The Pantry Plans Balanced Approach for Capital

Wells Fargo Retailer 'Fireside Chats,' Part 3: The Pantry

The Pantry CEO Dennis Hatchell

ATLANTA -- In the final report from Bonnie Herzog’s “fireside chats,” the Wells Fargo analyst rates The Pantry as "outperform." The Cary, N.C.-based convenience store chain (dba Kangaroo Express) continues to work on strengthening its fundamentals while also keeping an eye on opportunities for growth, its CEO Dennis Hatchell shared with Herzog.

The Pantry "seems persistent on pursuing acquisitions," Herzog said, "although it claims it will be disciplined as it looks for deals that would enhance its profit and cash flow right away and believes it can acquire and de-lever at the same time. While we think small, prudent acquisitions could add value, we hope [The Pantry] isn't too aggressive, especially given its history and its high leverage."

With this in mind, an acquisition or two may be "imminent," Herzog said, with the chain reviewing its core markets and competition.

"While its first focus is optimizing the stores in its existing markets, [The Pantry] is looking at the competition and analyzing if they happen to fit into what [The Pantry] wants to accomplish in a given market," said Herzog. "If [The Pantry] finds stores that would be a good strategic fit, it then analyzes if the stores would be a good financial fit--namely, if they would enhance profit and cash flow right away." Those that would not be a good fit are cut from further consideration.

The Pantry plans to shrink its net debt-to-EBITDA ratio to just over 4x in 2014, and according to Hatchell can de-lever and acquire at the same time.

On the remodeling front, The Pantry plans to remodel about 10% of its store base annually and customize product selection by store. All stores remodeled thus far have at least exceeded their cost of capital, Herzog noted.

For its Lifestyles Initiative, which tailors merchandise offers by store location and demographics (e.g., Hispanic and beach locations), The Pantry has invested in software that helps cluster stores to provide the optimal offering and "flex" it where needed, although it remains a work in progress.

The company's RooCup program--where customers can purchase a 20-ounce insulated cup for $6.99 and refills for 25 cents--is a de facto loyalty program for The Pantry. "The attach rate of other merchandise to refill purchase is close to 30% from the low 20% range, and [The Pantry] expects this to continue to build," said Herzog.

The chain plans to introduce the "Roo-Mug" for hot beverages, offering refills at 50 cents throughout the winter. In the rest of the foodservice category, The Pantry has around 500 sites with a "pretty decent" proprietary offer, said Hatchell. The chain believes it will take a couple more years before it can roll it out to its entire store base.

The Affordable Care Act, meanwhile, could cost The Pantry an additional $6 million to $8 million in healthcare costs in 2014, according to Hatchell. This greatly depends on whether employees will participate in The Pantry's healthcare plan, opt for the insurance exchanges or pay the penalty.

As of Aug. 6, 2013, The Pantry Inc., Cary, N.C., operated 1,559 convenience stores in 13 states under select banners, including Kangaroo Express, its primary operating banner.

See “Related Content” above to read Part 1/Susser Holdings Corp. and Part 2/Casey's General Stores Inc. of this series.