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    The Pantry's First Quarter Turnaround

    Favorable retail gas margins relieve the company of previous strains, but the outlook for fiscal 2008 is downbeat due to a softening economy.

    SANFORD, N.C. -- The Pantry Inc., operator of 1,644 convenience stores headquartered here, saw a greatly improved first quarter of fiscal 2008, including a 43.2 percent increase in revenue, reaching $2 billion, while earnings before interest, taxes, depreciation and amortization (EBITDA) jumped more than 50 percent to $53.6 million, the company stated.

    "We are obviously pleased with the improvement in earnings this quarter compared with earnings last year, despite very challenging conditions in the gasoline market for most of the quarter," Peter J. Sodini, chairman and CEO of The Pantry, said in a conference call with investors. He noted that the company got relief through lower gasoline prices in December, which enabled it to achieve a retail gross margin of 10.6 cents a gallon, nearly two cents above last year's first quarter.

    Net income for the company jumped to $3.2 million from the $125,000 seen in the year ago period, according to the company. Merchandise revenues were up 13.2 percent overall, due to new stores and acquisitions, according to Sodini, and were up 0.8 percent on a comparable store basis, according to the company.

    Gasoline gallons sold in the quarter increased 14.3 percent overall, but declined 2.8 percent on a comparable store basis, the company stated.

    "Although we are pleased with the improving trends in our gas margin, the sustained period of high prices coupled with the overall softening of the consumer spending has clearly had an impact on our comparable store gasoline gallons," said Sodini.

    Continued softening of consumer spending may pose a challenge for the company in the upcoming quarters.

    "We think we have some isolation [from the softening] by virtue of the merchandise, which is immediate consumption, we sell, but we're certainly not immune to it," said Sodini. "I think it's reasonable to expect … some decline in terms of comparable merchandise sales. I don't think it's going to be, at the end of the day, a horrific number."

    As for the proposed economic stimulus package's effect on the chain, Sodini said it would provide some benefit, as it targets the company's demographic better than most, but it will not be a material contribution to the company's financial results.

    In addition, The Pantry acquired three convenience stores and opened four new large-format stores during the first quarter, while closing six smaller, underperforming stores, he said. The company continues to look for acquisitions; however, it expects the number of purchases to be fewer than those seen in fiscal 2007.

    "There are plenty of potential deals out there given the challenging operating environment," said Sodini. "We continue to expect that the number of stores we acquire in fiscal 2008 will be substantially below the 152 we acquired last year." He added later in the conference: "As we sit here today, we haven't seen anything currently that would drive that number up to north of 100. But, tomorrow morning, something could pop up on the screen and change that forecast."

    The company also began rolling out ethanol to its stations, but is currently working to overcome logistical challenges presented by a lack of ethanol infrastructure in the southeast, according to Sodini.

    "It will only be good for our business," said Sodini on the future of the company's ethanol project. "Hell, even a penny to two cents [a gallon] … A penny is roughly $22 million pre-tax, so if we can get three cents net in all this activity, I think that’s a damn nice addition."

    However, due to the recent softening in consumer spending, the company expects fiscal 2008 merchandise sales and gasoline gallons may be below its previous expectations, the company stated.

    Comparable store merchandise sales may be relatively flat to slightly down for fiscal 2008, with total merchandise sales between $1.6 billion and $1.7 billion, the company stated. In addition, comparable gasoline gallons sold are expected to be down slightly, between 2.1 billion to 2.2 billion gallons during the year, the company stated.

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