The Pantry Opens Up

Officials tout upbeat second quarter, discuss major-oil assets

Angel Abcede, Senior Editor/Tobacco, CSP

SANFORD, N.C. -- Stable gasoline prices, product resets and cost-cutting measures ultimately led to second-quarter gains for one of the country's largest convenience-retail chains. In addition, officials for The Pantry ruminated on areas where major-oil divestments may have an impact on its operations, pinpointing assets in Tennessee and North Carolina.

Peter Sodini, chairman and CEO of the 1,600-store chain who last month formally announced his retirement upon completion of his contract this September, told listeners on the company's quarterly investor call that of the [image-nocss] major-oil assets due for divestiture, properties belonging to Houston-based ExxonMobil in the South will presumably fall in areas where The Pantry operates. Sodini said selloffs in Memphis and Nashville, Tenn., as well as Charlotte, N.C., are the ones they would watch.

With regards to acquisitions in general--and besides what Sodini described as an almost model purchase last month of the 40-store Herndon Oil, Mobile, Ala.--"as we sit here today, we don't see anything compelling in the market."

On the Herndon purchase, Sodini said many of those stores fell in line with The Pantry stores' average gasoline volumes, layout and size. He saw synergies in that Herndon Oil sites would benefit from, among other things, The Pantry's private-label program and improved foodservice offers. About $3 million is earmarked for store improvements tied to that acquisition. In addition, officials said the sites would be accretive in the first 12 months post take-over, with the deal expected to close in the second half of 2009.

This time last year, skyrocketing crude prices did a number on the chain's earnings, making this year's numbers a dynamic reversal of fortune. As of its second fiscal quarter ended March 26, 2009, the company reported net income for the quarter was $6.3 million, or 28 cents per share on a diluted basis, compared with a net loss of $5.1 million, or 23 cents per share, in last year's second quarter. EBITDA was $49.8 million, compared with $40.1 million a year ago. Net cash provided by operating activities was $18.0 million, compared with $4.9 million in last year's second quarter.

Improvements came from a number of angles, including stronger noncarbonated beverage sets, better labor scheduling and a focused effort at cost cutting, officials said.

The first-half picture showed even sunnier results. For the first six months of fiscal 2009, net income was $45.8 million, or $2.06 per share, compared with a net loss of $1.8 million, or 8 cents per share, in the corresponding period last year. Earnings before interest, tax, depreciation and amortization (EBITDA) for the first half of fiscal 2009 were $161.6 million, up 72.6% from $93.7 million in the first half of fiscal 2008. Net cash provided by operating activities was $106.9 million, compared with $31.2 million in the first half of fiscal 2008.

On the finance side from a quarterly perspective, results included 18 cents per share in gains on the company's pay down of debt, reflecting the repurchase of $26 million in principal amount of its outstanding bonds at a discount. In addition, results for last year's second quarter included 23 cents per share in losses on gasoline-hedging positions.

At the store level, inside revenue was up though margins were slightly down. Merchandise revenues for the second quarter rose 2.4% overall and 1.3% on a comparable store basis from last year's second quarter. The merchandise gross margin was 37.2%, down from 37.5% a year ago, but up significantly from 35.5% in the first quarter. Total merchandise gross profit for the quarter was $144.8 million, up 1.6% from the corresponding period a year ago.

Retail gasoline gallons sold in the quarter declined 4.9% overall and 6.4% on a comparable store basis. Excluding diesel gallons, comparable store gallons sold were down 4.4%. Total gasoline revenues fell 44.2%, primarily reflecting a 40.6% decline in the average retail price per gallon, to $1.84. The retail gross margin per gallon was 11.2 cents, compared with 9 cents a year ago. Total gasoline gross profit for the quarter was $55.4 million, up 18.1% from last year's second quarter.

"We are pleased to report solid second-quarter operating results in the face of a continued challenging retail environment," Sodini said in a statement. "In our merchandise business, comparable sales and gross margins both showed sequential improvement from the first quarter. While gasoline gallons remained soft, our gas margin was relatively strong for the second quarter--historically, the seasonal low point of our fiscal year. The results also benefited from our ongoing expense-reduction initiatives.bCrLf

As previously announced, during the second quarter, the company repurchased $26 million in principal amount of its outstanding debt for an aggregate purchase price of approximately $19 million, resulting in a pre-tax gain of $6.7 million for the quarter. Year-to-date, the chain has reduced its outstanding debt and lease finance obligations by $53.1 million, while also increasing its cash on hand by $26 million. At the end of the second quarter, the company had cash and cash equivalents of $242.8 million and an additional $145 million available under its revolving credit facility.

Sodini said, "We believe the repurchase of outstanding bonds at a discount and the pending acquisition both represent high-return investments on behalf of our shareholders and are key steps forward in executing our balanced strategy of reducing debt while growing the business."

Pantry officials also provided updated guidance ranges for its expected fiscal 2009 performance. The new ranges include the expected impact of the recently enacted federal-excise-tax increase on cigarettes to support the State Children's Health Insurance Program (SCHIP): Merchandise revenues: $1.62 billion to $1.66 billion. Retail gasoline sales: 2.02 billion to 2.05 billion gallons. Merchandise gross margin: 35.4% to 36.0%. Retail gasoline gross margin: 14 cents to 15.5 cents per gallon. Store operating and general and administrative expenses: $617 million to $623 million. Depreciation & amortization: $105 million to $107 million. Interest expense: $83 million to $85 million. Headquartered in Sanford, N.C., The Pantry is one of the largest independently operated c-store chains in the country. As of March 26, 2009, the company operated 1,647 stores in 11 states under select banners, including Kangaroo Express, its primary operating banner.

Angel Abcede, CSP/Winsight By Angel Abcede, Senior Editor/Tobacco, CSP
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