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CARY, N.C. -- Though merchandise revenues and margin picked up in the last couple months, The Pantry Inc., operator of 1,647 Kangaroo Express and other convenience stores in 11 states, reported a net loss for its second fiscal quarter ended March 25, 2010, of $166.1 million.
The results included non-cash impairment and other non-cash charges of $164.2 million after-tax and a charge of $1.9 million after-tax related to the settlement of a class action lawsuit. When adjusted for these charges, the net loss for the second quarter of fiscal 2010 was $6,000, compared to net income of $3.8 million in last year's second quarter, which included a one-time gain of $2.3 million after-tax, related to a gain on extinguishment of debt. The retailer recorded a $162 million after-tax impairment charge to write-down goodwill according to ASC 350, "Intangibles-Goodwill and Other."
"In view of the unusually cold and wet conditions experienced throughout our markets in the quarter, I am pleased we were able to deliver an earnings result in line with our expectations, excluding the charges," said President and CEO Terrance M. Marks. "I want to emphasize that the goodwill impairment charge does not have any effect on our operations, liquidity or debt covenants and in no way is an indicator of our business outlook and strategy to build long-term shareholder value.
"Our second quarter operating results reflect sequential improvement in merchandise margin and a heightened executional focus on fuel gross profit contribution. As the quarter ended, we saw improved merchandise sales performance and we are encouraged that this trend has continued into the third quarter. In addition, our cash position remains strong at $179 million, and we continue to make progress on our key strategic initiatives."
Total merchandise gross profit for the quarter was $138.2 million, down 4.6 percent from a year ago but up 1.4 percent from the first fiscal quarter. Merchandise revenues for the second quarter increased 5.1 percent overall and 3.6 percent on a comparable-store basis from the corresponding period last year. The merchandise gross margin was 33.8 percent, down from 37.2 percent a year ago, but improved 120 basis points sequentially from 32.6 percent in the first quarter of fiscal 2010, primary from actions to improve grocery margin. Merchandise gross profit a year ago benefited from an unusually high cigarette margin in advance of the federal excise tax increase, the company noted.
Total fuel gross profit for the quarter was $65.7 million, up 18.5 percent from a year ago. However, retail fuel gallons sold in the second quarter decreased 5 percent overall and 7.5 percent on a comparable store basis, in part reflecting weakness in miles driven in the company's markets, which on a weighted average basis were down 3 percent in the January-February period, the company stated. Retail fuel revenue increased 38.5 percent, supported by a 46.2-percent increase in the average retail price per gallon to $2.69, up from $1.84 in last year's second quarter.
"We heighten our focus on retail fuel margin improvement," Marks said. "This resulted in added fuel pressure on retail fuel volume. Going forward, we will seek the optimum balance of gallons [sold] and margin to improve gross profit contribution over time."
While the economy is improving somewhat, unemployment in The Pantry's markets is a bit more than 11 percent, compared to slightly more than 9 percent last year, which is keeping gallons sold soft, the company said.
The chain is doing site-by-site reviews of the gasoline business, in preparation of implementation of KSS fuel pricing software later this year, the CEO noted.
"We've been capturing historical data at these locations," Marks said. "The implementation of KSS has caused us to revisit our site-by-site assumptions, who is the most influential competitor, what is the acceptable gap over or under, based on a host of criteria. That diligence alone improves our understanding of the business. We are realizing benefits from that understanding now."
Cash flow from operations for the quarter were $22 million, vs. $18 million for the quarter the year prior, Marks added.
In terms of The Pantry's initiatives, Marks said point-of-sale system upgrades, which will allow basket-level analysis, are ahead of schedule; he anticipates them being completed by end of May. The chain also reorganized from three to five marketing-focused operations. "By reallocating resources, we were able to add these divisions at no incremental costs to the business," Marks said during a conference call.
The first several stores to feature The Pantry's Fresh Initiative, which will expand the stores' breakfast, lunch and snack menus, anchored by an upgraded Bean Street coffee program, are under construction now. They are expected to open in June.
The coffee offer will be switched from a glass-pot to an urn based program, feature a new prep station and use upgraded cups and accessories, while more pastries and fresh fruit will be added to the a.m. menu. New refrigerated cases will support merchandising efforts of a wider range of sandwiches, salads and fruit.
A new reimaging package will be implemented in stores as needed and the current Kanagroo logo will be replaced with an updated logo. The Pantry expects an initial coffee upgrade and menu expansion to be in all stores next year, with fixture upgrades in place at or than one-third locations by the end of 2011. The capital investment to support the Fresh Initiative is expected to be $30,000-plus per store.
The chain also plans to sell 80 sites throughout the Southeast, according to NRC Realty & Capital Advisors LLC, which will be assisting the chain in the sale. The properties include a mix of convenience stores with gas, stand-alone convenience stores, closed sites and prime real estate. Most of the stations are currently branded Kangaroo, Shell, Chevron, CITGO, Mobil, BP and Texaco and are located in a variety of markets in Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
The stores will be sold using NRC's "buy one, some or all" sealed bid sale process; the bid deadline has not yet been established.
"While these sites don't fit with our company's current strategic plans, they can be excellent locations for the right buyer, be they national distributors, independent operators or those in other retail businesses," Jim Bosworth, The Pantry's vice president, mergers and acquisitions said.
The retailer reported total store operating and general and administrative expenses for the quarter were $156.9 million, up $6.4 million vs. a year ago. This increase includes the $3.1 million pre-tax charge related to the class action legal settlement.
Depreciation and amortization expense was $30.6 million, an increase of $4.3 million from the prior year. This increase includes $2.4 million in excess depreciation related to the acceleration on the assets around Chevron's withdrawal from some of the company's marketing territories and the replacement of certain assets to meet credit card compliance requirements.
The Pantry's updated fiscal 2010 guidance ranges, which exclude any impairment charges, are: merchandise sales of $1.77 billion to $1.81 billion; merchandise gross margin of 33.6 percent to 34.1 percent; retail fuel gross profit of $248 million to $265 million; retail fuel gallons of 2.04 billion to 2.07 billion; and retail fuel margin per gallon of 12 cents to 13 cents.
Total operating, selling, general and administration expenses are expected to be $640 million to $650 million. The Pantry foresees depreciation and amortization to reach $116 million to $118 million and interest expense to be in the range of $87 million to $88 million.
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