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The Pantry Gets Picky

Having passed its 2007 acquisition goal, Southeast chain plans to slow its pace

SANFORD, N.C. -- Early in The Pantry's current fiscal year, chairman and CEO Peter Sodini said he would aim to match the previous year's acquisition count of 113 stores. And as Sodini reported the company's second-quarter 2007 results yesterday, he took a previously unheard-of stance on acquisitions, promising to tone down activity for the remainder of the year.

Along with a few small deals, which were recently announced, we've now acquired or agreed to acquire 152 stores so far this year, well north of our internal forecast, he said on an earnings conference [image-nocss] call. With everything we've already done this year, it's reasonable to assume that the bar has been raised somewhat at least for the next couple of quarters in terms of the criteria a major deal will need to meet before we go ahead with it. [For a complete report of The Pantry's quarterly earnings, see story at left.]

Most recently, The Pantry announced a handful of small acquisitions. But it was the purchase of the 66-store Petro Express chain, which closed earlier this month, that put the company over its annual goal well before year's end.

Thegood news for the quarter was on the acquisition front, where we again had one of the most active quarters in the company's history, Sodini said. But [the store count] actually understates our growth because many of the stores we've acquired generate significantly higher annual revenues than our existing store base. We estimate that we've acquired the equivalent of well over 200 of our average existing stores, and the acquisitions are in markets that complement our store base in the Southeast extremely well.

That said, Sodini turned the conversation to the coming six months, saying the company will slow its acquisition pace but not for lack of opportunity.

The M&A environment for convenience stores remains active in our geographical market. We're looking at a lot of product, and we're also in the process of screening out a lot of product, he said. Valuations still remain attractive, albeit up a half a turn from our historic range, excluding the Petro Express acquisition, which he described as probably the finest asset we've ever acquired from a strategic perspective.

He added, We're not going to stop looking and talking to people. We absolutely have the financial capacity to do more deals if they make sense. But our preference clearly would be to slow the pace down some for awhile.

But growth will move forward for the chain in the form of new construction. We've opened seven new stores so far this [fiscal] year, and we continue to plan on approximately 18 new openings for the full year. That compares with just five new stores opening in our fiscal 2006, Sodini said. This program's designed to complement our ongoing acquisition activity by filling in certain markets and growing in other markets as population growth pushes commercial activity outside the areas adjacent to our existing stores.

He added that the new-build program is focused on specific markets that meet certain criteria, and he offered Charlotte, N.C., a market just entered through the Petro Express deal, as a prime example. We have identified selective markets where we want to grow, and those would be markets that have, one, a higher growth profile and, two, are very difficult to penetrate via any other means, such as if you want to get into some of the suburbs where the growth is occurring, he said. A lot has to do with what the acquisition situation looks like in terms of growth. It's a measured item. It's targeted. It's got a specific purpose. If we are interested in building a store anywhere in our 11 states, we want it in very specific areas.

While Sodini certainly doesn't suggest that the new-build strategy will overtake the chain's preference for acquisitions, he said he felt it was necessary to address the issue to avoid assumptions being made by investors or analysts.

We can afford the luxury of being extremely selective in a market where there's an awful lot of product coming available, he said. We were just a little cautionary that people wouldn't take that 150 stores that we announced [and make assumptions]. We didn't want to get anybody's expectations that we're going to be looking at 250 or 300 stores this year. We're simply not.

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