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    The Pantry Hints at Huge 2007 Expansion Plans

    Acquisitions, new builds and $20 million in IT spending planned for 2007.

    SANFORD, N.C. -- At The Pantry Inc.'s fourth quarter conference call yesterday, the company gave a look at what was to come in 2007. Like 2006, next year will be filled with just as many acquisitions, if not more, according to chairman and CEO Peter J. Sodini.

    "The pipeline of potential acquisitions for fiscal 2007 appears very promising, and we would expect to acquire at least as many stores this year as in fiscal 2006," said Sodini.

    The company is "very encouraged by [this year's] acquisitions," he added. It will be a "strong year for acquisitions next year." The company will continue to undergo "aggressive remodels and rebuilds" in existing and acquired stores, where quick service restaurants (QSRs), coffee offerings and fountain drinks will be upgraded. In addition, the company continues to rebrand its stores to the Kangaroo Express banner, which will cost the company $10 million. The company also plans to increase technology spending by $20 million in the next year.

    In 2007, the company will invest $30 million in new store development, including 20 new stores containing a quick-serve restaurant and car wash will be opened. These stores will see twice as much profit as the company's traditional stores, Sodini estimates. The new stores "are not a substitute to acquisitions, but complement them," he noted, citing that the new builds allow the Pantry to see growth in certain markets, rather than through acquisition.

    Quick service restaurants will continue to be a focus of The Pantry's stores, as they provide profit and become a destination for customers, Sodini said. The company plans to open 25 QSRs per year.

    For the fourth quarter of 2006, the company's total revenues topped $1.7 billion, a 22.5 percent increase from last year's fourth quarter. Net income totaled $26.7 million, a 5.2 percent increase from last year's $25.4 million. In fiscal 2006, revenues totaled $6 billion, a 34.6 percent increase from fiscal 2005. Net income exceeded $89 million, a 54.3 percent increase from the $57.8 million recorded in fiscal 2005.

    Although gallons sold in the fourth quarter increased 13.6 percent from the same period last year and gas revenues increased more than 25 percent, gross margin per gallon dropped more than 2 cents, to 17.3 cents per gallon. "We clearly benefited from favorable conditions in the gasoline market during the first and fourth quarters of fiscal 2006," said Sodini. On the drop in margins, he added "I would encourage you not to focus on the short term ups and downs of our gasoline business."

    In the future, the company predicts even lower gasoline margins, estimating that fiscal 2007 will bring 12 cent margins per gallon, according to Dan Kelly, vice president of finance and CFO. He attributed the current drop in gas margins to high credit card fees; and for the first fiscal quarter of 2007, gas margins so far have been "significantly lower than expectations."

    Gasoline is expected to weigh on the company's profits in 2007, as earnings will drop to $2.80 to $3 per share, due to low gas margins, reflecting market conditions, Sodini said.

    Merchandise revenues for the company increased 12.1 percent from last year and increased 3 percent on a comparable store basis. Gross margins for merchandise in the fourth quarter were 37 percent higher, as total merchandise gross profits topped $138.5 million.

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