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    More Struggles for The Pantry

    Fourth quarter and fiscal 2007 are marred by lower gasoline margins, while fiscal 2008 will see a lower number of acquisitions.

    SANFORD, N.C. -- "It's been an interesting quarter," Pete Sodini, chairman and CEO of The Pantry Inc., told investors during a conference call to discuss the company's quarterly and fiscal 2007 results yesterday. Noting the runup in crude prices, along with the weak dollar and geopolitical tensions, he said all "play into the commodity market and all these things impact us and got us off to a rather disappointing quarter," he said, adding later that fiscal 2007 was "clearly a difficult year in a very challenging gas environment."

    For the quarter ended Sept. 27, revenues rose nearly 20 percent to $2 billion, while net income fell to $5.6 million compared to the $26.7 million seen in the year-ago quarter. Sodini described it as "substantially below" the year prior and explained that it "reflects the unusual conditions in the oil and gasoline markets," Sodini said.

    Revenues for the 2007 fiscal year jumped 15.9 percent to approximately $6.9 billion, and net income tumbled to $26.7 million, compared to $89.2 million seen in fiscal 2006.

    In addition, merchandise revenues for the fourth quarter increased 16.3 percent total, and 2.8 percent on a comparable store basis, accounting for merchandise gross profits of $160.9 million for the quarter. For the fiscal year 2007, merchandise revenues rose 13.7 percent, and 2.3 percent for comparable stores, with gross profits increasing 13.1 percent.

    Gasoline gallons sold in the quarter climbed a total of 17.8 percent, or 0.3 percent on a comparable store basis. Retail gasoline revenues rose by the same total percentage in the fourth quarter compared to the fourth quarter of fiscal 2006. In addition, the full-year retail gasoline gallons sold increased 15.6 percent overall and 1 percent for comparable stores, according to the company. Retail gross margin per gallon for the year slid to 10.9 cents in fiscal 2007, compared with 15.9 cents in fiscal 2006.

    With lower gasoline margins during the quarter and the first quarter, "the full year results are disappointing," he said. "The market environment has continued to be challenging into the first quarter. We expect at this time of the year, we would normally begin to see gasoline margins normalize, but it’s unclear when that will occur."

    On the acquisition front, Sodini noted it is "easy to lose sight that fiscal 2007 was a very successful year for our acquisition program." The company acquired 152 stores during fiscal 2007, compared to the 113 stores seen in fiscal 2006. The Pantry also opened 16 new large format stores in fiscal 2007.

    "We continue to believe The Pantry's fundamental strength as a consolidator in the industry has not been materially diminished over the past year," he said.

    Going into the next fiscal year, The Pantry will "continue to remain selective as we review potential acquisition opportunities, given current market conditions," said Sodini. "We fully expect to complete some acquisitions within fiscal 2008, but the number is likely to be well below the fiscal 2007 total."

    He added: "We have looked at them, but obviously we haven't done anything appreciably thus far," said Sodini, noting that he is not trying to convey the image of being bullish on acquisitions. "We think an awful lot of people are selling […] there are an awful lot of things out there that we wouldn’t be interested in buying."

    Later, when asked if he has seen more retailers in the industry looking to sell, he exclaimed: "Oh God, yes." He noted that with the activities in the crude and gasoline markets, "You can appreciate why."

    The Pantry also plans to build 15 new large format stores in 2008, he said. In addition, $18 million is planned to be spent on store system upgrades in fiscal 2008, Frank Paci, CFO for The Pantry, said in the investor call.

    In fiscal 2008, the company restated its previous outlook for merchandise sales, and expects that retail gasoline margins will be between 11 and 13 cents per gallon, although margins so far are challenging, Paci said.

    If the runup in gas prices remains, comparable store gas gallons could be flat or decline in fiscal 2008, but may be offset by cost-cutting operations, he added.

    To deal with the gas margin situation, the company is not standing still, Sodini said. A new offering coming to The Pantry stores in fiscal 2008 will be ethanol-blended fuel. The 10-percent ethanol blend will roll out to its store base in the month ahead, and will be a high percentage of stores at the end of the 2008 fiscal year.

    "We are pursuing this as much for defensive purposes as for offensive," said Sodini. "Given the current price differentials between ethanol and gasoline in the marketplace, we expect competitors will be exploring ethanol blending as well, and we don't want to be at a competitive disadvantage."

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