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The Pantry Sees 'Gradual' Turnaround


CARY, N.C. — The Pantry Inc. continues to make progress on its turnaround strategy as it eyes more store remodels and new builds in the next year.

"I think we've made terrific progress getting ourselves organized. I think we've made excellent progress in developing plans that we need over the next three to five years to be a successful chain," Dennis Hatchell, president and CEO, said during the company's fourth-quarter earnings call Tuesday morning. "I think our team has done an absolutely terrific job working against those plans and paying attention to the customer."

However, he acknowledged that the retailer is only "about 25 percent of the way there. We have a long way to go."

According to Hatchell, the turnaround "will be gradual, but we will continue to improve as a company."

The parent of Kangaroo Express convenience stores has seen positive inside-store comps for 11 out of 12 quarters. In addition, foodservice stood out as a bright spot for the retailer in its latest quarter, with foodservice comps up 6.7 percent over the fourth quarter of 2013. This growth was driven by its quick-service restaurant (QSR), grill, bakery and fresh case offerings, the CEO explained.

To that end, The Pantry's recent merchandise initiatives have included enhancing inventory assortment — notably, expanding its cold and frozen dispensed beverage offering into additional stores, and placing a greater emphasis on premium and healthy snack items. The company also introduced new bakery SKUs.

"Overall, foodservice growth remains a bright spot for us and was a key driver of fiscal year 2014 improved comparable store volume," Hatchell said. "Building our proprietary foodservice offering and increasing the overall mix of foodservice as a percent of sales is a major focus for us."

During the fourth quarter of fiscal 2014, The Pantry opened nine Little Caesars QSRs, meeting its goal of opening 20 new restaurants for the year. Looking to fiscal 2015, the retailer has brand approvals to open approximately 30 new QSRs, which will be a mix of Little Caesars, Subway and Dairy Queen.

The fourth quarter additionally saw The Pantry resume its store remodel program, with the first completions expected late in the first quarter of 2015. The company anticipates starting 45 to 50 remodels in fiscal 2015. According to Hatchell, the 2015 remodels "will generally be more significant than those completed in 2014 as we continue to strengthen our store base."

The Pantry will be installing new equipment in stores to build up its proprietary food offerings as well.

As for store count, the retailer opened one new store and closed nine in the fourth quarter, for a total of 31 closed stores in fiscal 2014. The Pantry is eyeing eight to 10 new stores in fiscal 2015.

"We made real progress developing a pipeline of quality sites supporting the growth of new stores into the future," Hatchell said.

Financially speaking, The Pantry reported net income of $14.7 million for the fourth quarter. This compares to net income of $1 million in last year's fourth quarter. Adjusted EBITDA was $71.1 million, up from $49 million in the prior-year quarter.

Comparable store merchandise revenue increased 2.5 percent, and merchandise gross margin increased to 35.2 percent from 34.3 percent.

On the forecourt, fuel gross profit increased to $57.7 million from $47.8 million a year ago as retail fuel margin per gallon increased to 13.3 cents from 10.7 cents in the prior-year quarter. Comparable store fuel gallons sold declined 2.5 percent.

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