Fourth Quarter 'Disappointing'

The Pantry continues to struggle with gasoline margins, plans to add ethanol

Published in CSP Daily News

By
Steve Holtz, Online News Director & Beverage Editor

SANFORD, N.C. -- Terms such as "difficult," "disappointing" and "challenging" peppered The Pantry's fourth-quarter-earnings conference call yesterday, as the company presented yet another drop in net income to $5.6 million from than four times that at $26.7 million for the same period a year ago.

"Fiscal 2007 was a difficult year for us and a very challenging gas environment," said CEO Peter Sodini. And while optimistic about fiscal 2008, Sodini admitted the year is off to a slow start. "Those conditions have continued so far into 2008."

He added that in the face of these conditions, The Pantry is "testing ethanol blends in several locations, and [we] expect to begin rolling [them] out across the store base in the months ahead. However, we would caution everyone that we are pursuing this as much for defensive purposes as for offensive. Given the current price differential between ethanol and gasoline in the marketplace, we expect competitors will be exploring ethanol blending as well, and we don't want to be at a competitive disadvantage."

Total revenues for the fourth quarter were approximately $2 billion, a 19.9% increase from last year's fourth quarter. Net income was $5.6 million, or 25 cents per share on a diluted basis, compared with $26.7 million, or $1.17 per share, a year ago. Results for the fourth quarter of fiscal 2007 included a one-time after-tax charge of $1.8 million related to the company's organizational restructuring.

For the full fiscal year, total revenues were approximately $6.9 billion, a 15.9% increase from fiscal 2006. Net income for the year was $26.7 million, or $1.17 per share, compared with $89.2 million, or $3.88 per share, in fiscal 2006. EBITDA for the year was $214 million, compared with $278.9 million in fiscal 2006.

"Our strong revenue growth for both the quarter and the year primarily reflects the continued successful execution of our regional acquisition strategy," Sodini said in a statement. "While we again delivered solid gains in our merchandise operations, net income declined significantly, primarily due to difficult year-over-year comparisons with unusually high gasoline margins in the fiscal 2006 periods."

Merchandise revenues for the fourth quarter were up 16.3% overall and 2.8% on a comparable store basis. The merchandise gross margin was 37.0%, unchanged from the corresponding period last year. Total merchandise gross profits for the quarter were $160.9 million, a 16.1% increase from a year ago.

For the full year, merchandise revenues rose 13.7% overall and 2.3% in comparable stores. Merchandise gross profits for the year were up 13.1%.

Retail gasoline gallons sold in the fourth quarter increased 17.8% overall and 0.3% on a comparable store basis. Retail gasoline revenues for the fourth quarter rose 17.8% compared to the fourth quarter of fiscal 2006. The average retail price per gallon was $2.76 for the fourth quarter, unchanged from a year ago. The retail gross margin per gallon was 10.5 cents, compared with 17.4 cents a year ago. Gasoline gross profits for the quarter totaled $58.9 million, compared with $82.5 million in last year's fourth quarter.

For the full year, retail gasoline gallons sold rose 15.6% overall and 1.0% in comparable stores. The retail gross margin per gallon for the year was 10.9 cents, compared with 15.9 cents in fiscal 2006.

Despite the similarly slow start to fiscal 2008, the company remains cautiously optimistic about gasoline margins for the year.

"We continue to expect the retail gasoline margins for [fiscal 2008] to be between 11 and 13 cents per gallon, even though margins for the first quarter to date continue to be challenging," corporate controller Berry Epley. "The rapid increase in gasoline prices has softened demand. We believe if prices remain high, comparable-store gas gallons for the year could be flat to down slightly, with total retail volume of about 2.2 billion gallons. However, through additional targeted expense reductions, we think we'll be able to offset most of this shortfall in gas gallons."

During fiscal 2007, The Pantry acquired 152 convenience stores, an increase from the 113 stores acquired in fiscal 2006. The company also opened 16 new large-format stores in fiscal 2007 and expects to open approximately 15 additional new large-format stores in fiscal 2008.

Despite poor financial results throughout 2007, Sodini said, "We continue to believe The Pantry's fundamental strength as a consolidator in the industry has not been materially diminished over the past year. As the leading independent convenience-store chain in the Southeast, we remained well-positioned for future growth both organically and through acquisitions as we have the financial strength and flexibility to execute that strategy."

For fiscal 2008, the company remains comfortable with its previous outlook for merchandise sales, which have been relatively strong so far in the first fiscal quarter.

Sodini concluded, "With our expanded store base, the benefits of our year-end restructuring, and the continued successful implementation of our merchandising initiatives, we believe the company is well-positioned to deliver stronger results when conditions improve in the gasoline market."

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 Nov. 8, 2007, the company operated 1,644 stores in 11 states.

By Steve Holtz, Online News Director & Beverage Editor
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