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Challenges & Opportunities in Integrating The Pantry

Store base in need of work, competition a significant hurdle: report

CHARLOTTE, N.C. -- Like all large convenience-store chains—especially those that have grown excessively through acquisition—The Pantry lays claim to some “premium” locations and others “in worse shape than average.” Therein lies the biggest challenge and greatest opportunity for new owner Alimentation Couche-Tard as it begins to integrate The Pantry’s Kangaroo Express c-stores into its business, according to a new report from a convenience-store analyst.

Couche-Tard and The Pantry's Kangaroo Express convenience stores

“Our trip in North Carolina highlighted the potential of The Pantry acquisition,” Martin Landry of GMP Securities L.P. wrote in a report this week, reiterating his “buy” rating for Couche-Tard. “Couche-Tard has its work cut out to refresh the network, decide on a branding strategy and protect its key markets currently being penetrated by strong competitors. Nonetheless, this is nothing new for this management team, and we believe in their ability to successfully turnaround The Pantry.”

Refresh

The “refresh” of The Pantry’s more than 1,500 c-stores is the first major opportunity, according to the report.

“In general, Pantry stores do not have a very developed food offering, with food representing 11% of merchandise sales vs. 18% for the industry average.” Landry said. “Generally, most of the stores seen were in need of investment, … but most of the investments needed were simply to refresh the look of the store and fuel canopy, not a major overhaul.”

The flipside was that the Circle K stores in the same markets “were in good shape having been renovated recently.”

Competition

One major challenge is the plethora of tough competition in many of The Pantry’s markets, including newer stores and growth activity by QuikTrip and Sheetz in North Carolina, and Wawa Florida.

Comparing those chains’ stores to newer Circle K c-stores in the same markets, Landry said, “Circle K provides a relatively modest food offering with limited products on a roller grill and a small fresh-fruit offering. This is probably where the company falls short vs. competitors such as QuikTrip, Wawa and Sheetz.”

Boosting Earnings

Noting that Couche-Tard expects to realize $85 million in annualized cost savings at The Pantry within 24 months, Landry said he expects an overall improvement to earnings from the Pantry acquisition completed in March.

“We would expect that by reinvesting in the network, Couche-Tard should be able to revitalize sales by narrowing the gap between Pantry’s merchandise sales and the industry average and turn its negative same-store-fuel volume back into positive territory.”

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