The Pantry Continues CEO Search as Q4 Net Income Falls

CARY, N.C. -- The Pantry Inc., operator of the Kangaroo Express convenience store chain, continues to search for a new leader after the October resignation of its former president and CEO Terry Marks. Six-year board member and 40-year retail veteran Edwin Holman is currently serving as interim CEO.

"The search is progressing in an organized manner. When [Marks] submitted his resignation, the board immediately appointed a search committee. I am not on the search committee. I am spending my time managing the team and the business," Holman explained in an earnings conference call this morning, noting there is no definite timeline to hire a new CEO.

"While the board has a sense of urgency to identify and employ a permanent CEO, the ultimate goal of the board is to conduct a thorough search to employ a seasoned C-suite executive with extensive experience and proven results in the retail industry," he added.

Until then, Holman is spending the majority of his time assessing the current trends of The Pantry's business and working with the executive team to find opportunities to improve short-term and long-term performance.

"We have taken a much more strategic approach to evaluating our total store network and our opportunities to increase market share by market and in total," Holman explained.

The evaluation process includes identifying core and non-core stores. "Currently, we are continuing an in-depth review of each store and each market's financial contribution and strategic importance to the total company," he said. "As you would expect, we will concentrate our investments in our core stores and markets."

Holman also said The Pantry's store portfolio will shrink over time "in respect to those stores with little or no profit before overhead."

As for short-term goals, Holman said he has been focused on gaining a better understanding of The Pantry's declining comparable store sales performance -- especially as it relates to fuel.

"Our strategy for most of 2010 and 2011 was to optimize our growth margins in fuel. As a result, we were not competitive in select markets and stores, and it had a negative effect on top-line sales," he explained.

Looking at the fourth quarter of 2011, he said the company was able to increase fuel margins by better margin management. Specifically, fuel gross profits before credit card fees increased by $6.3 million. Credit card fees were up $3.8 million resulting in a year-over-year increase on fuel gross profits of $2.5 million, or 4 percent, Holman said. Moving forward, The Pantry is building internal capabilities to more effectively balance gallons sold and margin contributions.

Company execs are also taking a closer look at the mix inside the stores to make strides in all categories, in addition to its Fresh Initiative launched in select Kangaroo Express stores at the end of 2010.

"We have achieved, on average, a 4-percent comp store improvement in our mature Fresh markets in Birmingham (Ala.), Charlotte (N.C.) and Raleigh (N.C.) vs. our remaining store base; however, gross margins remain an area for opportunity," Holman said.

By the end of the first quarter of 2012, 338 Kangaroo Express locations will offer the Fresh Initiative, which will bring an end to the first phase of the program, he reported. "We are taking this time to ensure that we have fine-tuned every component of the Fresh strategy before we move forward with additional stores and markets," Holman explained.

"Fresh is a differentiator, but it is still a relatively small percent of inside sales," he said, adding that the company will also be focused on other categories to better differentiate the company's brand, and increase sales and gross margin contributions.

One problem area inside Kangaroo Express stores is the cigarette category, Holman said, mainly due to the testing of different pricing strategies to protect the company's margins.

Overall, in terms of dollars and cents, The Pantry reported net income of $3.3 million for the fourth quarter of 2011 compared to net income of $8.5 million in the last year's fourth quarter. Excluding the impact of impairment charges, net income for the final quarter of fiscal 2011 was $8.4 million. Additionally, adjusted EBITDA was $64.4 million compared to $66.8 million a year ago.

Drilling down, comparable store merchandise sales decreased 0.8 percent and merchandise gross margin was 33.8 percent compared to 34.4 percent a year ago. Comparable store sales, excluding cigarettes, were up 0.6 percent, explained Mark Bierley, senior vice president and CFO.

According to Bierley, total revenue for the quarter was $2.18 billion, which marks a 12-percent increase from the fourth quarter of fiscal year 2010. That increase, he said, was primarily due to an increase in retail fuel prices.

Three main areas are having a significant impact on The Pantry's margins, he stated. Overall, cigarette margin was down because of competitive pricing pressure. In addition, increased promotional activity with the Kangaroo Express Roo Cup and higher costs associated with the retailer's coffee program led the dispensed beverage margin to have a negative 40-basis-point impact. Beer and packaged beverages also contributed to the decline, Bierley explained.

As for real estate holdings, The Pantry closed seven stores in the fourth quarter of 2011 and did not open or acquire any new stores, ending the quarter with 1,649 locations. Bierley said the company's 114-store divesture program is nearing completion. "We expect to receive proceeds of $3 million from closing 27 locations, which had negative EBITDA contribution of $500,000," he said. "As a result of converting these stores to a dealer operation, we expect these stores to contribute to EBITDA going forward."

Additionally, The Pantry is marketing 84 surplus properties with an estimated fair value of $31 million. It has "a firm interest" in 19 locations currently worth an estimated $7 million, of which The Pantry has closed on nine with proceeds of $3 million realized.

"As we look forward to 2012, we are taking a more conservative view especially in cigarette and fuel margins to better position us in the marketplace and gain back market share for long-term success," Holman said.