The Pantry Makes 'Significant Progress' on Its Strategic Agenda

CARY, N.C. – For The Pantry Inc., operator of the Kangaroo Express convenience store chain, the fourth quarter of fiscal year 2012 was spent making "significant progress" on several facets of its strategic agenda, President and CEO Dennis Hatchell shared during the company's Q4 earnings call today.

The completion of its transition from the Chevron and Texaco brands to the Valero brand; the introduction of a new Hispanic "lifestyle program;" and continued adjustments in the company's ongoing store remodeling initiative were among the projects Hatchell discussed.

During the last three months, The Pantry completed its conversion from the Chevron and Texaco fuel brands to the Valero brand at the roughly 170 stores that fall under its new agreement with Valero. Hatchell said the chain is "seeing positive operating results" from these stores.

The chief executive also reported that Kangaroo Express currently has 53 stores selling a complete product offering of food and beverages focused on the Hispanic market, while nearly 200 stores have a partial offering. The c-store retailer plans to continue rolling out this lifestyle program, with progress accelerating as its suppliers expand their distribution.

"We are pleased with the results of this initiative and will aggressively expand this program to a broader group of stores while continuing to leverage the knowledge and experience gained from the initiative," Hatchell explained. "Additional lifestyle programs are being developed and products are being sourced for rollout over the next several quarters."

In the area of capital programs, the company has made headway in its ongoing store remodeling initiative, with 36 store remodels and 10 new quick-service restaurants (QSRs) now in some phase of development, from design to construction. Two new replacement stores were opened in October and November, and one additional store is under construction in Charlotte.

"The leadership team and I have taken a highly detailed and exhaustive approach to developing our initial list of target stores for remodels to ensure that we prioritize them appropriately and provide the individual locations with exactly what they need to succeed," Hatchell said.

During the company's third-quarter earnings call in August, he stated that The Pantry would begin to remodel 10 percent of its Kangaroo Express stores every year, with the remodels beginning with its best-performing stores and working their way down.

During today's earnings call, Hatchell said he and the rest of The Pantry's leadership team continue to learn a great deal throughout this process and are making adjustments where needed to make sure the remodel program is as efficient and effective as possible.

For instance, the company has adjusted its plan from a store-by-store remodel to now remodeling store clusters, which Hatchell said helps the retailer address the market dynamic.

"We believe this clustering approach will help us be more efficient in delivering a consistent store presentation, as well as enhancing our ability to implement our training programs," he said. "We intend to leverage the information from the initial remodels to increase our pace of remodel activity in the future."

Along with focusing on the physical plan at each location, the chain continues to review the product offerings at all 1,500-plus stores to ensure they satisfy the local customer base.

The final and most important element in The Pantry's strategic agenda, according to Hatchell, is making sure its team members are excited and energized, and have the training and tools to successfully maximize the results of these improved locations.

"We believe that our key initiatives, while still in development, are gaining traction and will be successful," he stated.

Before turning the earnings call over to Berry Epley, vice president and corporate controller, Hatchell took a moment to recognize Joe Venezia, the company's new senior vice president of operations. Venezia, who was hired in September, is a proven leader with a unique blend of operating and management experience, he said. "His successful track record with Walmart and Procter and Gamble make him ideally suited to help us grow sales and lead the company's store operations," the CEO said.

He also noted that the company remains focused on filling the position of chief financial officer, which has been open since former CFO Mark Bierley resigned from the company on May 25. Bierley was the fourth high-level executive to leave the business in less than a year.

Fourth Quarter and Fiscal 2012 Results

Despite the progress made on its many initiatives, The Pantry experienced a net loss of $4.8 million in its fourth quarter, ended Sept. 27, compared to net income of $3.3 million in last year's Q4. For the fiscal year, the net loss was $2.5 million vs. net income of $9.8 million last year.

Other fourth quarter results were:

• Adjusted EBITDA was $52.8 million, compared to $64.4 million a year ago.
• Fuel gross profit was $44.0 million vs. $64.4 million a year ago.
• Retail fuel margin per gallon was 9.5 cents compared to 13.5 cents a year ago.
• Comparable store fuel gallons sold decreased 2.6 percent.
• Comparable store merchandise revenue increased 3.3 percent. Excluding cigarettes, comparable store merchandise revenue increased 6.1 percent.
• Merchandise gross margin was 34.6 percent, compared to 33.8 percent a year ago.
• Store operating and general and administrative expenses were $153.7 million, compared to $157.7 million a year ago.
• Net cash from operating activities was $28.5 million vs. $71.6 million a year ago.

Other fiscal year 2012 results were:

• Adjusted EBITDA was $210.1 million, compared to $231.7 million in fiscal 2011.
• Fuel gross profit was $210.3 million vs. $257.1 million a year ago.
• Retail fuel margin per gallon was 11.5 cents compared to 13.5 cents a year ago.
• Comparable store fuel gallons sold decreased 3.1 percent.
• Comparable store merchandise revenue increased 3.3 percent. Excluding cigarettes, comparable store merchandise revenue increased 5.9 percent.
• Merchandise gross margin was 33.7 percent compared to 33.9 percent in fiscal 2011.
• Store operating and general and administrative expenses were $610.0 million, compared to $628.5 million a year ago.
• Net cash from operating activities was $144 million vs. $178.7 million last year.

The Pantry closed out fiscal 2012 with 1,578 company-operated locations, 218 QSRs and 71 wholesale fuel locations. Operating across 13 states, it is one of the largest independently operated convenience store chains in the country.