No Rain on The Pantry's Parade

Q3 brought increased foodservice, merchandise sales per customer, soft fuel margins, cig sales

Abbie Westra, Director, Editorial, CSP

CARY, N.C. -- It was only fitting that rain was coming down at The Pantry headquarters this morning, as CEO Dennis Hatchell and CFO B. Clyde Preslar presented results of the company's fiscal third quarter ended June 27, 2013.

The wet weather has closed roads, changed consumer habits and softened sales for The Pantry in the past month. For the fourth quarter to date, merchandise sales are down 0.5% and retail fuel gallons are down 6.9% with a cents per gallon of 11.5.

"It's just raining. It's raining all the time," Hatchell told listeners during the call. "But we're hopeful that's going to end at some point. … It's bound to happen sooner than later, and we'll get those customers back in our stores."

Despite a wet start to the fourth quarter, Hatchell was pleased with the company's third-quarter financials, which featured a nice bump to merchandise sales per customer, attributed to improved merchandising and marketing strategies.

Comparable-store merchandise revenue climbed back into positive territory--up 1.3%, or 3.3% excluding cigarettes. Customer traffic levels improved from a 4.6% decline vs. prior year in the second quarter to a decline of 1.2% in the third quarter.

"But more importantly, we continue to grow our merchandise sales per customer, which was up 2.5% on a comparable basis," said Hatchell.

"When customers visit our stores they are responding to our marketing initiatives and product offerings and driving higher merchandising sales per customer," he continued. "Our goal is to continue growing average sales per customer and leverage it as our traffic strengthens."

In early June, The Pantry announced Boris Zelmanovich as its new chief marketing officer, and since then has focused on lifestyle and local merchandising strategies, strong point-of-purchase (POP) advertising, initiatives such as the temporary store built infield at the Charlotte Motor Speedway and the successful RooCups campaign, which has sold 500,000 cups and more than seven million refills since its kickoff in April.

Hatchell further attributed the increase in merchandise sales per customer to a focus on suggestive selling, decreasing out of stocks and keeping product fresh.

Meanwhile, fuel gallon counts showed "significant improvement on a sequential quarter basis, but still minus 4.4% from prior year," said Hatchell. In the face of inconsistent wholesale cost changes, retail fuel margins declined 2.3 cents per gallon to 12.3 cents.

At the category level, cigarettes saw comp sales decline 3.3%, and other packaged goods increase 3%. Proprietary foodservice saw a 6.9% increase thanks to strong dispensed-beverage sales as well as grill, deli and fresh-food offerings. QSR sales were down 2.4%, but still strong relative to the overall QSR market.

In terms of facilities, the company completed 31 remodels in the third quarter for a year-to-date total of 41. It is aiming for 70 to 80 remodels by the end of the fiscal year. So far, Hatchell and Preslar are "pretty pleased with the performance" of the remodels, which are expected to yield a 5% to 10% sales lift.

Adding QSRs is "a key element to our strategy," said Hatchell. The Pantry completed three new QSR builds in the third quarter and plans to open 15 for the fiscal year, bringing its total QSR count to 221.

While opening a new store in Charlotte in February and acquiring another in Conway, S.C. in July, the company continues to optimize its portfolio by closing stores that are no longer a fit to their revenue or market goals. Since fiscal year 2011, it has closed 140 stores.

For the full year 2013, Preslar is "encouraged by our sales during periods of favorable weather." The company expects total merchandise sales to be between $1.79 billion and $1.8 billion, and merchandise gross margin between 33.8% to 33.9%. Retail fuel volumes are expected to come in between 1.69 billion and 1.71 billion gallons, and retail fuel margins between 11.4 and 12 cents per gallon.

Meanwhile, the company continues to study the market for acquisitions that fit its growth strategy (see "The Pantry Outlines Growth, Remodel Plans"). Where those acquisitions might take place and the size of the acquisition all depends on how a particular opportunity fits their goals, said Hatchell.

Following are key metrics from The Pantry's fiscal third quarter:

  • Net income was $5.9 million or 26 cents per diluted share. This compares to net income of $14.8 million or 65 cents per diluted share in last year's third quarter. Excluding the impact of impairment charges, net income for the third quarter of fiscal 2013 was $6.4 million, or 28 cents per diluted share, compared to net income of $15.9 million, or 70 cents per diluted share, in the prior year.
  • Adjusted EBITDA was $65.3 million, down from $74.7 million a year ago.
  • Fuel gross profit was $53.8 million, compared to $67.1 million a year ago as retail fuel margin per gallon decreased to 12.3 cents from 14.6 cents in the prior year quarter.
  • Comparable store fuel gallons sold decreased 4.4%.
  • Comparable store merchandise revenue increased 1.3%--with a 3.3% increase excluding cigarettes.
  • Merchandise gross margin was 33.8% compared to 33.5% a year ago.
  • Store operating and general and administrative expenses were $149.4 million compared to $152.1 million a year ago.
  • Customer traffic levels improved from the 4.6% decline versus prior year in the second quarter to a decline of 1.2% in the third quarter.Merchandise sales per customer improved 2.5% on a comparable basis.

Based in Cary, N.C., The Pantry Inc. is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of Aug. 6, 2013, the company operated 1,559 stores in 13 states under select banners, including Kangaroo Express, its primary operating banner.

Abbie Westra, CSP/Winsight By Abbie Westra, Director, Editorial, CSP
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