Moody's Marginalizes The Pantry

Lowers retailer's credit rating over gas margins as Deutsche Bank all but cashes out

Published in CSP Daily News

SANFORD, N.C. -- Moody's Investors Service, which provides independent credit ratings, research and financial information to the capital markets, has downgraded The Pantry Inc.'s credit rating, saying the convenience store and fuel retailer could falter given the economic downturn and volatility in gasoline profits. The corporate credit rating for The Pantry is now B2, which is five levels below investment-grade debt.

In a statement cited by The Triangle Business Journal, New York City-based Moody's said the downgrade reflects the fact that it will be tough for The Pantry to lower its [image-nocss] high levels of debt—$748 million of long-term debt at the end of fiscal 2007 compared to earnings before interest, taxes, depreciation, amortization (EBITDA) and lease payments of $178 million.

Moody's said the economic downturn could cut into retail sales. And The Pantry has been struggling with gasoline margins, as it has not been able to pass on all of the cost of rising gasoline to its customers.

There is also a negative outlook on the company's debt rating, Moody's added, because the covenants on the company's bank agreement are likely to tighten in the next 12 months.

As reported in late June, because The Pantry has been hurt by volatile fuel markets, an unsuccessful fuel hedging strategy and rising credit card fees, executives decided to issue a statement saying that the company's finances are stable. The company said that "it remains comfortable with its most recent financial performance guidance ranges for fiscal 2008."

It added, "The company continues to expect merchandise and retail gasoline sales for fiscal 2008 to be within the ranges of $1.6 to $1.7 billion and 2.1 to 2.2 billion gallons, respectively. The merchandise gross profit margin is expected to be approximately 37%, with a retail gasoline margin between 10 and 12 cents per gallon. The company also continues to expect that fiscal 2008 store operating and general and administrative expenses will be at the low end of the previously announced range of $615 to $630 million. In addition, while earnings per share for the fiscal third quarter ending June 26, 2008, are expected to be below the corresponding period a year ago, the company expects third quarter earnings per share to exceed the current First Call consensus estimate of [23 cents]. The company is currently, and expects to remain, in compliance with all of its applicable debt covenants." ( Click here to read full CSP Daily News coverage.)

Meanwhile, Deutsche Bank has cashed out of almost all of its shares in The Pantry, the Business Journal reported. The bank said in a filing with the Securities & Exchange Commission (SEC) that it now owns just 0.03% of The Pantry. Deutsche Bank owned about 5% of outstanding shares as of March 31, when shares of The Pantry closed at $21.08. Since then, shares have been cut in more than half, closing July 9 at $9.87. The Pantry is well off its 52-week high of more than $40. The company has been hurt by a slowing economy and an inability to pass along rising oil prices to its customers, said the report.

In April, Hayground Cove Associates LLC, an investor that had owned 7.5% of The Pantry, cashed out its stake in the company. As of May 2007, Hayground Cove Associates owned 722,935 shares of The Pantry, valued at about $32 million, according to the SEC. The move came days after The Pantry said it would post a loss for the quarter ended March 27. ( Click here for full coverage.)

Headquartered in Sanford, N.C., The Pantry had revenues for fiscal 2007 of approximately $6.9 billion. As of June 16, 2008, it operated 1,660 stores in 11 states under select flags, including Kangaroo Express, its primary operating banner.