High Expectations for The Pantry, Food Retailing

CARY, N.C. -- Expectations remain high for The Pantry, dba Kangaroo Express, as the now-relatively-quiet company gets its feet under itself almost a year after grocery industry veteran Dennis Hatchell was named president and chief executive officer of the Southeast convenience store retailer.

"We ... expect the company to generate approximately $50 million of free cash flow on an annual basis," wrote Wells Fargo Securities analyst Bryan C. Hunt. In the New York company's 2013 Integrated Research & Economics Outlook, Hunt made The Pantry his "top recommendation" in the food retailing sector. "In our opinion, the company has a large, unappreciated real-estate portfolio."

Hatchell joined The Pantry in March 2012. Since then, the company has turned over many of its top executives while retrenching an ambitious foodservice program started by previous CEO Terry Marks.

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. The company operates 1,550 stores in 13 states under select banners, including Kangaroo Express, its primary operating banner.

Meanwhile, Hunt is also bullish about food retailing as a whole.

"We are maintaining our market-weight recommendation on the food retailing sector," he wrote, predicting continued challenges for the grocery sector that could benefit convenience stores.

"Traditional grocers face secular headwinds due to changes in consumption patterns, as alternative channels compete more effectively and consumers migrate toward smaller meals and increased snacking," he wrote. "Many traditional food retailers are unionized and therefore have significant (unfunded) pension and health-care obligations. Without a meaningful improvement in the overall economy, frugal purchasing patterns could become more entrenched, and traditional grocers could continue to lose share."

He noted that some supermarket chains have adopted creative promotions, such as fuel rewards programs, to remain competitive, lending further strength to the c-store market.

"The convenience store channel should [also] benefit from America's snacking trend, but we see continued pressure on same-store gallons sold (more fuel-efficient vehicles) and cigarette sales," he concluded.