The Pantry Puts Remodels on Hold for Peak Season

CARY, N.C. -- With seven store remodels under its belt for the second quarter of fiscal 2014, The Pantry Inc. is putting the initiative on hold as the convenience store retailer enters the peak consumer traffic seasons. However, the operator of Kangaroo Express will pick up where it left off after the summer.

Hitting the pause button will allow the company to refine its remodel plans and apply learnings from completed projects moving forward, President and CEO Dennis Hatchell said during the company's earnings call this morning.

All told, the Cary-based retailer is anticipating approximately 40 store remodels for its 2014 fiscal year.

In addition to the remodeling initiative, The Pantry is accelerating its quick-service restaurant (QSR) initiative. During the second quarter, it open three Little Caesars and is on track to add 20 QSRs this fiscal year, Hatchell said.

The company previously identified 700 locations that have the potential for a QSR. Of those locations, 224 have now been built out. The Pantry could add a QSR to another "couple of hundred" without any need for expansion, the chief executive explained.

Subway, Little Caesars and Dairy Queen could fit inside these locations, but concepts like Hardees and Church's Chicken would require a bigger footprint, Hatchell added.

The Pantry closed four c-stores in the second quarter and is targeting between 25 and 30 closings for the year. Going forward, it is looking to close approximately 40 stores a year over the next two to three years. These stores will be ones that are not responding to The Pantry's programs, or underperforming stores with leases coming to an end.

On the flip side, Hatchell reported that the four new stores the company opened in calendar year 2013 are performing well. The Pantry is focusing investment in high-potential markets and developing a pipeline of high-quality sites to support accelerated store growth, the CEO said.

Acquisitions are still a part of The Pantry's game plan, but "not acquisitions like you have been reading about lately,' Hatchell said, perhaps alluding to the $1.8-billion merger agreement between Energy Transfer Partners and Susser Holdings Corp. announced earlier this week.

Instead, The Pantry is taking a market-by-market approach to acquisitions. For example, it will explore opportunities should there be a small group of stores or even one store in a market where the retailer would like to be or would like to expand, he explained.

FINANCIAL RESULTS

Looking at its second-quarter financials, The Pantry continued to make progress growing inside sales, with comparable store merchandise up 2.3 percent for the quarter despite challenging weather that affected customer traffic, Hatchell said.

In addition, merchandise gross margin improved to 34 percent, up from 33.7 percent in the prior-year quarter, as packaged beverages and foodservice increased as a percent of merchandise sales.

Fuel gross profit, however, decreased to $42.6 million from $48.4 million a year ago. Wholesale fuel cost increases during much of the quarter put pressure on margins. Comparable store fuel gallons were down 3.2 percent, primarily driven down by the weather conditions, the retailer reported.

As of May 1, The Pantry operates 1,534 stores in 13 states under select banners, including Kangaroo Express, its primary operating banner.