The Pantry's Fresh Initiative Gets Second Look

CARY, N.C. -- Two years after rollout, The Pantry Inc.'s Fresh Initiative is getting a closer look. CEO Dennis Hatchell is leaning toward taking a more holistic approach to the company's Kangaroo Express stores.

In the two months since joining The Pantry as its new CEO, Hatchell has thrown himself into learning everything about the convenience industry overall and the operator of Kangaroo Express specifically. His transition from the grocery channel comes as the company reports a net loss of $9.7 million for the second quarter of fiscal year 2012.

"I joined the company in early March and since then I have been fully engaged in getting acquainted with the company, especially our stores and our employees," he said during a company conference call this morning. "With the help of the employees I have been able to gather insights into the business while learning people's views on how we can continue to make this a better company for all our stakeholders."

To that end he has scheduled time each week to visit different markets to meet the employees. He has been joined by members of operations and various support functions, as well as field personnel. They have also taken the opportunity to visit the chain's competition in the various markets to get a better grasp on its Kangaroo Express' current relative position, he explained.

Additionally, part of his immersion into The Pantry has included gaining a better understanding of the company's strategic five-year plan, and working with the board of directors and management to establish short-term goals to achieve the longer outlook, Hatchell said.

As part of that, he said, the company is developing a strategic agenda. The agenda includes creating an enjoyable workplace while developing the best people; delivering store standards that consistently present products that are pleasing to the customers; becoming an organization that is focused on selling; improving the product offering as well as the company focus on the customer; fine tuning marketing skills around the Kangaroo Express brand; and using information technology to improve productivity, profitability and top line growth, he noted.

Hatchell pointed to the company's Fresh Initiative as an example of the new approach.

"Our company has been focused a great deal on its foodservice offering the last two years and has talked a lot about its Fresh Initiative under which approximately 340 stores were remodeled. This initiative is one I am still reviewing; however, it appears the effectiveness of Fresh could be improved if it is more store focused rather than market driven, which is how we will approach our store reinvestment plan going forward," Hatchell explained.

CFO Mark Bierley, who is resigning from the company effective May 25, added that the Fresh Initiative is performing well in the Raleigh market.

"The reality is we did not open any new Fresh Initiative locations within the quarter. We want to dig in a little bit in terms of results," he said. "The Raleigh market continues to well out perform the rest of the chain but what I can tell you Dennis' perspective here is taking a more holistic view of the components of Fresh and how do we drive overall store improvement. I think you will hear us incorporate proprietary foodservice into a broader remodel strategy. "

Excluding the Fresh Initiative locations, Bierley said, proprietary foodservice in all the other stores within the chain was up 26.6 percent in the quarter -- an increase driven primarily by promotional categories like $1.50 for a hot dog and 20-ounce drink and the $1.59 refillable coffee mug.

"The key is we didn't do a lot of displacement of other categories within the store. We focused on driving existing investments and saw a very nice return on our margins," he noted.

As for store remodels, Hatchell explained that instead of launching a remodel program by market, The Pantry has laid out a plan that looks at about 10 percent of the stores each year. Those stores will be based on both profitability and competitive impact. They will then be studied for both the demographics around them as well as what has to happen within that store to drive it, he added.

"One of the reasons we talked about not talking about Fresh so much going forward is that obviously foodservice is an important part of our store but so are all the other categories within the store and we need a total store lift," he said. "Fresh seems to be confused between both product as well as store operations and the actual remodel of the store, and we need to focus those stores on what exactly is needed at specific locations."

Quick-service restaurants (QSRs) also play an important role in the company's foodservice offerings. The Pantry ended its fiscal second quarter with 230 QSR locations. Notably, it increased its Subway franchise count and dropped a few other QSR offerings, Bierley added.

"Our Subway brand continues to grow and I think, in the near term, we will continue to push on the Subway development. We view QSRs as a great foundation to build a good foodservice program and the good news is we operate a very well respected Subway franchise in our stores," he said.

Hatchell did stress that The Pantry is not going to develop its own brand of restaurant offerings.

Speaking to the company's second-quarter earnings, Berry L. Epley, vice president and corporate controller, explained the company suffered a net loss of $9.7 million, compared to a net loss of $300,000 last year. Excluding the impact of impairment charges and loss on extinguishment of debt, the net loss for the second quarter was $6.7 million.

Total revenues for the quarter were approximately $2.1 billion, which equals a 9-percent increase from last year's second quarter primarily due to the large year-over-year increase of retail fuel prices. Comparable store merchandise revenue increased 4.8 percent, up 7.9 percent when excluding cigarettes, he said. These comps were helped by the company's continued strong performance in foodservice and packaged beverages categories as well as favorable weather conditions throughout the quarter.

The Pantry's overall merchandise gross margin rate for the quarter was 33.4 percent, a 90-basis point decline from previous year which was primarily driven by cigarettes and higher shrink.

On the fuel side, the company reported retail gallons sold for the quarter increased by 1.1 percent in comparable stores. Total fuel revenues for the quarter increased 10.5 percent primarily due to the 10 percent increase in the average price per gallon, Epley said.

As for store count, The Pantry didn't open or acquired any new locations during the quarter. On the flip side, it did close 13 stores, of which five were transitioned to a dealer operation for fuel. The Pantry ended the quarter with 1,611 company-operated stores. The Pantry continued its divesture plan and, all told for the 2012 fiscal year, the company closed on 38 locations. It sold operations at 27 stores to new dealer customers, he explained.

"We are wrapping up our current marketing effort and hope to close on additional transactions in third quarter. We hope to generate proceeds in excess of $2 million based on locations were currently have firm interest in," Epley said.

The Pantry is currently marketing approximately 85 surplus property sites with an estimated fair value of greater than $25 million. It has firm interest in 11 sites worth approximately $4.5 million, he added.