The Pantry's Q3 Merchandise Sales, Gross Margin Grow

CARY, N.C. -- Seeing much better merchandise sales and gross margin results, The Pantry Inc. beat analysts' expectations with earnings of $0.94 per diluted share, 26 cents above the consensus estimate.

The convenience store retailer made year-over-year improvements as net income for the quarter hit $18 million, compared to a net loss of $749,000 in last year's third quarter. The results for this quarter of fiscal 2010 included non-cash charges of $2.7 million after-tax and a $481,000 after-tax net loss on the extinguishment of debt. When adjusted for these charges, net income for the third quarter of fiscal 2010 was $21.2 million.

Net cash provided by operating activities was $83.5 million, compared with $41 million in the third quarter of fiscal 2009.

"We are pleased with our results for the third quarter," said President and CEO Terrance M. Marks. "As expected, we saw broad-based improvement in our merchandise business with robust comparable sales growth and continued improvement in gross margin. On the fuel side, we continued to experience soft demand in line with our expectations and benefited from an above-average fuel margin.

"Importantly, our core strategic initiatives are on track. In June, we began to implement our Fresh Initiative in Raleigh, N.C. stores and are encouraged by the customer response."

Merchandise revenues for the third quarter increased 8.8 percent overall and 7.7 percent on a comparable-store basis from the same period a year ago. Total merchandise gross profit for the quarter was $160.5 million, an increase of 6.2 percent from the third quarter a year ago. Merchandise gross margin increased 40 basis points sequentially, with all major categories showing improved margins. Total fuel gross profit for the quarter was $80.5 million compared to $50 million for the comparable quarter last year. Retail fuel gallons sold in the third quarter decreased 3.7 percent overall and 5.6 percent on a comparable store basis. Retail fuel margin per gallon was 15.6 cents in the quarter compared to 9.3 cents in the comparable period last year. For the nine months ended June 24, 2010, retail fuel margin per gallon was 13.5 cents compared to 15.3 cents in the same period a year ago. During the third fiscal quarter, the company did not experience an adverse impact on fuel gross profit from its BP-branded facilities, it said in a statement.

Total store operating and general and administrative expenses for the quarter were $156.9 million, up $4.4 million vs. a year ago. The increase was primarily driven by expenditures to improve store conditions and higher insurance costs.

Depreciation and amortization expense was $29.9 million, an increase of $3.4 million from the prior year. This increase includes $2.4 million in accelerated depreciation on the assets related to the Chevron withdrawal from some of the company's marketing territories and the replacement of certain assets to meet credit card compliance requirements.

In the third quarter of fiscal 2010, the retailer recorded an impairment charge of $1.7 million after-tax, to increase the goodwill impairment charge that was recorded in the second quarter of fiscal 2010.

During the quarter, The Pantry repurchased $16.1 million in principal amount of its convertible notes for $14.9 million, which resulted in a loss of $786,000, including the write-off of the unamortized debt discount and deferred loan costs of $2.0 million.

As of Aug. 2, 2010, the retailer operated 1,641 stores in 11 states under select banners, including Kangaroo Express, its primary operating banner. The Pantry's stores offer a broad selection of merchandise, as well as fuel and other ancillary services designed to appeal to the convenience needs of its customers.

Meanwhile, Marathon Oil Corp. saw earnings and revenue rise significantly during its second quarter. The largest refiner in the U.S. Midwest reported second quarter profit from the refining segment rose to $421 million, from $165 million a year earlier.

Net income climbed 72 percent to $709 million from $413 million. Revenue rose 39 percent to $18.6 billion. "The rare combination of favorable crude oil prices combined with very positive refining margins made for a very good second quarter," Gianna Bern, president of Brookshire Advisory & Research Inc., told Bloomberg News.

Marathon will spend $675 million over a four-year period that started in 2008 related to its refinery system's compliance with toxic-air regulations. That's down from an earlier estimate of $1 billion over six years, the company said.