $14.5 million. RINS are currently trading around $0.90. For comparison purposes going forward, last year in the third quarter the average RIN sold for approximately $0.89. Same-store gallons sold year to date were up 1.8%, which is the top of our annual guidance.

[Audio gap] total gallons sold for the year up 5.6% to 1.1 billion. Due to the higher fuel margin in the quarter compared to the same period a year ago and increased gallons sold, gross profit dollars in the fuel category grew 11.7% to $110.7 million. Total sales in the grocery and other merchandise category were up 5% to $572.2 million in the second quarter. Same-store sales were up 2.5% during the quarter, which was toward the lower end of our guidance due to slower traffic in October that we believe was attributable to multiple adverse weather patterns throughout the month.

However, we continue to outpace market data in our operating region. The average margin in the quarter was 32%, consistent with a year ago in the same period and at the top end of our annual guidance. As a result, gross profit for the quarter in the category was up nearly 5% to $183 million. For the year, same-store sales were up 2.8%, with total sales up 5.3% to $1.2 billion.

The average margin year to date was 31.9%. We're pleased with the gains in the category in light of the current environment that we are currently experiencing, and we remain optimistic about our long-term growth opportunities as we benefit from the continued roll-out of major remodels, replacement stores, and new-store openings. In the prepared food and fountain category, total sales were up 5.5% to $262 million for the quarter. Same-store sales were up 2.1%, which fell below our annual guidance.

After starting the quarter off strong in the month of August, this category was the most affected in the back half of the quarter, especially in October with the previously mentioned adverse weather patterns that drove negative same-store customer account for the month. We recognize that our customers continue to be value-conscious, and we have seen how well the fuel-saver program has resonated with them over the years. Beginning December 1, we kicked off a "Pizza-to-Pump" promotion. The program offers a $0.10 per-gallon coupon on up to 20 gallons of fuel for the purchase of any large pizza.

We have offered this promotion in the past in select areas of a market with great success. As retail fuel prices have risen recently we believe this offer will lessen the strain on our consumers. The average margin for the second quarter was 61.3%, down 160 basis points from a year ago, primarily due to an increase in sales and higher input costs. The average cost of cheese has locked in at our Ankeny distribution center through December 2017 at $1.86 per pound.

The market has recently been favorable for a cheese pricing, giving us the opportunity to enter into a new forward-buy of cheese. We are currently locked in for nearly all of our cheese through December 2018, at a price of approximately $1.87 per pound. In the quarter, prepared-food gross profit dollars rose 2.7% to $160.5 million. Year to date, same-store sales were up 2.9% with an average margin of 61.9%.

Based on our year-to-date results we have revised our annual same-store sales guidance range down from 4% to 6% to 2% to 4%. We are encouraged about our long-term growth outlook in this area as we continue to benefit from the roll-out of our growth programs, new-store openings, and the implementation of price optimization, as well as the new digital engagement platform. At the six-month mark, operating expenses were up 9.7%. For the quarter, operating expenses increased 9.4% to $322.9 million.

Approximately 60% of this increase was due to a rise in wages and payroll taxes primarily related to operating more stores compared to a year ago in the same period. In addition, we experienced a combined increase of $4.1 million in credit card fees and fuel expense primarily due to increased retail fuel prices in the quarter. This had a 140 basis-point adverse impact to the quarterly operating increase. We continue to make gains in controlling our operating expenses.Store-level operating expenses for open stores not impacted by any of the growth programs were up approximately 3.7% in the second quarter.

Without the impact from the increase of store manager salaries stemming from the proposed change by the Department of Labor a year ago, store-level expenses would have been up approximately 2.7%. The unchanged numbers include the adverse impacts of the higher credit card fees mentioned previously. Operating expenses will continue to be an area of focus throughout the year. I would now like to turn the call over to Bill to discuss the financial statements.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

On the income statement, total revenue in the quarter was up over 12% to $2.2 billion, primarily due to an 11% increase in the retail price of fuel from the second quarter last year and increased sales gains mentioned previously, as well as increased number of stores in operation this quarter compared to the same period a year ago. Depreciation was up 11.3 %. We expect depreciation increase in the second half of the year, as we accelerate the number of new-store openings. Year-to-date total revenues up 9.2%.

The effective tax rate in the quarter was 36.9%, up 80 basis points primarily due to a decrease in favorable permanent differences and the change in the Illinois state tax rate that went into effect during the first quarter. Recently we received a number of inquiries regarding the potential impact to Casey's with the new tax reform bill. There are many aspects to this reform and the provisions are still being debated and reconciled between the Senate and House. However, as it stands currently, taking into account all the changes in the new tax law, we anticipate it will have a significant one-time favorable impact on earnings per share when it becomes effective as Casey's will reset our deferred tax liability at the new lower tax rate.

Going forward in future years, the company will benefit from the substantially lower corporate effective tax rate. Our balance sheet continues to be strong. At October 31, cash and cash equivalents were $285.2 million, up from $76.7 million at the end of the fiscal year, primarily due to the additional debt we secured for future growth offset by share repurchases. Long-term debt net of [Inaudible] maturities was $1.3 billion.

At the six-month mark, we generated $242 million in cash flow from operations, and capital expenditures were $271.6 million compared to $209.2 million a year ago in the same period. We expect capital expenditures to increase as new-store construction accelerates, we close on additional acquisitions, and we complete more major remodels during the second half of our fiscal year. Lastly, I would like to give you an update on the progress of the share-repurchase program. As a reminder, the program authorized purchases of up to $300 million of common stock over the course of two years.

As the press release indicated, during the second fiscal quarter we repurchased over 510,000 shares for approximately $55 million. Since the start of the program, we have repurchased nearly 1.7 million shares. We continue to believe a share-repurchase program is an important tool in providing shareholder value. I'd now like to turn the call back over to Terry to talk about our unit growth and an update on our growth programs.

Terry?

Terry Handley, President and Chief Executive Officer --

Thanks, Bill. This quarter we opened 10 new store constructions and completed 13 replacement stores. We acquired 11 stores and have 16 additional acquisitions stores under agreement to purchase. We also completed 17 major remodels in the quarter.

In addition to all this activity, we currently have 66 new stores, 18 replacement stores, and 14 major remodels under construction. Currently, we have 134 sites under agreement for new builds. We are also encouraged by the increase in acquisition activity. We believe this is in part related to the continued challenges in the economic environment in our marketing territory.

Our store count at the end of this quarter was 2,003. Given our strong balance sheet and expanded geography, we're positioned very well for future growth. We are also excited to celebrate the milestone of opening of our 2,000th store, in Russellville, Kentucky. Growth programs continue to be a key part of our long-term strategy.

In the first six months, we converted 65 locations to a 24-hour format and 75 stores to the pizza-delivery format. In addition to these conversions, we have also completed 28 major remodels. For the fiscal year, we are planning to complete 75 major remodels. Currently, we have a total of 1,062 stores that are open 24 hours, 655 stores that deliver pizza, and 492 stores that have been remodeled.

In addition to these programs, we were encouraged by the performance of our online ordering program. Total downloads of the mobile app have now exceeded 1 million. The amount of pizza orders completed online has climbed to 16% and the basket bring of an online order continues to be around 20% higher compared to a telephonic order. At this time I would like to update you on the progress of our price-optimization and digital-engagement programs mentioned in our previous earnings call.

Since that time, we've engaged separate consultants for each program. Each consultant is currently going through an assessment phase, which will clarify our present state and provide a road map and timeline associated with the development and integration of each program. This assessment phase will be completed in January. We will update all of you in more detail at our earnings call in March.

We believe that these programs will give us the opportunity to widen our customer base with better insight to our customer needs and buying habits. We will also have an opportunity to take advantage of differences in market conditions related to pricing of certain products, allowing us the ability to drive incremental growth profit dollars. In closing, we remain optimistic about our long-term growth opportunities. The steps we have taken over the past year has put the company in a position to have consistent and sustained unit growth over the next several years at higher levels than we have experienced in the past.

We will look to augment our new-store construction activity with acquisitions in both new and existing markets. Keep in mind that we will always have return on invested capital as a top priority. As we look ahead to the remaining part of the fiscal year and into Fiscal 2019 and beyond, we feel we have the opportunity to drive significant long-term shareholder value. We will now take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time if you have a question please press the * and the No. 1 key on your touchtone telephone. If your question has been answered and you want to remove yourself from the queue, please press the # key.

And our first question comes from the line of Shane Higgins of Deutsche Bank. Your line is open.

Shane Higgins -- Deutsche Bank -- Analyst --

Good morning, thanks for taking the questions. Hey guys, just wanted to circle back on the prepared foods. Obviously, you guys were running pretty strong in August and then, you called out October, I guess was weather? Could you just help us kind of understand kind of how the cadence, traffic, and average ticket was throughout the quarter and how you guys are doing thus far in the third quarter?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Yeah, absolutely, Shane, I'll go ahead and field that question, and you're exactly right. In the last earnings call, we certainly called out the month of August at that time, and we certainly were performing what we consider to be relatively strong in the month of August. At that time gallons were certainly trending above the current guidance at that time and as you may recall, Shane, that we did make some comments that both prepared food and grocery and general merchandise were trending toward the higher end of the range. And so as you move through the quarter, the month of October really was kind of the call-out as far as, kind of the downward trend there.

As we alluded to, we had negative customer account on a same-store basis in the month of October. One of the comments there that Terry made had to do with adverse weather patterns, and so in the month of August, excuse me, in the month of October throughout the majority of our area, we experienced on the weekends significant thunderstorm activity and rainstorms. That may not sound like a severe weather pattern but when roughly about half to 60% of our pizza sales run through the weekends and you have customers that just don't get out and about because of the weather patterns that will affect a short-term basis and that's what we're referring to there. Really, October was the month that really was kind of the anomaly in the quarter when we look at it.

Does that answer all your questions, Shane?

Shane Higgins -- Deutsche Bank -- Analyst --

So does that indicate that, I mean obviously you guys brought your guidance down a little bit for the for the full-year call, but it seems to imply that comps are at least stabilizing and maybe getting slightly better for the remainder of the year. I know you guys talked about the promotion that you guys just launched. Did November's trends give you guys some additional confidence that you guys can hit even the midpoint of the new range in the back half?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Yea, and I think the latter part of your question is, kind of this quarter quarter-date here in Q3, kind of where we're trending at, I think that might answer your question, so with respect to the fuel gallons, we are trending ahead of our guidance, quarter to date. With respect to grocery and general merchandise and prepared foods, we would be in line with how we finished the second-quarter results. And, again, we just kicked off that pizza-to-pump promotion that Terry mentioned just about a week ago.

Shane Higgins -- Deutsche Bank -- Analyst --

OK, great. And then just on the margins. Obviously, margins were down a bit in the prepared foods. You guys did reaffirm the margin guidance for the year.

Can you just give us some color as to some of the puts and takes for this quarter and as we look into the back half?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Sure, coming into the fiscal year, one of the gray areas or the unknowns was the back half of the fiscal year, because at that point time we were only locked in on our cheese through December 2017 and so, as we mentioned, we were fortunate that the pricing environment became favorable and we were able to lock in our cheese costs for the back half of the year. So that gives us some confidence to keep that guidance still intact on the margin side of the equation.

Shane Higgins -- Deutsche Bank -- Analyst --

Any changes to call out in terms of the competitive environment from any the pizza chains or any of your other prepared-food competitors?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

I don't think there's any changes that we would call out relative to what we've already called out in the past two quarters. We haven't seen necessarily any type of an acceleration in that competitive landscape. Obviously it still remains competitive but kind of stable competitive if you wanna call it that.

Shane Higgins -- Deutsche Bank -- Analyst --

Just one housekeeping. On your inventories were up about 16%, is that a reflection of the unit growth that you guys have for the back half of the year? Can you just help me understand the uptick in the inventories?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Yea, there are really two things there. One would be the cigarettes, we had a price increase in cigarettes and so you saw a significant rise there, and also with the rising fuel, you would see that in the inventory category, as well.

Shane Higgins -- Deutsche Bank -- Analyst --

Got it. All right. That's it for me. I'll get back in the queue, thanks.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

You bet.

Operator

Thank you. Our next question comes from the line of Ryan Gilligan of Barclays. Your line is open.

Ryan Gilligan -- Barclays -- Analyst --

Hi, good morning. Thanks for taking the question.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Hi Ryan, how you doing?

Ryan Gilligan -- Barclays -- Analyst --

Good, thanks.

On the digital-engagement and price-optimization projects, have you had enough time to size the opportunities yet and when do you think these initiatives can start to roll out?

Terry Handley, President and Chief Executive Officer --

Yea, Ryan, this is Terry. I think we're, we had our first roll-up meeting with the digital team actually just yesterday and the price optimization, first meeting with those folks in terms of the role-up first assessment will be here later in the month so we're not ready to share with you exactly what we have planned. We want to see actually through some future discussion here what the work plan will actually look like and certainly as we've indicated in the call here so far is that we're looking at the end January to have an understanding of where we're going forward and what tools or platforms may be required to us off to the right start and we will certainly bring you more clarity on that in the Q3 call.

Ryan Gilligan -- Barclays -- Analyst --

And how should we think about the cadence of unit growth for the rest of the year?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Those 66 stores that we have under construction, roughly about two-thirds of those that we anticipate closing in the fourth quarter, and so a third obviously coming here in Q3. As far as the acquisitions I would say most of it, that's kind of right on the bubble. I would push those ones that we have under agreement into the fourth quarter so definitely there will be an acceleration in the back half of the year. So we fully anticipate to be somewhere close to opening roughly 80 new-store constructions and at least as of the information we presented, we're going to have about 30 new acquisitions rolling through.

Ryan Gilligan -- Barclays -- Analyst --

Do you anticipate tax reform potentially changing your appetite for doing larger deals?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Well we always have an appetite to look any type of acquisition, and certainly whether that's small or large, certainly the tax reform as it sits now stands to be a benefit to us, and so we'll have to evaluate how the final bill rolls up from House and Senate. But certainly that is a possibility. I would say this, Ryan, along the M&A front: We definitely have seen an uptick in M&A activity that's indicative by what we were report, obviously. Right now we have 14 acquired stores and 16 under agreement, that alone probably combined for last two fiscal years together, and certainly we are seen many more people willing to have conversations about selling their business.

We believe certainly a reflection of the environment that we have we been talking about and that they are pretty much feeling the type of strain that we are on a slower pace, so we're encouraged by that area.

Ryan Gilligan -- Barclays -- Analyst --

That makes sense and just quickly, the credit card fees for the quarter?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

The credit card fees were $31.6 million.

Operator

Thank you. Our next question is from the line of Bonnie Herzog of Wells Fargo. Your line is open.

Bonnie Herzog -- Wells Fargo -- Analyst --

I just wanted to circle back on your prepared-food margins in the guidance that you did maintain. I just really want to understand your ability to hit these targets, just thinking in context of the stepped-up promos on your pizza business that you mentioned. So I just want to understand what kind of impact that could have on your margins and maybe any other initiatives that you might have in the works in the last couple of quarters for the year that could possibly negatively impact margins. Just trying to think through that.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Just a couple thoughts around the prepared-food margin for you, Bonnie, as I mentioned, we are locked into cheese for the remaining part of this fiscal year so we're encouraged by that and that will stabilize probably the biggest variable when it comes to be prepared-food margin. The other side of the equation, one of things that affected us in the second quarter, was the weather patterns that happened to hit just about every week in the month of October. We obviously have production planners that we were scheduled to meet the demands of our customers, and obviously we have a high demand on the weekends and so when an activity like that happens on a repeat basis, we we tend to have product that in our warmers that we end up staling, so there was a little bit of an anomaly coming through there, so we think that we have opportunity to to accelerate from that point on. Also keep in mind we are locked in on our coffee, as well, well into the summer.

And with respect to your question on the pizza-to-pump promotion, that actually is a coupon for fuel and so that will run through the cost of goods sold in the fuel category not the prepared-food margin category.

Bonnie Herzog -- Wells Fargo -- Analyst --

So, you're still feeling pretty darn confident that the margins will be, you'll achieve them, obviously, based on what you just mentioned.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Based on the information we know of today, we didn't see a reason to change that. Some of the other categories we also maintained. Obviously the unit growth right now, the low side of that's 90, and if you go through the math that we just talked about you were tracking it around 110 and maybe a little higher than that units for this year, so that's one that looks like we're pushing toward the higher edge of that guidance. The same holds true on the fuel gallon guidance, as well.

Bonnie Herzog -- Wells Fargo -- Analyst --

I imagine you're on the upper end of your margin and guidance there, closer to 20 CPG.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Obviously by what we reported we are certainly on the upper end there, as well as the same-store gallon movement. And, as we mentioned, at least through this conference call, we are trending above the same-store gallon guidance currently.

Bonnie Herzog -- Wells Fargo -- Analyst --

Then I wanted to see if you could provide a little bit more color on some of the key merchandise categories. I might've missed it, but if you could drill down a little bit on package beverages and you did mention, of course, the cig price increase that occurred and how your tobacco business performed, and did that in any way have any impact on some of the softer traffic you mentioned?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Well, I will say this: We think it's the weather that is causing more of the softer traffic right there, and when we have a slower traffic pattern, whether that is lower single digits or even negative, it does permeate across all lines of our business. and so I would say the takeaway there in the month of October we would have reported higher results throughout every line of our business if it hadn't been for those somewhat of anomalies there. So drilling down to your question with respect to the grocery and general merchandise category, you may have picked up that we made a comment that we believe we're gaining market share within this category. Part of the reason that we believe that is now we obviously get market data similar to what you do with IRI, Nielsen Data, also what we call supplier-shipment data, and so we are trending above all of that in the cigarette category, which obviously dominates the grocery and general merchandise category.

One of the things to point out more specifically, you probably heard us in the past conference calls talk about the beer category and how promotional that's been? Here in the second quarter, I think we started late in the second quarter, we went off of a lot of promotion activity and so we definitely have seen a margin uptick in the beer category. Our liquor sales are doing exceptionally well. We continue to look for opportunities to add more liquor to our stores. That seems to be a trend, especially in some of the younger consumers that we have.

Look for us to continue to increase the liquor offerings that we have.

Bonnie Herzog -- Wells Fargo -- Analyst --

OK. Just one final question on the traffic, which, again, you just mentioned, that you really think a lot of it had to do with the the weak weather but then I'm trying to understand with you know your stores and the locations, it's pretty widely spread. So curious if you could give us a sense of maybe the traffic patterns across your portfolio. I'm just wondering if you didn't see any pockets of traffic growth in some areas where maybe weather was better.

Just trying to really get an understanding of what happened and if you're seeing signs of improvement.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

So the magnitude of the weather, and it seems odd to talk about rain, but when heavy rain falls on the weekend it can impact us, especially if it is a broad, sweeping weather pattern. For us, the three states that would be impactful the most, as you might know, are Iowa, Missouri, and Illinois, and that's where the weather patterns hit, that represents about 75% of our store base. Typically in the winter months those storms that we get will be probably more isolated to the northern part of our region. This one just happened to be a little bit further sweeping.

Bonnie Herzog -- Wells Fargo -- Analyst --

And you're already feeling better about the traffic patterns so far in this next quarter?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Yea, definitely the traffic patterns are moving upward from the month of October.

Operator

Our next question is from the line of Ryan Domyancic of William Blair. Your line is open.

Ryan Domyancic -- William Blair and Company -- Analyst --

Hey, Bill, good morning and thank you for taking my question. So not to get into the traffic again, but you talked about the negative traffic attacking the prepared-food side, but gallon growth, which I assume is a pretty good proxy to traffic, has been on the high end of the guidance range for the past two quarters. So I guess can you help us understand and reconcile why gallon growth has been meeting expectations but there's some issues inside the store with that prepared-food comp?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Yeah, there's probably a lot of things going on in the gallon area. Obviously in our market area there is really no alternative for public transportation so customers continue to have to go to and from work, we continue to add stores in key locations, which I think is taking market share for us. Obviously we have a fuel-saver program that's different than some of our peers that's also helping out, but we noticed that same type of what would appear to be a disconnect in central gallon movement with respect to the transition or conversion inside, and that's kind of one of the beauties of the pizza-to-pump promotion. One of the thoughts, Ryan, in order to redeem that coupon, a customer will have to go inside the store.

So they buy a large pizza and get that coupon, they'll redeem that coupon at some future date, but to do so, as I just mentioned, they're forced to come into the store. So we're trying to create more touch points with consumer inside the store to convert into some type of additional sales above and beyond just the fuel, so that's one of the thought processes behind that promotion.

Ryan Domyancic -- William Blair and Company -- Analyst --

All right, that's helpful. And then results to date demonstrates that you've made progress in [Inaudible] the OPEX growth in the past two quarters, but the OPEX guide was reiterated. If you have the managers' salary increases in December, are there any other costs that are going to be backfilling kind of that costs that you're lapping that would cause the OPEX growth to maintain its current trajectory instead of slow down?

William J. Walljasper, Senior Vice President and Chief Financial Officer --

One of the things to think about, and I think Bonnie or somebody else might have asked the question about the cadence of new store roll-outs. And so obviously as we add more stores into the mix that will obviously add more operating expenses, and so that's one of things -- we did discuss whether or not we should move that guidance down, obviously we were trending to the low end of that guidance. Once we cycle over that Department of Labor, that will be one of those things that we might actually be slightly below but probably a little bit cautious from our perspective. especially after having reduced the prepared-food same-store guidance now for two quarters in a row.

Just trying to take maybe a little bit of a conservative approach there.

Ryan Domyancic -- William Blair and Company -- Analyst --

That makes sense. Very helpful, thank you for your time today.

Operator

Thank you and our next question is from the line of Irene Nattel of RBC Capital Markets. Your line is open.

Irene Nattel -- RBC Capital Markets -- Analyst --

Thanks and good morning, everyone. Just thinking about your commentary around the value-conscious consumers -- wondering what promotional activity you might have planned incrementally either in-store or above and beyond just that pizza-and-a-pump linkage to really get at that because with farm income once again having been depressed for this year, that behavior is unlikely to change as we you know get into after even after F '19.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Yeah, I'll tell you this: We have a series of promotional activities throughout the remainder of this fiscal year. As we get into the latter part you'll start a frame up and think about Fiscal '19. We tend not to talk about what those are in advance -- we don't want to give our competitors any type of forewarning of what we might promote coming up. But definitely your comments ring very true here, certainly there is a value-conscious customer, we don't think that's going to change in the near term, and so we are looking for ways to bring about some value propositions for the consumer at the same time trying to drive him inside of our stores.

So that's kind of what the promotional activity's about. Now to Terry's comments earlier, as well, I think when we look at the digital-engagement side of that and start kicking that off as we head into Fiscal '19 I think that'll give us some really keen insight on our consumer behavior and buying habits that we then can at that point individual promotions specific to a customer rather than just a blanket promotion that would go throughout the entire corporate territory.

Irene Nattel -- RBC Capital Markets -- Analyst --

Absolutely and, again, presumably this a lot of these initiatives really are geared to strengthen your most loyal customers but at the same time drive your top line through more effective promotions?

William J. Walljasper, Senior Vice President and CFO --

Yes. Yes, that's exactly right .

Irene Nattel -- RBC Capital Markets -- Analyst --

OK. I'm just on the OPEX side, I guess the last fella that was asking questions sort of was trying to get at this, but the programs that you've implemented to date, have the results been better than you anticipated? In other words, I guess I'm really trying to get at is the OPEX gains, are they bigger than you expected? Could the size of that pie be larger than what you've already disclosed?

William J. Walljasper, Senior Vice President and CFO --

I would characterize it this way, Irene: The ones that we have rolled out are performing as expected, but we had we have several that we just rolled out here in the last fiscal quarter that really are not part of the results that we've reported. I'd be happy to walk through some of those. The one that we first did it was changing the automatic raise of $0.25 an hour after 90 days, and we did that and that that resulted in Q1 and Q2, that's performing as expected. Also, we have taken a more a tactical approach in our advertising spend.

You might recall that we did increase advertising pretty significantly in Fiscal 2017, so right now advertising spend is down and tracking to where we we believe it was expected to track at. Several things that are just out that I think will have an impact in the back half of the year. We did, as I mentioned in last call, we did establish a kind of 3% merit increase kind of target, as you might recall. We've been tracking prior to this at about 4% to 5% merit increase, which may not seem like a lot but in a 1% to 2% movement is a pretty big number.

Now that one takes a course of time really to see that benefit. It is tracking right where we think it is but, keep in mind. not everybody has the same anniversary date in the company, so it takes at least a full year to kind of cycle through that to see that full benefit. We just implemented here recently what I'll call -- I'm going to characterize as an increased focus on clocking in, clocking out, primarily focused on the clocking-in side of it, and that's simply put is, we'll have hourly employees that might be scheduled, say, 9 to 5, well they come in at 8:45, clock in, and everybody thinks they're a hard worker.

At the end of the day, we're paying them unscheduled labor hours, so there's a little more keen focus there and not allowing them to check in anytime sooner than when they're scheduled. So that just got kicked off the ground, so you're not seeing that in the fiscal quarter. Also, we made a change in the shift differential hours here in the second quarter . We used to have a shift differential that would pay people through 8 a.m.

We pulled back several hours and that will be a benefit moving forward here into fiscal Q3, for us. And then one of the things that I know store operations has done a great job of, is taking a look at our budgeted hours and obviously when you're having maybe a slower pace of revenue in customer traffic, there might be opportunities to pull back some of the hours, and so we are tracking, that's probably the biggest reason you're seeing that unchanged store base come down. So there's a number of things like that and we can continue to look at the budget-hours calculator, as well, so just a few nuggets for you there.

Irene Nattel -- RBC Capital Markets -- Analyst --

That's really helpful, thank you. And one final question, if I may, on the proposed tax reform. A lot of what I hear says on a blended basis it would likely come in around 25%, so I guess that my question is twofold, No. 1) based on your sort of state mix is it the right level? And, No.

2) is it really as simple as taking your tax rate down from, let's call it that 35 to 36 rate level, to the 25ish level or is there something else we need to take into, keep in mind?

William J. Walljasper, Senior Vice President and CFO --

To answer your first part, when you adjust for all the potential changes, and granted these changes could move here, but when you adjust for different things, some give and takes in the tax reform, that blended rate is basically what you just mentioned. Our effective tax rate right now is around 37% and I think it has the opportunity to be somewhere that, I'm gonna give you a range of 22 to 27%. I don't know when it's going to be in effect whether it's going to be 1/1/19 or how they kind of reconcile that. Then the one-time effect, as I mentioned in my opening comments, the reset of the deferred tax liabilities; think about that.

That's a pretty good number that's well over a $100 million of a reset that will hit the income statement on a one-time basis.

Irene Nattel -- RBC Capital Markets -- Analyst --

Very helpful. Thank you.

William J. Walljasper, Senior Vice President and CFO --

You're welcome.

Operator

Thank you, our next question on the line is Ben Bienvenu of Stephens. Your line is open

Daniel Imbro -- Stephens --

Yes, thanks guys, this is actually Daniel Imbro on for Ben. Thanks for taking our questions.

William J. Walljasper, Senior Vice President and CFO --

You bet.

Daniel Imbro -- Stephens --

So I know it's been discussed but I did want to start on the prepared-food guidance. Given we're halfway through the year, the implied range for prepared-food comps in the back half looks to be pretty wide. Is that an indication of the volatility you guys are seeing in your markets or kind of any color there on why back-half implications are still pretty wide range would be great.

William J. Walljasper, Senior Vice President and CFO --

Well, yea, it's still a pretty wide range predominantly because of the Pizza-at-the-Pump promotion. Obviously there's an opportunity to accelerate from where we're at. So we decided to keep it at a relatively large range at this point time.

Daniel Imbro -- Stephens --

OK, great. Kind of shifting gears a little bit here, with the OPEX being well -controlled can you talk about the employee reaction to some of your labor management decreased wages increases, have there been any kind of meaningful change in turnover or employee retention with those changes?

William J. Walljasper, Senior Vice President and CFO --

No, we haven't seen anything. That's a great question because it's a common question we get and one we were concerned about. Right now we haven't seen any type of significant or larger spread concern over some of the changes we've made that's something that we're going to continue to monitor, especially when we start reducing hours. Obviously that creates a strain on store operations and certainly don't want to cause any adverse or unintended consequences like additional turnover from reduced hours at the store that puts pressure maybe a managerial staff person.

A great question.

Daniel Imbro -- Stephens --

Great. Then one last one for me if I could, kind of a clarifier, I think you called out credit card fees, if I heard you right, were 140 bps of the OPEX growth in the quarter? Your OPEX growth guidance of 9 to 11, are you assuming any contribution of that from credit card fees if we see gasoline prices continue to rise?

William J. Walljasper, Senior Vice President and CFO --

Well that's a great question. Obviously, if fuel prices rise significant in the back half of the year, that would be one area that you will see spike up and so keep in mind that credit card fee, that $4.1 million that we referenced, that would be a combination of credit card fees and our own fuel expense to run our fleet. So it's twofold there.

Daniel Imbro -- Stephens --

Ok, thanks and best of luck.

William J. Walljasper, Senior Vice President and CFO --

You bet.

Operator

Thank you. Our next question is from the line of Kelly Bania of BMO Capital. Your line is open.

Kelly Bania -- BMO Capital -- Analyst --

Good morning and thanks for taking my questions. Just curious on the prepared-food comps. It sounds like the beginning of the quarter was maybe tracking over 5 and possibly flat to negative in October. I guess the weather is a big factor there but it just seems like a pretty big swing for weather so just curious if there's anything else that you think is going on? Any comparisons, any other market conditions, or just how much analysis went into kind of looking at that and how that compares to historical weather pattern? And then also if you look at kind of the trends within grocery versus prepared food, are you seeing any different or the same signs of price sensitivity or trade up or trade down or does it depend on the category? Just trying to get a understanding of really where your consumer's mindset is.

William J. Walljasper, Senior Vice President and CFO --

Yeah, I'll try to get all of those answers. If I miss one, Kelly, please circle back with me on that. But with respect to the prepared-food comps you're correct, I mean we were trending certainly north of 5 in the month of August for prepared food and fountain, and so it really started really kind of the back half of September, and moved right into almost the entire month of October. So the analytics that we did, we started looking at weekdays, weekend days, things of that nature, understanding to the best of our knowledge whether there's any other factors that are impacting us.

We felt there were no other incremental factors that were impacting us either in September or October that we didn't already see in the month of August, and so, as I mentioned, 50% to 60% of all of our pizza sales happen on the weekends. Take it a step further, about 45% of all our inside sales happen on the weekends. So when you have weather patterns or any other events for that matter that would affect traffic on those periods of time, it will have a significantly higher impact, adverse impact, especially in a short period of time. So when you look at that you're talking about almost a 200% increase in precipitation, significant across those three major states that we talked about And so, when we look at thee data that's kind of how it rolls up.

And so the back half of the question you have to reiterate for me, Kelly.

Kelly Bania -- BMO Capital -- Analyst --

Just curious if within the prepared-food category versus the grocery category are you seeing the same trends in terms of price sensitivity, trade up, trade down? I think you also mentioned you raised some cigarette prices, I think some of the prepared food price increases are falling off, just I think in November, so just curious about how you feel about those kind of signs and prices and your consumer willingness to accept those?

William J. Walljasper, Senior Vice President and CFO --

Yeah, no you're right, we did have a price increase that fell off in November. We chose not to have that type of price increase moving forward because that value-conscious commentary we gave. You know, with respect to some of the trends that we are seeing are like, for instance, cigarettes, we definitely continue to see a continued move toward more pack purchasing, albeit it's been slow and gradual over the last 12 to 18 months, but people continue gravitate to packs more than cartons and more to a value brand then a premium brand. And those are signs that certainly the consumer is continuing to be strained.

Now the basket bring inside the store, excluding fuel, is relatively consistent to where it was in the past three quarters so that we have some stabilization there, so I think that's encouraging. Farm income, there is some reports out there from the USDA that they expect an upward movement in farm income as we head into Calendar '18. Things don't turn around overnight but those are all positive signs for us.

Kelly Bania -- BMO Capital -- Analyst --

I'm sorry, did you mention where quarter to date the comps are? Because I think you had a very warm November last year and I don't know if I missed that, so just curious with all those dynamics how you're cycling that.

William J. Walljasper, Senior Vice President and CFO --

A good memory, Kelly. Yeah we had, actually the first half of November last year was unseasonably warm and so there was a little bit of pressure. You might recall we made some comments about November last year -- that was our strongest prepared-food comp month of the year. I think it may have been the strongest grocery and general-merchandise month of the year, as well.

A lot of it had to do with the very unseasonably hot weather. The first part of November. Now the back half of November last year actually changed and we actually saw in the back after November this year some very unseasonably warm weather, so we definitely saw a pickup in the back half of November, and certainly so far in December, the weather patterns seem to be favorable. You asked a question about quarter-to-date numbers? I think you did? The commentary we gave for a quarter to date -- in the fuel category we're trending above our guidance; in the grocery and general merchandise and prepared-food category we are trending very similar quarter to date what we finished in the second quarter.

Kelly Bania -- BMO Capital -- Analyst --

OK, so you're expecting continued improvement, I guess, in the prepared-foods category as you cycle those comparisons, would that be fair?

William J. Walljasper, Senior Vice President and CFO --

Yeah, that would be fair. Obviously, with the Pizza-to-Pump promotion, we anticipate certainly a benefit there not only in the prepared-food category but also on the gallon movement. In addition, I will point out that we look at a potential tailwind going forward here for Q4, you might recall that we had some adverse impacts from some deep discount promotions that we ran in the fourth quarter that did not resonate with the customer, so we will be countering against some lighter numbers as we head into the back half of the year.

Kelly Bania -- BMO Capital -- Analyst --

And can you help us understand what you meant that you've tested this Pizza-to-Pump promotion -- what kind of results? What you learned from that? What we can expect in terms of elasticity from that and how that impacts your fuel margins?

William J. Walljasper, Senior Vice President and CFO --

So the last time we did this was, so I think it was back in the state of Indiana back in 2014, and the reason we did it back then, obviously we saw behavior in the state of Indiana that we wanted to change, and so we wanted to get more presence and impact in our prepared-food category and increase that brand recognition. So we ran that for a short period of time with great success. Comps were probably two to three times higher than the unchained store base in the state of Indiana. The more positive takeaway from that program back in 2014, is after we shut it off, those comps continued to be relatively robust, so there wasn't a drop-off.

So I think it did what it was intended to do. So now we're in a situation where we're trying to maybe change consumer behavior or play upon some of the value-conscious thought processes of our consumer, and so we decided at this point, let's try to do this corporatewide, understanding we're not going to have maybe as big of an impact because obviously we we have a strong brand recognition but the idea is to shift the consumer behavior to think about that value proposition to leverage several pieces of our business together -- that would be the pizza category as well fuel category. Especially as we see retail fuel prices rise, we see how the fuel-saver programs have resonated over the years with our consumers. We feel we have an opportunity to kind of leverage both aspects of that, and, as I mentioned in one of the earlier answers to the questions, one of the nice things about the program, in order to redeem the coupon it does push the customer inside the store, which gives us more opportunities to do a selective-sale proposition.

At this point, it would be hard for me to gauge what the impact might be on the fuel margin side. A lot of it has to do with the redemption of the coupon. if I recall back in 2014, we roughly had about a 50% redemption rate of that coupon.

That's very helpful and then just one more? I just wanted to ask about the performance of new stores, how that's tracking relative to your expectation and how many of the smaller stores you opened so far and how that's going?

Yea, well, the stores are trending as expected for us. We monitor that relatively closely, looking at not only movement of revenue ramp-up in all three of our major categories, but also cash-flow ramp up. And so we haven't seen any discernible change that would would give us pause in that program. With respect, I think you're asking about the small format, 3,600-square-foot facility, This last fiscal year I think we're doing about a third of our stores with that smaller footprint, continuing to look for opportunities, We obviously continue to always tweak that store design to make sure that we're trying to meet the needs of the customer.

Operator

Your next question comes from the line of Ben Brownlow of Raymond James.

Ben Brownlow -- Raymond James -- Analyst --

Hi, good morning and thanks for taking the question. You mentioned the fuel pricing strategy earlier on. I'm just trying to get my hands a little bit better around the conversion issues. Have you changed that fuel pricing strategy at all over the past few months and aside from the promotion-linked coupons that you plan on running?

William J. Walljasper, Senior Vice President and CFO --

I wouldn't say we changed it over the last few months, I would probably characterize it as an increased focus on the movement of our competitors and an increased focus on the movement of wholesale gas. I mentioned in the last conference call we did that I had a great opportunity to hire a young man from Murphy to come in and be our director of fuels and so we definitely, he has brought certainly a sharper light on that area. I wouldn't say, however, that has changed the strategy at this point, it's just a continued focus on that area. Gallon movement is probably also related to some things I mentioned in the previous answers.

I would say this, though, that when when Terry talks about price optimization, fuel is part of that program and so that's something that we are are looking at to refine to see if there's an opportunity.

Ben Brownlow -- Raymond James -- Analyst --

OK, so that's helpful and so, in effect you're being more active, around, as opposed to following, you're being a little bit more active in some of those markets on on trying to lead price?

William J. Walljasper, Senior Vice President and CFO --

I'm not sure I'd call it lead price, but certainly make sure that we are as responsive as we should be to the changing issues within the fuel category by demographic.

Ben Brownlow -- Raymond James -- Analyst --

That's helpful. And on the tax reform, just given that the industry is historically pass-through expense savings, and kind of thinking of tax as obviously an expense, how do you see that playing out over a quarter, even 12 months? Do you see that being passed through to the consumer in lower prices? And also how should we think about the impact to the cash stacks, just given [Inaudible] that one-time kind of reset in the deferred tax expense, but that's been keeping your cash stacks around 17% to 20% over the past few years, so how should we think about that given the reform?

William J. Walljasper, Senior Vice President and CFO --

Well, I'll probably defer the first cash tax question until we know exactly how the bill's going to play out, so that might be a follow-up question, Ben, in the March conference call. But with respect to to speak to your other questions, we've never had this type of broad, sweeping tax change, at least in my time with the company. I can't sit here and tell you whether we pass through or not. Really right now I believe it will probably not be completely passed through to the consumer and be retained at the corporate levels.

Especially when you think about, at least our market area, Ben, you think about our market area and the kind of the economic environment that we're in. A lot of people are, have a slower pace in their operation and there may be a likelihood for them to retain that as opposed to pass it on, but I guess that the competitive landscape will have to play out here as we move forward, but that's a great question.

Operator

Thank you, and as a reminder, if you have a question at this time, please press the ^ key and the No. 1 key in your touchtone telephone. And the next question is from the line of Anthony Lebiedzinski of Sidoti and Company. Your line is open.

Anthony Lebiedzinski -- Sidoti -- Analyst --

Yes, good morning and thank you for taking the questions. All right so I was just looking again at the prepared-food and fountain category. When [Inaudible] in that segment, was there any notable divergence between that, or was it consistent?

William J. Walljasper, Senior Vice President and CFO --

I gotta apologize. You cut out several times there so I didn't quite hear your question.

Anthony Lebiedzinski -- Sidoti -- Analyst --

I'll repeat it, so just looking at the prepared-food and fountain category, if I were to look at just the pizza sales versus the other products within that category, was it consistent or was there some divergence between, for sales performance there?

William J. Walljasper, Senior Vice President and CFO --

I would say that if you look at all three categories rolled out there was definitely a more adverse impact on the pizza line than the other categories and those other categories, by way of reference, would be your bakery and your fountain category.

Anthony Lebiedzinski -- Sidoti -- Analyst --

Great, thank you for that. And also you mentioned before that your liquor sales are doing well and I think there's plans to expand that, so do you mean to have more stores offering liquor or [Inaudible] just offering within your store [Inaudible] how many of your stories actually sell liquor nowadays?

William J. Walljasper, Senior Vice President and CFO --

The answer there would be looking to add more stores with that product line as opposed to changing the product mix inside the existing stores. We have roughly about 1,100, a little less than 1,100 stores, that sell liquor, 872, I'm told. Sorry. And so opportunities there, I guess you know that'll be a state-by-state basis but there are hundreds and hundreds of opportunities we think we'd like to put liquor in.

Anthony Lebiedzinski -- Sidoti -- Analyst --

Switching gears, so to just looking at the number of RINS actually sold ithe quarter, on a year-over-year basis, was down 17.3 versus 17.8. Can you say whether this was some timing issue or something else going on?

William J. Walljasper, Senior Vice President and CFO --

No, it wasn't a timing issue, probably just the movement of fuel at that particular time. I don't necessarily see that was a huge difference there but nothing nothing to point out at this time.

Anthony Lebiedzinski -- Sidoti -- Analyst --

Got it, got it, OK, and just say the housekeeping question, as far as store closing plans or anything for Q3 and Q4 that we should think about when we update our models?

William J. Walljasper, Senior Vice President and CFO --

Well we wouldn't be able to give you any, I guess, forward-looking comments on stores to close, but we are always looking at opportunities to close stores that are underperforming or we might have a replacement store that we might close one or two stores, but I would anticipate the run rate to be similar to last year.

Anthony Lebiedzinski -- Sidoti -- Analyst --

OK. All right. Thank you.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

You bet.

Operator

Thank you, and that concludes our Q&A session for today. I'd like to turn the call back over to Mr. Bill Walljasper for any closing remarks.

William J. Walljasper, Senior Vice President and Chief Financial Officer --

I'd just like to thank everybody for joining us this morning. Great questions. I wish all of you and your families a great holiday season. Thanks.

Duration: 59 minutes

Call Participants:

William J. Walljasper, Senior Vice President and Chief Financial Officer --

Terry Handley, President and Chief Executive Officer --

Shane Higgins -- Deutsche Bank -- Analyst --

Ryan Gilligan -- Barclays -- Analyst --

Bonnie Herzog -- Wells Fargo -- Analyst --

Ryan Domyancic -- William Blair and Company -- Analyst --

Irene Nattel -- RBC Capital Markets -- Analyst --

Daniel Imbro -- Stephens -- Analyst

Kelly Bania -- BMO Capital -- Analyst --

Ben Brownlow -- Raymond James -- Analyst --

Anthony Lebiedzinski -- Sidoti -- Analyst --

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