SANFORD, N.C. -- Stock-watching website The Motley Fool has selected The Pantry as one of five stocks currently in a "tailspin," echoing a two-part analysis of the company run in CSP Daily News last month. According to The Motley Fool, The Pantry is "getting socked after bracing investors for some bad news."
The report said, "The Pantry is blaming the usual macroeconomic factors for its reduced outlook for quarterly earnings—higher gas prices and falling consumer sentiment. The company gave notice that it saw a 3.4% decline in same-store sales in the first calendar quarter of 2008, [image-nocss] as it took a hit from rising gasoline prices despite hedging contracts."
It added, "The setback comes as the company has been taking on more debt to expand its operations and consolidate is brand across all stores. Now that sales are softening, the company will be cutting $20 million out of its 2008 capital expense plan. CAPS investors are more divided on whether The Pantry will weather this latest storm, however: More than 11% of investors rating the company believe it will underperform the S&P going forward."
CSP Daily News reported that rumors are surfacing that the chain's best days are behind it and that its aggressive growth is over. And although Chapter 11 reorganization or a takeover are unlikely because of its $1.2 billion debt, some analysts are expressing concerns about The Pantry's long-term viability, citing the heavy debt load, an overdependence on gasoline margins, serious miscalculations on its fuel-hedging positioning and the lack of a robust c-store concept to draw customers in from the pump.
That The Pantry's stock value has slipped is not necessarily a harbinger of financial doom. The company has long had its wild ups and downs on Wall Street. But what makes the current picture more uncertain is The Pantry's reliance on fuel rather than foodservice. Other chains have revamped or expanded their fresh proprietary foodservice offerings to offset sluggish fuel margins and to wean themselves off pump dependency.
In recent years, the chain has spent tens of millions of dollars consolidating its numerous banners under the Kangaroo Express banner. It also had invested through the first half of 2007 in acquisitions for larger assets, most notably the 66-unit Petro Express chain, for which many analysts and rivals said The Pantry grossly overpaid.
The Pantry has also invested heavily in a robust private-label program to complement its emphasis on big-brand products. Initiatives have included Celeste private-label water, soft drinks, sports and energy drinks; Bean Street Coffee Co. fresh coffee service; Chill Zone beverage and frozen beverage stations; additional franchised quick-service restaurant concepts; and "power aisles" featuring Celeste private-label candy. Also, it has upgraded many of its sites through improved lighting and better interior access.
But despite this attention to merchandise, in-store sales remain essentially flat. Recently, the company, citing the weak national economy, reported a decline in merchandise sales for the first quarter.
If high gasoline prices persist, as expected, some question how The Pantry will generate enough growth inside the store to compensate for lost profits at the forecourt.
There may be one upside. An industry observer familiar with The Pantry said the company has one distinct advantage: geography. Other than Florida, where it competes head-on with Hess, most of The Pantry's current markets include only small and midsized operators, none in the mold of major operators such as QuikTrip or Wawa.
"I'm not sure they need to have the best offering in the world," the observer said. "If they were in a different marketplace, their business conditions would be different."
To read The Motley Fool's complete "5 Stocks in a Tailspin," click here.
Click hereto read Part 1 of CSP Daily News' analysis of The Pantry.
Click hereto read Part 2 of The Pantry analysis.
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