The Pantry Announces Third Quarter Fiscal 2013 Results

The Pantry, Inc. (NASDAQ: PTRY), a leading independently operated convenience store chain in the southeastern U.S., today announced financial results for its fiscal third quarter ended June 27, 2013.

Third Quarter Summary:
  • Net income was $5.9 million or $0.26 per diluted share. This compares to net income of $14.8 million or $0.65 per diluted share in last year's third quarter. Excluding the impact of impairment charges, net income for the third quarter of fiscal 2013 was $6.4 million, or $0.28 per diluted share, compared to net income of $15.9 million, or $0.70 per diluted share, in the prior year (see reconciliation below).
  • Adjusted EBITDA was $65.3 million, down from $74.7 million a year ago.
  • Fuel gross profit was $53.8 million, compared to $67.1 million a year ago as retail fuel margin per gallon decreased to $0.123 from $0.146 in the prior year quarter. Comparable store fuel gallons sold decreased 4.4%.
  • Comparable store merchandise revenue increased 1.3% and increased 3.3% excluding cigarettes.
  • Merchandise gross margin was 33.8% compared to 33.5% a year ago.
  • Store operating and general and administrative expenses were $149.4 million compared to $152.1 million a year ago.
  • Our effective tax rate for the third quarter of fiscal 2013 was 54.9% compared to 36.5% in the third quarter of fiscal 2012 due to actual and anticipated levels of pre-tax profit. We now anticipate a full-year 2013 effective tax rate of 32.6% compared to 54.1% in 2012.

President and Chief Executive Officer Dennis G. Hatchell said, "I am pleased with the progress we made during the third quarter. Our comparable store merchandise sales growth moved back into positive territory as average sales per customer increased 2.5% compared to the prior year quarter. Additionally, we slowed the rate of decline in retail fuel gallons sold. However, fuel margins were $0.023 per gallon lower than during last year's third quarter leading to the decline in Adjusted EBITDA."

Mr. Hatchell continued by saying, "During the third quarter we made significant strides in the areas of store remodels and QSR's -- completing 31 store remodels and opening three new QSR's. We intend to maintain this pace going forward and to complement these activities with new store openings."

Fiscal 2013 Outlook

The Company announced the following guidance ranges for its expected performance in fiscal 2013, which is a 52-week fiscal year:
                   
                                 
     

Q4

FY12
    Q4 FY13 Guidance     FY12     FY13 Guidance
      Actual     Low   High     Actual     Low   High
                                 
Merchandise sales ($B)(1)     $0.470     $0.467   $0.477     $1.81     $1.79   $1.80
                                 
Merchandise gross margin     34.6%     33.5%   34.1%     33.7%     33.8%   33.9%
                                 
Retail fuel gallons (B)(1)     0.455     0.423   0.438     1.81     1.69   1.71
                                 
Retail fuel margin per gallon     $0.095     $0.100   $0.125     $0.115     $0.114   $0.120
                                 
Store operating and general and administrative

expenses ($M)
    $154     $154   $158     $610     $601   $605
                                 
Depreciation & amortization ($M)     $33     $29   $30     $120     $117   $118
                                 
Interest expense ($M) (2)     $23     $22   $23     $84     $89   $90
                                 
Capital expenditures, net ($M)    

$9
    $21   $26     $55     $77   $82

(1) Fiscal 2013 guidance assumes closure of approximately 35 stores (2) Excludes loss on extinguishment of debt

Conference Call

Interested parties are invited to listen to the second quarter earnings conference call scheduled for Tuesday, August 6, 2013 at 8:30 a.m. Eastern Time. The call will be broadcast live over the Internet and will be accessible through the Investors section of the Company's website at www.thepantry.com. A slide presentation for the conference call will also be available for download at the investor section of our website. An online archive will be available immediately following the call and will be accessible for 30 days.

Use of Non-GAAP Measures

Adjusted EBITDA

Adjusted EBITDA is defined by the Company as net income (loss) before interest expense, net, gain/loss on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA is not a measure of operating performance or liquidity under generally accepted accounting principles in the United States of America ("GAAP") and should not be considered as a substitute for net income, cash flows from operating activities or other income or cash flow statement data. The Company has included information concerning Adjusted EBITDA because it believes investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in the Company's business, make strategic acquisitions and to service debt. Management also uses Adjusted EBITDA to review the performance of the Company's business directly resulting from its retail operations and for budgeting and compensation targets. Adjusted EBITDA does not include impairment of long-lived assets and other charges. The Company excluded the effect of impairment losses because it believes that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of its remaining assets. Adjusted EBITDA does not include gain/loss on extinguishment of debt because it represents financing activities and is not indicative of the ongoing performance of the Company's remaining stores.

Net Income and Net Income Per Share Excluding Certain Items

In addition to net income and net income per share presented in accordance with GAAP, the Company has also presented net income and net income per share for the three months ended June 27, 2013 excluding the after-tax impact of non-cash charges related to impairment and loss on extinguishment of debt. Management believes that investors find this information useful as a reflection of the Company's underlying operating performance and that this information facilitates comparisons between the Company and other companies in its industry. Management uses these measures as part of its preparation of operating plans, budgets and forecasts and in its assessment of the Company's historical performance.

Additional Information Regarding Non-GAAP Measures

Any measure that excludes interest expense, gain/loss on extinguishment of debt, depreciation and amortization, impairment charges, or income taxes has material limitations because the Company uses debt and lease financing in order to finance its operations and acquisitions, uses capital and intangible assets in its business and must pay income taxes as a necessary element of its operations. Due to these limitations, the Company uses non-GAAP measures in addition to and in conjunction with results and cash flows presented in accordance with GAAP. The Company strongly encourages investors to review its consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

Because non-GAAP financial measures are not standardized, the measures referenced above, each as defined by the Company, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare the Company's use of these measures with non-GAAP financial measures having the same or similar names used by other companies.

About The Pantry

Headquartered in Cary, North Carolina, The Pantry, Inc. is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of August 6, 2013, the Company operated 1,559 stores in thirteen states under select banners, including Kangaroo Express ®, its primary operating banner. The Pantry's stores offer a broad selection of merchandise, as well as fuel and other ancillary services designed to appeal to the convenience needs of its customers.

Safe Harbor Statement

Statements made by the Company in this press release relating to future plans, events, or financial condition or performance are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by the use of words such as "expect," "plan," "anticipate," "intend," "outlook," "guidance," "believes," "should," "target," "goal," "forecast," "will," "may" or words of similar meaning. Forward-looking statements are likely to address matters such as the Company's anticipated sales, expenses, margins, tax rates, capital expenditures, profits, cash flows, liquidity and debt levels, as well as our pricing and merchandising strategies and their anticipated impact and our intentions with respect to acquisitions, the construction of new stores, including additional quick service restaurants, and the remodeling of our existing stores. . These forward-looking statements are based on the Company's current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements. Any number of factors could affect actual results and events, including, without limitation; the Company's ability to enhance its operating performance through its in-store initiatives and its store remodel program; fluctuations in domestic and global petroleum and fuel markets; realizing expected benefits from the Company's fuel supply agreements; changes in the competitive landscape of the convenience store industry, including fuel stations and other non-traditional retailers located in the Company's markets; the effect of national and regional economic conditions on the convenience store industry and the Company's markets; the global financial crisis and uncertainty in global economic conditions; wholesale cost increases of, and tax increases on, tobacco products; the effect of regional weather conditions and climate change on customer traffic and spending; legal, technological, political and scientific developments regarding climate change; financial difficulties of suppliers, including the Company's principal suppliers of fuel and merchandise, and their ability to continue to supply its stores; the Company's financial leverage and debt covenants; a disruption of our IT systems or a failure to protect sensitive customer, employee or vendor data; the ability of the Company to identify suitable acquisition targets and to take advantage of expected synergies in connection with acquisitions; the actual operating results of new or acquired stores; the ability of the Company to divest non-core assets; environmental risks associated with selling petroleum products; and governmental laws and regulations, including those relating to the environment and the impact of mandated health care laws. These and other risk factors are discussed in the Company's Annual Report on Form 10-K and in its other filings with the Securities and Exchange Commission. In addition, the forward-looking statements included in this press release are based on the Company's estimates and plans as of August 6, 2013. While the Company may elect to update these forward-looking statements at some point in the future, it specifically disclaims any obligation to do so.
The Pantry, Inc.
Unaudited Condensed Consolidated Statements of Operations and Selected Financial Data
(In thousands, except per share and per gallon amounts, margin data and store count)
         
 
Three Months Ended Nine Months Ended
June 27, 2013 June 28, 2012 June 27, 2013 June 28, 2012
Revenues:
Merchandise $     476,596 $     476,493 $     1,324,393 $     1,339,751
Fuel 1,516,055   1,660,632   4,475,682   4,822,512  
Total revenues 1,992,651   2,137,125   5,800,075   6,162,263  
Costs and operating expenses:
Merchandise cost of goods sold 315,741 316,767 875,499 892,425
Fuel cost of goods sold 1,462,222 1,593,571 4,324,242 4,656,242
Store operating 123,275 126,914 371,808 383,084
General and administrative 26,078 25,166 75,179 73,190
Impairment charges 776 1,833 3,955 4,743
Depreciation and amortization 29,446   29,802   87,570   86,443  
Total costs and operating expenses 1,957,538   2,094,053   5,738,253   6,096,127  
Income from operations 35,113   43,072   61,822   66,136  
Other expenses:
Loss on extinguishment of debt 2,539
Interest expense, net 21,959   19,732   67,218   61,282  
Total other expenses 21,959   19,732   67,218   63,821  
Income (loss) before income taxes 13,154 23,340 (5,396 ) 2,315
Income tax expense (benefit) 7,216   8,525   (1,412 ) 87  
Net income (loss) $     5,938   $     14,815   $     (3,984 ) $     2,228  
 
Earnings (loss) per diluted share:
Earnings (loss) per diluted share $     0.26   $     0.65   $     (0.18 ) $     0.10  
Weighted average and potential dilutive shares outstanding 22,896   22,686   22,673   22,632  
 
Selected financial data:
Adjusted EBITDA $ 65,335 $ 74,707 $ 153,347 $ 157,322
Payments made for lease finance obligations $ 13,047 $ 13,024 $ 38,689 $ 38,525
Merchandise gross profit $ 160,855 $ 159,726 $ 448,894 $ 447,326
Merchandise margin 33.8 % 33.5 % 33.9 % 33.4 %
Retail fuel data:
Gallons 432,096 454,520 1,267,043 1,357,300
Margin per gallon (1) $ 0.123 $ 0.146 $ 0.118 $ 0.121
Retail price per gallon $ 3.45 $ 3.59 $ 3.47 $ 3.49
Total fuel gross profit $ 53,833 $ 67,061 $ 151,440 $ 166,270
 
Comparable store data:
Merchandise sales % 1.3 % 3.6 % 0.5 % 3.4 %
Retail fuel gallons % (4.4 )% (3.6 )% (5.7 )% (3.3 )%
 
Number of stores:
End of period 1,562 1,592 1,562 1,592
Weighted-average store count 1,567 1,605 1,571 1,619

(1)Fuel margin per gallon represents fuel revenue less cost of product and expenses associated with credit card processing fees and repairs andmaintenance on fuel equipment. Fuel margin per gallon as presented may not be comparable to similarly titled measures reported by other companies.
The Pantry, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
     
(Unaudited)
June 27, 2013 September 27, 2012
ASSETS
Cash and cash equivalents $ 44,147 $ 89,175
Receivables, net 77,045 80,014
Inventories 146,074 137,376
Prepaid expenses and other current assets 22,712 21,734
Deferred income taxes 17,852   17,376
Total current assets 307,830   345,675
 
Property and equipment, net 899,145 935,841
Goodwill and other intangible assets 441,072 441,070
Other noncurrent assets 78,500   76,954
Total assets $ 1,726,547   $ 1,799,540
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 2,555 $ 62,840
Current maturities of lease finance obligations 10,901 10,947
Accounts payable 162,451 155,008
Other accrued liabilities 115,165   121,760
Total current liabilities 291,072   350,555
 
Long-term debt 498,961 500,600
Lease finance obligations 435,895 443,020
Deferred income taxes 62,373 62,766
Deferred vendor rebates 9,547 11,886
Other noncurrent liabilities 106,335 106,162
Total shareholders' equity 322,364   324,551
Total liabilities and shareholders' equity $ 1,726,547   $ 1,799,540
 
The Pantry, Inc.
Reconciliation of Non-GAAP Financial Measures
(In thousands)
               
Three Months Ended Nine Months Ended
June 27, 2013 June 28, 2012 June 27, 2013 June 28, 2012
 
Adjusted EBITDA $ 65,335 $ 74,707 $ 153,347 $ 157,322
Impairment charges (776 ) (1,833 ) (3,955 ) (4,743 )
Loss on extinguishment of debt (2,539 )
Interest expense, net (21,959 ) (19,732 ) (67,218 ) (61,282 )
Depreciation and amortization (29,446 ) (29,802 ) (87,570 ) (86,443 )
Income tax (expense) benefit (7,216 ) (8,525 ) 1,412   (87 )
Net income (loss) $ 5,938   $ 14,815   $ (3,984 ) $ 2,228  
 
Adjusted EBITDA $ 65,335 $ 74,707 $ 153,347 $ 157,322
Loss on extinguishment of debt (2,539 )
Interest expense, net (21,959 ) (19,732 ) (67,218 ) (61,282 )
Income tax (expense) benefit (7,216 ) (8,525 ) 1,412 (87 )
Stock-based compensation expense 623 546 2,348 2,170
Changes in operating assets and liabilities 19,147 22,861 (12,060 ) 12,426
Expense (Benefit) for deferred income taxes 7,421 7,691 (1,056 ) (1,704 )
Other 1,567   2,638   4,340   9,194  
Net cash provided by operating activities $ 64,918   $ 80,186   $ 81,113   $ 115,500  
 
Additions to property and equipment, net $ (19,658 ) $ (9,925 ) $ (55,016 ) $ (46,120 )
Acquisitions of businesses, net     (502 )  
Net cash used in investing activities $ (19,658 ) $ (9,925 ) $ (55,518 ) $ (46,120 )
 
Net cash used in financing activities $ (10,104 ) $ (3,683 ) $ (70,623 ) $ (103,354 )
 
Net increase (decrease) in cash $ 35,156   $ 66,578   $ (45,028 ) $ (33,974 )
 
 
      Three Months Ended
June 27, 2013       June 28, 2012
Pre Tax   After Tax   EPS Pre Tax   After Tax   EPS
Income, as reported $     13,154 $     5,938 $     0.26 $     23,340 $     14,815 $     0.65
Impairment charges 776 474 0.02 1,833 1,121 0.05
Loss on extinguishment of debt          
Income, as adjusted $     13,930   $     6,412   $     0.28   $     25,173   $     15,936   $     0.70
 
 
Nine Months Ended
June 27, 2013 June 28, 2012
Pre Tax After Tax EPS Pre Tax After Tax EPS
(Loss) income, as reported $ (5,396 ) $ (3,984 ) $ (0.18 ) $ 2,315 $ 2,228 $ 0.10
Impairment charges 3,955 2,418 0.11 4,743 2,900 0.13
Loss on extinguishment of debt       2,539   1,552   0.07
(Loss) income, as adjusted $ (1,441 ) $ (1,566 ) $ (0.07 ) $ 9,597 $ 6,680 $ 0.30

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