The Pantry's Earnings Tumble

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The Pantry's Earnings Tumble

SANFORD, N.C. -- The Pantry Inc., operator of 1,524 convenience stores in the Southeast, announced its first quarter of fiscal 2007 was seriously impacted by low gas margins, resulting in a net income dive from the $33 million recorded in the first quarter of fiscal 2006 to $125,000 for this fiscal year's first quarter, ended Dec. 28, 2006.

Although total fuel gallons sold increased 14 percent to 466 million gallons and gallons sold were up 2 percent on a comparable store basis, the 9.4 percent decline in average retail price per gallon caused The Pantry's gross margin per gallon to total 8.6 cents, compared to the 21.1 cents per gallon seen in the first quarter of 2006. The low margins were not offset by a 3.3 percent increase in gasoline revenues, which brought in 40.2 million in gasoline gross profit, still significantly lower than the $86.6 million recorded in the company's first quarter last year.

"As we expected, our first quarter results were significantly affected by unusually low gasoline margins relative to our historical seasonal trends, especially compared with very strong gas margins a year ago," chairman and CEO Peter J. Sodini said in a written statement.

Dan Kelly, CFO, explained to investors during a conference call yesterday that the dramatic difference in earnings was due to a post-Katrina environment in the first quarter of fiscal 2006, where margins and prices were higher. "Unusually high gas revenues in the year prior, and unusually low gas margins this year, made for a very difficult comparison."

Future quarters may be more in line with historical data, as margins begin to grow. "We are pleased to report that gasoline margins and comparable store revenue trends improved at the end of the first quarter, and the improvement has carried over so far in our second quarter," Sodini said.

Total revenues for the first quarter increased 5 percent to $1.38 billion. Merchandise revenues jumped 10.3 percent compared to the first quarter of 2006, to total $3.49 million, and were up 1.9 percent on a comparable store basis. Merchandise gross margins improved 10 basis points to 37.6 percent for the first quarter of fiscal 2007, while merchandise gross profits totaled $131.1 million, a 10.6 percent increase from the first quarter of last year. Sodini noted in the call to investors that lotto, car wash and phone card categories remained strong.

"More importantly," Sodini said, "the strategic highlight of the quarter was the exceptional results achieved in our acquisition program, as measured by both the number and the quality of transactions negotiated."

To date, the company has signed acquisition agreements for 133 locations, already exceeding the 113 stores acquired over the entire fiscal 2006. The first quarter of fiscal 2007 saw the addition of 67 locations through acquisition agreements, which included 24 Sun Stop stores in Florida, Georgia and Alabama and 16 Angler's Mini-Mart stores in the Charleston, S.C. market.

The company also firmed up agreements to acquire 66 Petro Express stores in the Charlotte, N.C. and South Carolina market, shortly after the end of the first quarter. Sodini described the Petro Express purchase as a "key part for our survival in the Charlotte area," noting that "the presence of Petro Express kept us from developing there."

Before changing the Petro Express format to include The Pantry's quick-serve restaurants and other additions, Sodini explained that the company "right now is trying to retain what we bought in terms of revenue and good will."

With the Petro Express acquisition, The Pantry acquired a wholesale petroleum distributing company. The company plans to retain the business and its employees. "We are retaining the people and we think, within our situation and market, we can expand that business in a very material way," Sodini told investors.

While other acquisitions remain unannounced, the company plans to purchase more locations when they become available. "The fact that there were so many [acquisitions] in the first quarter is not something to multiply out [into the remaining quarters]. It's when things come along," Sodini emphasized, calling the market "active."

The company also plans to building 20 new stores in fiscal 2007, "not a replacement for acquisitions, just a supplement to target certain markets to get dominance and presence," Sodini said, noting that these new stores tend to be "substantially more profitable than average."

The company also plans to add 25 quick-serve restaurants in its stores, 10 of which have already been completed in the first quarter. The increase in acquisitions and new store locations call for an increased investment in technology, which the company previously announced will total $4 million.

When asked about the ongoing FTC investigation into the company regarding a sale-leaseback transaction, Kelly stated that the company was notified and it is cooperating with the FTC, however, there was nothing else to report at the time.

Lower net income caused the company to lower its share guidance from the $2.80 to $3 range to $2.75 to $2.90.