Company News

The Pantry Sees Improvement

Chain battles issues both internal (gasoline forecasting) and external (credit-card fees)

SANFORD, N.C. -- Executives from The Pantry took shots at the economy, gasoline prices and credit-card fees as they reported their third-quarter financial results yesterday, but they also took responsibility when appropriate. "We have done a lousy job of forecasting gasoline [margins and sales to the point that] we're almost reluctant to talk about it," said chairman and CEO Peter Sodini during a conference call with stock analysts.

Retail gasoline gallons sold in the quarter were down 2.5% overall and 5.2% on a comparable store basis. Retail gasoline revenues rose 26.4%, reflecting a 29.6% [image-nocss] increase in the average retail price per gallon to $3.72. Meanwhile, the retail gross margin per gallon—which The Pantry typically targets at 12-13 cents—was 10.7 cents compared with 12.8 cents a year ago.

"We report gas margins net of credit-card fees and equipment maintenance costs," noted Frank Paci, senior vice president of finance and CFO, "which were 6.2 cents per gallon in this year's third quarter, compared to 4.8 cents per gallon a year ago, and 5.5 cents in Q2. Almost all of the increase in Q2 was driven by higher gasoline prices."

While taking blame where he feels it's appropriate, Sodini squarely targeted credit-card fees as a source of pain for The Pantry and the industry overall.

"Credit-card fees were up again, up more than 1 penny a gallon from a year ago," he said, noting the industry's effort to fight back. "There is a substantial class-action lawsuit out there against the credit-card companies. If you look at some of the disparities between some of the credit-card fees in Europe, … one would have to believe that there is a day of reckoning coming [for credit-card companies] because they would be hard pressed to justify what they're charging here. … That may be two or three years down the road; it might be longer. But that will bring some semblance of reason to the subject of credit-card fees."

Sodini also noted the strain the difficult economy and rising gas prices is putting on retailers.

"Our third-quarter earnings per share of 48 cents is down from a year ago but significantly improved from the second quarter. We feel we've managed through this very challenging past period," he said. "The macro-economic environment we're facing from the perspective of both overall weakness of consumer spending and on gas-cost escalation is the toughest I've seen here in my past 10 years."

Total revenues for the quarter were approximately $2.5 billion, up 20.1% from the corresponding period a year ago. Net income was $10.7 million, or 48 cents per share on a diluted basis, compared with $12.6 million, or 55 cents per share, in last year's third quarter. EBITDA for the quarter was $66.1 million, compared with $69.1 million a year ago and $40.1 million in the second quarter of fiscal 2008.

Merchandise revenues for the third quarter declined 0.4% overall and 2.5% on a comparable store basis from last year's third quarter. The merchandise gross margin was 36.5%, down 10 basis points from the prior year. Total merchandise gross profit for the quarter was $156.6 million, a 0.7% decrease from the corresponding period a year ago.

While down compared to last year, Sodini notes, "We saw an improvement in our merchandising sales trends despite the gasoline comparable sales, which has an impact on traffic in our stores. Comparable merchandise sales were down 2.5% vs. a 3.4% decline in the second quarter."

The company continued to manage expenses well during the quarter. Store operating expenses were down $6.4 million, or 4.8%, from a year ago, benefiting from a $4.2 million reduction in the Company's insurance reserves, reflecting its favorable claims experience. General and administrative expenses declined $4.8 million, or 17.6%, primarily as a result of the restructuring completed last year.

Results for the third quarter include a charge of $0.04 per share related to the company's gasoline hedging positions, which have all been closed. Results for the third quarter of fiscal 2007 included a charge of $0.06 per share for deferred financing costs in connection with a debt refinancing.

For the first nine months of fiscal 2008, total revenues were approximately $6.5 billion, a 32.5% increase from the corresponding period a year ago. Net income for the nine-month period was $8.8 million, or $0.40 per share, compared with $21.1 million, or $0.92 per share, a year ago. EBITDA was $159.8 million, up 2.8% from $155.5 million in the first nine months of fiscal 2007.

"Operating conditions remained challenging in the third quarter, with a series of new record highs for crude-oil prices and a continued soft retail environment," Sodini said in a press release. "In this context, we are pleased with the sequential improvement in our results from the second quarter despite the current market conditions.

"Our results benefited from our continued focus on maximizing gasoline gross profits and on expense management. With our suspension of acquisition activity and share repurchases for at least the balance of the calendar year, and our substantial reduction in non-essential capital expenditures, we continue to expect that we will generate free cash flows in the months ahead, even if there is no significant change in the current macro-economic environment. Longer term, we believe that the company remains well-positioned to leverage its strong market position in the Southeast over the years ahead."

As of June 26, 2008, the company had approximately $162 million of cash and short-term investments, with an additional $142 million available under its revolving credit facility. The company is currently, and expects to remain, in compliance with all of the applicable debt covenants under its outstanding instruments.

The company is also updating its fiscal 2008 guidance ranges. Merchandise revenues are now expected to be between $1.62 billion and $1.65 billion, while retail gasoline sales are expected to be approximately 2.1 billion gallons. The merchandise gross margin is expected to be between 36.8% and 37.0%, with a retail gasoline gross margin between 10 and 12 cents per gallon. The company now expects that fiscal 2008 store operating and general and administrative expenses will be between $605 million and $610 million, down from its previous guidance of between $615 million and $630 million.

The Pantry's stock stood just below $16 per share yesterday afternoon after dropping below $11 per share earlier this year.

Based in Sanford, N.C., The Pantry is one of the largest independently operated c-store chains in the country, with revenues for fiscal 2007 of approximately $6.9 billion. As of July 24, 2008, the company operated 1,659 stores in 11 states under select banners, including Kangaroo Express, its primary operating banner.

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