The Pantry Expects to Beat Analysts' Earnings Projections

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The Pantry Expects to Beat Analysts' Earnings Projections

By Tammy Mastroberte

NEW YORK – The Pantry Inc. expects its fiscal 2008 earnings to be higher than the $1.04 a share forecasted by analysts, even though CEO Peter J. Sodini, speaking to a group of investors here yesterday morning, described the current financial period as "one of the more difficult years we’ve had."

Sodini and CFO Frank G. Paci were featured presenters at the 2008 Wachovia Consumer Growth Conference held in New York.

The company had reported earnings of $1.17 a share in the year-ago period. For 2008, analysts expect earnings of $1.04 a share, before special items, according to Reuters.

"When we say difficult, we look at a straight commodity market on crude," said Sodini. "A year ago this time, it was trading at $79 a barrel, and went to a high of $147. I know the economic forecasts for 2009 are dire and gloomy … from our perspective we can’t imagine a worse energy component than we had to deal with last year, so we are happy where we are for ’08."

Once known for its rapid expansion, The Pantry slowed it acquisition rate. Sodini admitted to being "out of the acquisition business since last spring," but plans to start again in the future.

"We thought [stopping] was the prudent thing to do given the way we read the economy and some of the other statistics," he noted. "We stayed out of it through December as planned, but we plan to get back into it. It doesn’t mean we have 150 planned in the winter, but it does mean we will continue with opportunities, particularly in our market as they evolve."

The Sanford, North Carolina-based c-store retailer said it will sell about 2.1 billion gallons of gasoline this year, up from its previous expectations of 1.65 billion gallons, and retail gasoline margin is expected to be at the top end of its previous forecast of 10 cents to 12 cents a gallon.

"2008 was a bad year from the standpoint of volatility," Sodini said at the conference. "There was active trading in the commodity market, and we think clearly that did not work to our benefit. Since the market has had some scrutiny over the last few months, it’s amazing how the activity has cleared up, and we have come to experience a more normal market."

"The 'comfortable range' for gas margins is 10 to 13 cents, and a penny to us is about 21 million dollars," Sodini explained.

The company’s CFO, Paci, spoke immediately following Sodini, and said the numbers had been impacted by weak gas margins in 2007, but favorable gas margins in the fourth quarter will show an improvement.

Additionally, merchandise sales are expected to rise to $1.64 billion, while profit margin is expected to be below the forecast range of 36.8 percent to 37 percent.
However, the company’s merchandise margins are consistently above industry average, according to Paci. "Our scale allows us to acquire better margins, and we have a very active private label program, which allows us to have an offering for the value customer at a lower price point, but a very attractive penny profit and gross margin for us within the business," he noted.

The company’s private label products include its Celeste line, which offers energy drinks, water and high velocity items like carbonated packaged beverages, "enabling us to get a decent velocity on products with good margins, so these price points will be significantly below the national brands," he said.

The company also has a proprietary coffee program called Bean Street Coffee, which falls within the c-store breakfast daypart—"a very active daypart that helps to drive traffic," Paci said, also mentioning the Candy Lane in the stores offers a variety of candy, which is always kept fresh and new.

On the foodservice side, the company just announced that Brandon Frampton was named vice president of foodservice. In his new role, he will oversee the company’s QSR operation, which consists of 239 company-operated restaurants that include 105 Subway locations.

Additional responsibilities include overseeing the expansion of the company’s convenience store foodservice offerings, including include new product and menu development for the grill program and other in-store food service initiatives.

The grill program is called Grilling Depot, which offers items like the company’s proprietary fried chicken called Aunt M’s. It is a company focus right now to increase its focus on base store foodservice in addition to what it offers through QSR’s, Paci said, although he does think The Pantry has an opportunity to double the number of stores with branded foodservice as well.

"We think there is an opportunity to grow our foodservice in our base stores, and we just hired a vice president of foodservice to help increase that part of our merchandise sales because it is a great margin area," Paci said.

He also spoke about company initiatives this past year that addressed the changing consumer environment, as well as cost-cutting measures. These included increasing vendor supported promotions, multi-pack promotions on cigarettes, and deals on carbonated beverages.

"We look at high velocity, high return areas so we have been doing 99-cent fountain beverages, which is a very good margin area for us, and it doesn’t take much for us to drive some additional traffic in order to pay that off," Paci explained.

In terms of operating costs, the company looked at reducing the store level and corporate level overhead. "We feel we have done a good job in terms of managing expenses, and from a financial flexibility standpoint we bolstered our liquidity by accessing a delayed draw feature that we had when we renegotiated our debt in May 2007," Paci said.

The company also reduced bad checks expenses by isolating stores having issues with bad checks. It stopped accepting checks at these locations, and also lowered expenses by going to prepay for gasoline chain wide, he noted.

"We ended the third quarter with 162 million in cash on hand, and we have a $225 million revolver, which was undrawn at the time and has a $142 million in letters of credit," Paci said. "We are replacing a relatively low fourth quarter last year with a much better quarter this year."