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Tickers in this Article: CASY, PTRY, MO, RAI, KR
Rural convenience store operator Casey's General Stores (Nasdaq:CASY) has spent most of this year fending off hostile offers for its business. A corporate recapitalization may have fought off these advances for good, and its second quarter results illustrate that the company will have no problem going it alone, though the higher debt leaves less downside protection for investors.

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Second Quarter Review
Total sales grew 16.9% to $1.35 billion on new store additions and same-store sales improvements. The company has built eight new stores and acquired 10 stores so far this year and saw comparable sales increase in its three main sales categories. Gasoline sales, which account for the vast majority of sales (69% of total sales so far this year), reported a comp increase of 3.6% and was ahead of management's long-term goals. So were grocery and other merchandise comps, which rose 6.9% and benefited from good weather, though cigarette sales from the likes of Altria Group's (NYSE:MO) Philip Morris brand and Reynold's American's (NYSE:RAI) Camel and Kool brands. Prepared food and fountain comps fell below company goals but still rose a robust 7.2%.

Operating expenses jumped 17% as Casey's spent money to fend off a hostile buyout offer from Canadian convenience store operator Couche-Tard. Management rejected the offer of $38.50 and said it "firmly believes that it substantially undervalues Casey's". Shortly after rejecting this offer, it rejected a competing $43 per share offer from 7-Eleven on the same grounds.

To fend off these hostile overtures, Casey's took on a hefty debt load to buy $500 million worth of shares. The purchase price was $38 per share and cost $19.4 million to carry out, which was reflected as a cost in the second quarter. As a result, reported net income fell to $21.7 million, or 51 cents per diluted share. Excluding these one-time items, it estimates earnings would have been 81 cents per share.

Outlook
Analysts currently project full-year sales growth of almost 13% for total sales of $5.2 billion. The earnings consensus estimate is $2.71 per share.

The Bottom Line
The higher debt levels have significantly altered Casey's corporate structure and puts the company closer to rival the Pantry's (Nasdaq:PTRY) high leverage. This increases Casey's operating risk as it leaves less downside protection for a downturn in its core business. It also makes it more difficult to carry out its aggressive strategy of acquiring mom-and-pop convenience stores in the core Midwest markets it operates in.

Higher debt also lowers earnings due to higher interest expense. Overall though, Casey's has succeeded in remaining independent and has a successful track record of going it alone and expanding its operations. A rural focus helps and keeps its stores away from larger competitors, including 7-Eleven and other general retailers such as grocery-store chain Kroger (NYSE:KR), which also happens to run a number of gas stations. At a forward P/E of 15.2, the stock is pricey but still has appeal over the longer haul. (For related reading, take a look at Analyzing Retail Stocks.)

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