Company News

Marginal Results for The Pantry

Third "challenging" quarter forced chain to lower investor guidance

SANFORD, N.C. -- The main issuegasoline marginsthat made fiscal 2006 a great year for The Pantry is making the current year much harder to bear.

This was clearly another challenging quarter for The Pantry, said chairman and CEO Peter Sodini yesterday during a conference call with investors and analysts. Overall, our net income and earnings per share were well below a year ago. The decline was due to lower gasoline margins than the above-average level a year ago and costs incurred in the recently completed refinancing.

The Pantry closed its 2006 in September with a year-end-average gasoline margin of 15.8 cents per gallon. As a result, the Sanford, N.C.-based company expected to see an average of 14.2 cents per gallon this year. With three straight quarters of margins well below that figure8.6 cents in the first quarter, 11.4 cents in the second and 12.8 cents in the thirdthe company found it necessary to lower its investor guidance earlier this summer.

Our previous guidance required us to achieve on average gas margins of approximately 14.3 cents per gallon in the second half of the year to offset the unusually low 8.6 cents per gallon in [the first quarter] and still achieve a full-year gas margin of 12 cents per gallon, said the company's new CFO Frank Paci. We felt this was achievable at that time because it was below last year's second half cents-per-gallon [average] of 15.5.

Instead, the company is returning to its pre-Hurricane Katrina expectations for gasoline margins.

We continue to believe that 12- to 13-cent gas margins are the right target for our business on an annual basis. And as is painfully obvious from last year and the year before, it is very difficult to even forecast quarterly gasoline margins with any degree of certainty and confidence, Sodini said. You can point to the spring of this year; you had significant unplanned refinery maintenance and down time, which reduced inventory in this country and ratcheted up wholesale costs in a very material way.

In further reporting its financial results for its third fiscal quarter ended June 28, 2007, company officials noted that total revenues for the quarter were approximately $2.1 billion, a 24.8% increase from last year's third quarter. Net income was $12.6 million, or 55 cents per share on a diluted basis, compared with $20.3 million, or 86 cents per share, a year ago.

Results for the third quarter of fiscal 2007 include a charge of approximately 6 cents per share for deferred financing costs in connection with the company's refinancing of its credit facilities.

While we are disappointed that our quarterly results were below last year's third quarter, there were a number of positive accomplishments in the quarter, Sodini said. We completed the acquisition of Petro Express and began integrating these stores into our system. In addition, we completed the refinancing of our bank debt, which we believe gives us increased financial flexibility. Finally, we were pleased to see gas margins return to a level that we believe is consistent with our long term expectations.

During the quarter, merchandise revenues were up 15.8% overall and 1.9% on a comparable store basis, on top of a 5.8% comparable store increase a year ago. The merchandise gross margin was 36.6%, compared with 37.4% in last year's third quarter. The lower margin reflects the impact of newly acquired stores that generally have margins below the company average and changes in cigarette promotional allowances that affect gross margin but not unit gross profit. Total merchandise gross profits for the quarter were $157.7 million, up 13.3% from last year's fiscal third quarter.

Retail gasoline gallons sold in the third quarter increased 19.9% overall and 1% on a comparable store basis. Retail gasoline revenues rose 24.5%. The average retail price per gallon was $2.87, up 4%. The retail gross margin per gallon was 12.8 cents, compared with 14.1 cents a year ago. Total gasoline gross profit totaled $70.8 million, a 9.3% increase from last year's third quarter.

For the first nine months of fiscal 2007, total revenues were approximately $4.9 billion, a 14.4% increase from the corresponding period in fiscal 2006. Net income for the nine months was $21.1 million, or 92 cents per share, compared with $62.5 million, or $2.71 per share, a year ago.

Through the first three quarters of fiscal 2007, the company has acquired 152 convenience stores, compared with the total of 113 stores acquired in fiscal 2006. The company has also opened 8 new large format stores so far in fiscal 2007, and expects to open approximately 16 for the full year.

During the conference call, Sodini repeated that The Pantry will slow its acquisition growth for about the next year as the recently acquired stores are worked into the company's systems. He added that any near-future acquisitions would have to be of extraordinarily exceptional properties.

The Pantry is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated c-store chains in the country, with revenues for fiscal 2006 of approximately $6 billion. As of June 28, 2007, the company operated 1,642 stores in 11 states under several banners, including Kangaroo Express, its primary operating banner.

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