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The Pantry's Common Tread

Higher sales with lower margins, diverting negative stores at core of 2012 plan

CARY, N.C. -- Breaking down the specific numbers, there was a common thread to The Pantry's second fiscal quarter 2012 as laid out by company executives during a conference call today: increasing sales, decreasing margins. Comparable-store merchandise revenue increased 4.8% (7.9% when excluding cigarettes), while merchandise gross margin was 33.4%, compared to 34.3% in 2011.

The Pantry, the Southeast's leading independently operated c-store chain, reported a net loss of $9.7 million for second-quarter 2012 compared to a net loss of $300,000 for second-quarter 2011.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $38.9 million as opposed to $50.5 million last year.

"As you saw our margins in the second quarter that is really reflective of the positions we've taken in terms of cigarette pricing," said Mark Bierley--the chain's CFO, who has just announced his May 25 departure from the company to take a position closer to home in Michigan (see Related Content below for previous CSP Daily News coverage). "We've moderated our margin outlook in that core category, but to that same extent, we've raised our sales performance in terms of guidance. Same from a fuel perspective."

While retail fuel margin per gallon indeed decreased from $0.137 in 2011 to $0.096 in 2012, gross profit also declined, going from $61.8 million to $43.3 million. But with comparable-store gallons up 1.1% and fuel prices likely to improve, Bierley said that he was is optimistic for the rest of the year.

"We've assumed for the back-half of this year, our fuel margins will improve significantly from the first half performance," Bierley said. "Our guidance is reflective of the market we're seeing so far in April and May. We did raise our sales but we also tempered our margin expectations to get a balanced look for the rest of the year."

New president and CEO Dennis Hatchell (see Related Content below) added that for the remainder of 2012, "we'll be looking for consistency on fuel and cigarette pricing … it's very important that we improve our pump-to-store interaction and this will receive a lot of our attention going forward so that we're able to increase our merchandise sales."

Another key strategy for The Pantry has been diverting stores with negative EBITDA to dealer operations. The company closed 13 stores during the second quarter, five of which were transferred to a dealer operation for fuel--making a total of 38 store closures in fiscal year 2012, 27 of which were sold to dealers.

"This resulted in a 3.2 million of proceeds and we expect $900,000 improvements in EBITDA as a result," said vice president and corporate controller Berry Epley. "We hope to close on additional transactions in the third quarter and expect to generate proceeds in excess of $2 million based on locations we currently have firm interests in."

It's a strategy the company plans to stick with for the remainder of the year, perhaps with even more of an emphasis on moving negative EBITDA locations.

"The reality is we just need to continue to look for interested parties to move those stores to a dealer operation," Bierley said. "We've made progress, but there's more work we need to do in order to accelerate that."

Overall, the current CFO was happy with the second-quarter earnings, despite the challenges presented by rising wholesale fuel costs.

"We were real pleased with the fact that we ran a plus 4.8% and ran positive gallon traffic for the first time in many quarters," Bierley said. "We feel that if we get our stores straight and execute the work that Dennis is doing with the rest of the team, this really puts us in a position to continue to drive our performance."

The Pantry, based in Cary, N.C., is the leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of Feb. 3, 2012, the company operated 1,618 stores in 13 states under select banners, including Kangaroo Express, its primary operating banner.

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