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Analysis: The Pantry (Part 2 of 2)

If in-store sales can 't save the 1,650-store chain, its geography just might

SANFORD, N.C. -- In just a couple of weeks, The Pantry will be releasing its Q2 results. When analysts dial in on the May 6 conference call, they will want to know whether fuel margins per gallons have picked up from the 9 cents post credit-card fees that The Pantry reported for the first quarter of fiscal year 2008. They will also want to know another thing: How are the roughly 1,650 stores that The Pantry controls in 11 states performing inside.

In recent years, the largest traditional convenience chain in the Southeast has spent tens of millions of dollars consolidating about 85% of [image-nocss] its numerous banners under the Kangaroo Express moniker. It has also invested heavily into a robust private-label program to complement its emphasis on big-brand products.

Among those initiatives:

· Celeste private-label water, soft drinks, sports and energy drinks
· Bean Street Coffee Co. fresh coffee service
· The Chill Zone beverage and frozen beverage stations
· Additional franchised quick-service restaurant concepts
· Candy Lane “power aisles” featuring Celeste private-label candy

Additionally, as the company notes on its website (, it has upgraded many of its sites through improved lighting and better interior access. It also had invested through the first half of 2007 in acquisitions for larger assets, most notably the desirable 66-unit Petro Express chain, for which many analysts and rivals say The Pantry grossly overpaid.

And 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.

With fewer stores counted in fiscal year 2007, ending Sept. 26, The Pantry posted revenues of nearly $1.6 billion in merchandise, and sold 2.03 billion gallons of gas. Today, with a larger store count, sales are expected to be about the same, if not slightly up, in FY 2008, and gasoline sales are, at best, to hit between 2.1 to 2.2 billion, according to a research note by Friedman, Billings, Ramsey & Co. Inc.

Inside the Store

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.

“I think it 's tough across the board and especially for convenience stores,” said one Wall Street analyst, who like several other analysts and industry observers interviewed for this 2-part feature, spoke on condition of anonymity. “But there are some who are better suited to weather a recession. Wawa and places like that that have a really strong foodservice program will be okay. I 'm just not sure what The Pantry has that [distinguishes] it.”

The analyst talked excitedly about Delek US 's new MAPCO Mart store concept as breaking out of “the box” mentality. That the analyst cites MAPCO is relevant as the Tennessee chain has become an emboldened competitor of The Pantry 's in part of the Southeast, is flush with funds and has emerged as a serious M&A company.

Like The Pantry, MAPCO has been steering aggressively toward private-label brands. More importantly, MAPCO is moving away from its ordinary MAPCO Express locations and investing in a 4,000-square-foot concept called MAPCO Mart, which allocates roughly one-third of floor space to its proprietary Grille Marx foodservice program and features both indoor and outdoor seating.

The Pantry has not embarked on a similar venture and, in light of its decision to pare capital spending, is not likely in the near future.

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, and putting aside the nascent MAPCO Marts for now, most of The Pantry 's landscape is replete with small and mid-sized operators, none in the mold of top-notch operators such as QuikTrip or Kwik Trip 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.”

What 's Next?

As of this writing, The Pantry faces a possible downgrade of its credit rating from Moody 's. The company 's weak earnings and debt load have put the company 's B1 credit rating—four steps below junk-bond status—in jeopardy, Moody 's says.

In addition, there is definite resentment from Wall Street. Some of it may stem from The Pantry 's decision last year to stop holding quarterly earnings estimates, which gave analysts a barometer of what to expect for the actual quarterly earnings report.

At the same time, there is a strong sense that the energy has run out on this once dynamic aggregator that sought to consolidate much of the South 's fragmented c-store landscape.

“If they can hold off on acquisitions, put away their Am-Ex card for awhile and bring down some of their debt, it will be seen very favorably,” said one analyst. “This has not been The Pantry way, but it will have to be.”

Click hereto read the first installment of this two-part analysis.

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