The Pantry Posts Record 3Q Results
Restating financial statements for sale-leaseback transactions
SANFORD, N.C. -- The Pantry Inc. said revenues for its third fiscal quarter were $1.1665 billion, up 25.7% from $928.3 million in the corresponding period a year ago. Net income was $16.7 million, a 25.9% increase from $13.2 million in last year's third quarter. Diluted earnings per share were 75 cents, up 17.1% from 64 cents a year ago.
Operating performance in our core stores remained strong in the third quarter, with solid growth in comparable store merchandise sales and gasoline gallons sold, as well as a substantial increase in our merchandise gross [image-nocss] margin, said Peter J. Sodini, president and CEO of the Sanford, N.C.-based chain. These results reflect the positive impact of our store conversion and rebranding programs, as well as our increased focus on higher-margin merchandise categories such as foodservice and private-label products.
Merchandise revenue for the quarter increased 7% overall and 4.1% on a comparable-store basis. The merchandise gross margin of 36.6% was up 50 basis points from last year's third quarter. Total merchandise gross profits rose 8.5% to $118.6 million, and again accounted for more than 70% of the company's total gross profits.
Comparable-store gasoline gallons increased 5.6% from a year ago, and total gallons sold rose 15.2%. Gasoline revenues were up 34.7%, partly due to a 17% increase in the average retail price per gallon, to $2.13. The gross margin per gallon was 12.3 cents, compared with 13 cents in last year's third quarter. Gasoline gross profits for the quarter totaled $48.4 million, up 9% from a year ago.
During the quarter, the company completed the acquisition of 53 Cowboys convenience stores located mostly in Georgia and Alabama. In addition, it announced a definitive agreement to acquire 23 c-stores in Virginia that are currently operating under the Sentry Food Mart banner. That acquisition is expected to close in the fourth fiscal quarter.
Both of these transactions are excellent examples of our strategy of focusing on tuck-in acquisitions that leverage our existing market presence across the Southeast, and both are expected to be immediately accretive to our earnings per share, Sodini said.
For the nine-month period ended June 30, 2005, total revenues were approximately $3.1 billion, up 24.2% from the corresponding period last year. Net income for the nine months was $32.5 million, or $1.50 per diluted share, up sharply from $3.2 million, or 16 cents per share, a year ago. Net income for the first nine months of fiscal 2004 included 69 cents per share in early debt extinguishment costs, as well as 4 cents per share in expenses related to a secondary stock offering. In addition, there was duplicate interest expense of 5 cents per share on two issues of senior subordinated notes for a one-month period when both were outstanding.
The Pantry also announced that it intends to restate certain of its prior period financial statements to correct its accounting for transactions that it characterized as sale-leaseback transactions. This change is the result of the determination, in consultation with its independent registered public accountants, that such transactions must be accounted for as financing transactions rather than sale-leaseback transactions. The change will not affect cash flow and will have a minimal impact on earnings per share and retained earnings. The restatement recharacterizes the transactions as financing transactions, with the assets and related financing obligation carried on the balance sheet. As a result, approximately $177 million in additional debt will be recorded as of June 30, 2005, with a similar increase in assets.
While the company is in compliance with all of the financial ratio covenants of the loan agreement under its credit facilities, the increase in debt will put it in default because of provisions that limit the company's ability to incur additional indebtedness. The company currently is in the process of obtaining an amendment to the loan agreement. Based on its discussions with lenders, the company expects to enter into an amendment in the first half of August that would put it in compliance with the agreement and obtain any necessary waivers. It also is taking steps to address the impact of the restatement on other financing arrangements where there may be a breach and anticipates no material consequences arising from them.
Certain technical issues were identified that had the potential to cause certain of these transactions to not qualify for sale-leaseback accounting treatment. One of these issues impacts almost all of The Pantry's previously reported sale-leaseback transactionswhether the retention by the company of ownership of underground fuel storage tanks represents a continuing involvement in the leased property that precludes treating these leases as operating leases pursuant to sale-leaseback accounting rules. Although generally accepted accounting principles on this topic are not clear, the company has concluded at this time that a restatement is appropriate.
As of June 30, 2005, the company operated 1,386 stores in 11 states under a number of banners including Kangaroo Express, The Pantry, Golden Gallon, Cowboys and Lil Champ Food Store.