Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Pantry (NASDAQ:PTRY)

Q1 2013 Earnings Call

February 05, 2013 08:30 AM ET

Executives

Berry Epley - Vice President and Corporate Controller

Dennis Hatchell - President and CEO

Analysts

Bryan Hunt - Wells Fargo Securities

Ben Brownlow - Raymond James

Ronald Bookbinder - The Benchmark Company

Anthony Lebiedzinski - Sidoti & Company

Operator

Good day ladies and gentlemen and welcome to the Q1, 2013, The Pantry Inc. earnings conference call. My name is Sue and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes. I would like to turn the call over to Berry Epley, Vice President Controller. Please proceed sir.

Berry Epley

Good morning everyone and thank you for joining us. Earlier this morning we announced financial results for our first quarter fiscal 2013. I would like to point out that certain statements made during this call may be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, comments regarding the company are management's beliefs, expectations, targets, goals, plans, outlook, guidance or predictions of the future are forward-looking statements.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by these forward-looking statements. These risks and uncertainties are detailed in The Pantry's filings with the SEC and in our earnings release issued this morning. We refer you to the SEC's website or our site at thepantry.com for these and other documents.

We also will discuss certain non-GAAP financial measures today that we believe are helpful to a full understanding of our financial condition. Certain of these non-GAAP measures were also included in the press release we issued this morning. We therefore refer you to our press release posted on our website, which includes presentation and reconciliation of each non-GAAP financial measure to the most directly comparable financial measure included in the press release, and an explanation of why we believe these measures provide useful information to our investors, and how they are used by management.

Also with us on the call today is The Pantry's President and CEO Dennis Hatchell. I will now turn the call over to Dennis.

Dennis Hatchell

Thanks Berry. Good morning everyone. This morning we reported first quarter results where we generated $49 million of adjusted EBITDA, a $5 million improvement over the prior year. Our merchandise comparable store sales increased 2.2%. All of our major categories inside the store, except cigarettes showed positive comps versus last year with especially strong results on our food service programs.

We are continuing to develop new offering to offset the challenges we faced on the cigarette portion of our business. When you exclude the negative comps on cigarettes, our comparable source sales improved 4.6%. This strong performance is highlighted by the significant improvement over prior year of adjusted EBITDA excluding fuel gross profit. Our team has maintained its focus on managing OSG&A costs. We reduced OSG&A as a percent of merchandise sales by 1.7% over the prior year. This improvement saved us approximately $7.4 million for the quarter.

During the quarter, wholesale fuel prices initially declined rapidly for few weeks and then increased dramatically during the last couple of weeks of the quarter. As normally occurs, retail prices in our market did not keep pace with these cost changes and that exerted significant pressure on our margins. We are pleased that we’re making good progress rolling out our pricing system which will help us respond to the changing marketplace and it will be completed in quarter two.

During the quarter, we continue to make progress on other parts of our strategic initiatives in particular our lifestyle merchandizing program continues to grow. We have now identified nine different lifestyles local merchandizing needs. We are currently installing three of the nine. Hispanic is now in 130 locations, colleges in 120 locations and the Beach is installed in 47 locations. The early results of this initiative are positive and we are pleased with the progress we are making. We have plans to add another 56 Hispanic locations in the month of February and we will continue to rapidly add more locations to all the lifestyles as we remodel or reset our stores.

In regards to capital, we currently have more than 60 projects started including remodels, QSRs and new stores. We completed four remodel stores during the month of December and we are pleased with how the stores look as result of the remodeled effort and we just recently held grand openings for these locations.

With each remodel project, we continue to learn and are improving the process to minimize operational disruption or making each remodel effective as possible. We believe all our initiatives will provide us both growth and profit that will overtime, minimize the effect of the declining cigarette category and the impact of a volatile fuel market.

Before I transition the call back to Berry, I would like to take a moment to recognize Clyde Preslar our new SVP and Chief Financial Officer. Clyde is a proven leader, ideally suited for the Pantry with more than 15 years of financial leadership experience as a Chief Financial Officer. Clyde has extensive breadth of financial experience including financial leadership in the consumer goods arena and an exceptional track record of financial management, planning and corporate development. In addition, Clyde has deep roots in North Carolina having received his graduate degree at Elon University and an MBA from Wake Forest University. Clyde has shared with me, he is excited to have the opportunity to be living and working in his home state again.

We look forward to having Clyde join The Pantry and am especially pleased to have someone help me pull through the Wake Forest (inaudible). Now, Berry will review the financial statements.

Berry Epley

Thanks Dennis. Our net loss for the first quarter was $3.1 million or $0.14 per share compared with a net loss of $2.9 million or $0.13 per share last year. Current year loss includes $0.06 per share of non-cash asset impairment charges compared to $0.02 per share of non-cash asset impairment and debt extinguishment charges a year ago. Excluding the impact of asset impairments, current year net loss was $1.7 million or $0.08 per share.

Adjusted EBITDA for the quarter was $48.9 million, compared with $43.8 million a year ago. Total revenues for the quarter were approximately $1.9 billion, a 2.4% decrease from last year’s first quarter primarily due to the decline in fewer gallons sold and an average of approximately 61 fewer stores.

On the merchandise side, comparable store merchandise sales were up 2.2%, excluding the impact of cigarettes; our comparable store merchandise sales increased 4.6%. The comp store improvement was primarily driven by the performance of our grocery, packaged beverage and food service categories. Consistent with the prior quarter, our comp store sales increase was a result of a 3% increase in basket with a slight decline in customer count.

Our food service business experienced another strong quarter as evidenced by an increasing mix of 10.8% from 10.5% in the same period a year ago. Total comparable store food service sales grew 4.2% which includes 8.6% improvement in proprietary food service. Our overall merchandise gross margin rate for the quarter was 34.3% which is a 110 basis point increase as compared to the prior year, primarily driven by the expense beverage and other proprietary food service.

In the fuel business, retail gallon sold for the quarter decreased by 4.8% in comparable stores. Our first quarter retail gross margin per gallon was $11.04 compared with $12.02 a year ago. Our fuel margin is debt of credit card fees and equipment maintenance cost which totaled $6.08 per gallon this quarter compared to $6.04 per gallon a year ago. Excluding these fees, our retail gross margin per gallon would have been $18.02 and $18.06 in the first quarter of fiscal 2013 and the prior year respectively.

In the first few weeks of quarter two, we have seen continued margin of volume pressure during to rising wholesale fuel cost which is implied in our second quarter guidance. Total store operating and general and administrative expenses for the quarter were reduced by approximately 7.2 million compared to last year. We remained focused on managing store operating expenses which declined $5.6 million in the first quarter compared to the same period a year ago.

The decrease was driven by lower facility related cost which was the result of our initiatives as well as a 4% reduction in average retail stores compared to the prior year. We reported general and administrative expenses at $23.9 million for the first quarter which is a reduction of $1.6 million. The reduction in general and administrative cost is primarily related to the timing of gains and losses of real estate transactions and lower personnel cost. Appreciation and amortization expense was $28.6 million; net interest expense for the quarter was $23.1 million versus $21.3 million from last year's first quarter.

Our income tax rate was 39.9% in the quarter. As you know, the Taxpayer Relief Act was signed into loss subsequent to the end of our quarter. This act reinstated certain work opportunity tax credits back to the beginning of 2012 and as a result, we anticipate that our fiscal 2013 effective tax rate will be approximately 30%.

Net capital expenditures for the quarter were $18.4 million which included an offset of $2.2 million of proceeds from asset sales and insurance reimbursements. Expected net capital expenditures for fiscal 2013 were raised from $80 million to $95 million.

During the first quarter, we closed six doors and we ended up the quarter with 1572 company operated locations, 217 quick service restaurants and 71 wholesale fuel locations. We generated approximate $17 million in cash flow from operations during the first quarter and we finished the quarter with $24.4 million in cash and cash equivalents compared to 150.7 million a year ago. We currently have over 100 million liquidity which includes cash on hand plus availability on the revolver.

In this morning's press release, we provided our current outlook for our fiscal second quarter and full year 2013 results. For the year, we expect total merchandise sales to be between 1.83 billion and 1.87 billion and retail fuel volume to be between 1.7 and 1.75 billion gallons. Our fuel gross margin is targeted to be between $10.5 and $12.5 per gallon and our merchandize gross margin is projected at 34.3%.

Store operating and general administrative expenses are expected to be between $607 and $619 million. In addition, depreciation and amortization is estimated $115 to $120 million. Net interest is projected at $89 to $92 million. With that, we'll turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. (Operator Instructions). Your first question comes from the line of William Reed, Bank of America Merrill Lynch. Your line is open.

Unidentified analyst

This is actually Spencer in for Bill; I appreciate you guys taking my questions. I was wondering if you guys could remind us how many stores are suitable for a QSR and then if you are still planning on doing 20-25 this year.

Berry Epley

Yes, I think the number for this year is still consistent with what we've told you in the prior quarter. Now we have ample stores with square footage to continue to grow at that pace in the next few years.

Unidentified analyst

And then with the new fuel pricing technology you're putting into your stores, is that performing in line with what you had expected?

Dennis Hatchell

Good morning, this is Dennis, yes, it is, we've monitored a couple hundred stores now for two months or more and have been really pleased with the results that’s been turning out. So we're pleased to be on track, get it done by the end of the quarter for all stores.

Unidentified analyst

I was wondering with the tweaking of the retail gallons sold guidance for the year, just the reasoning behind that, and if you're seeing anything, any changes in the marketplace.

Berry Epley

Yes, I think if you look at our guidance, really we are seeing as I said, continued pressure on demand as we head into Q2. We've got retails now in our markets that have gone above 3.50. So it's really guided by what we've seen. We anticipate getting back to a more normal, at least margin environment in the second half, but we are seeing demand lower in our markets.

Operator

Thank you and your next question is from Bryan Hunt, Wells Fargo Securities, your line is open.

Bryan Hunt - Wells Fargo Securities

Dennis, just expanding on the pricing system where you have it rolled out, are you seeing a notable difference in performance on a same store gallons basis than the stores that do not have the system in place and could you quantify that for us?

Dennis Hatchell

I think the best way to answer that is what we're getting is a really good current information which is allowing us to react in the marketplace that we haven't been able to do before, there is just lot of changes going on in the marketplace in terms of either between weather and competition and the price of fuel that makes it hard to predict what our actual results are but we're really pleased with the ability to respond to it, so I'm still very pleased with what we're seeing.

Bryan Hunt - Wells Fargo Securities

Okay, and then shifting gears to the remodels that you've completed on the merchandise front on the Hispanic college and beach, is there any way you can delineate how those stores are performing relative to the rest of the store base?

Dennis Hatchell

We put the expected results that we’re getting out of these stores which were placed within our guidance. I think the best way to answer that is we’re continuing to roll it out; we’re a little hesitant sharing the numbers we’re getting out of some of the actual products just because we think it’s a competitive advantage right now, so we’re accelerating the roll out of these lifestyles as we go. So you can read into that if the performance is good.

Bryan Hunt - Wells Fargo Securities

Very good, and then you have completed your fuel supply contract with BP in the quarter. I believe it’s a seven year contract. Is there any way you can talk about some of the benefits of that new contract?

Berry Epley

Well, I'll just say Bryan, we are pleased with extending the relationship with BP for another seven years, but we are not really going in to the specifics of the agreement.

Bryan Hunt - Wells Fargo Securities

Okay, and then my last question is, if you look at the year-over-year store operating expense line, in Q1, on a year-over-year basis, you were down about $5 million, just on store operating expenses, not SG&A, and then the guidance for Q2 as you are looking at flat year-over-year expenses. Can you talk about maybe what happened on the store expense line and why you would expect flat going forward relative to the significant savings you saw year-over-year in Q1?

Berry Epley

You can say we are offsetting some of the inflationary pressures of some of those expenses with the initiatives that we put in place. We've benefitted from initiatives around things such as utilities calls, maintenance calls, insourcing tax, those kinds of things, and the guidance just implies the benefit we think we’ll continue to get. Our store count has decreased pretty significantly from last year’s first quarter but going forward we are offsetting any inflationary pressures with these initiatives.

Operator

Your next question comes from (inaudible) BMO Capital.

Unidentified Analyst

A couple of questions, maybe can you talk a little bit about the cadence in sales throughout the quarter and what it’s looking like in the current quarter? Thanks.

Dennis Hatchell

Yes, I would just say that during the quarter there were no significant variances on a monthly basis from what we have for entire quarter.

Unidentified Analyst

Okay, and then just turning to tobacco, it seems like the trends are getting a little worse in tobacco, and I guess I am wondering if you can maybe give a little color on the way things are going on, is it pricing, is it unit, is it the competition. There has been a lot of noise on dollar stores getting much more aggressive in tobacco just want to ask if there is any color there?

Berry Epley

Our transactions are pretty consistent. I think we are negative [28] and cigarettes comps in the fourth quarter last year and the first quarter this year and actually in the first quarter of the prior year. So we have had a pretty consistent trend of kind of that 2% to 3% and it’s been primarily in units, but that’s not consistent what we’ve been saying was going to be the trend for us. So it’s not outside of our expectation. We've not made a lot of changes in our pricing positions since the last time we spoke.

Unidentified Analyst

And has there been any change in the competitive environment that you’ve noticed, I mean specifically from the dollar stores?

Dennis Hatchell

No, I think that there is two things going on, we had another price increase that’s going to impact the sale of cigarettes again and I think that how retailers handle the different promotional programs that the cigarette companies offer. Everybody continues to try to figure out the best way to handle those. Those are the biggest changes. There is nothing new in terms of how many dollar stores or other folks are selling the products right now.

Unidentified Analyst

Okay, just remind me when you said you would have the KSS System at all your stores by the end of when?

Berry Epley

Well, the pricing system will change by the end of the second quarter, so over the next month and half.

Unidentified Analyst

Okay but you would say right now it’s not necessarily helping your gas margins, it’s just helping you react faster to not lose share, is that a fair characterization?

Berry Epley

We’re getting a lot of information that’s allowing us to be more flexible in the market to manage to really optimize gasoline gross profit where it be it CPG or in gallons, so that varies by store but the information that we’re getting and the ability to react is what’s giving us the power here.

Unidentified Analyst

But are the gallon comps of those stores now, are they higher than the (inaudible) average?

Berry Epley

Yes, they are.

Operator

Thank you and your next question is from Ben Brownlow of Raymond James.

Ben Brownlow - Raymond James

On the fuel pricing software, how does that differ, I believe you guys rolled out KSS a few years back, how does that differ from the system now?

Berry Epley

I think, the easiest way to describe that Ben is the KSS System gathers the data that’s going on in the marketplace. The price optimization program we’re using takes that data and optimizes both the gallons and the CPG.

Ben Brownlow - Raymond James

And on the guidance that you gave for the fuel margins in the quarter, given that it’s not even at the midpoint of the quarter, do you feel like there is a conservatism in that guidance that $0.08 to $0.10 per gallon?

Berry Epley

I would not say it’s conservative, no.

Ben Brownlow - Raymond James

Okay. And what credit card fees do you have imbedded in that guidance?

Berry Epley

(Inaudible) what you saw in Q1, may be slightly higher because we are seeing increased retails, like I said, retails of our market they have gone above the 350 average, we were 342 in the first quarter so that would imply a slightly higher credit card fee. What really was driving the guidance is, we’ve seem pretty dramatic cost increases here in January. So, it exerted pressure on margin per gallon.

Ben Brownlow - Raymond James

And then just bigger picture, I know you don’t want to get too detailed on the lifestyle but just I guess bigger picture what are you doing with merchandising, just trying to get a handle on differences that you’re doing with the college and beach and Hispanic et cetera.

Berry Epley

I’m not quite sure what you’re looking for but the simplest example would be along the beach where last summer we had stores over there that they were effectively carrying what you would expect drink some foods that people would use at the beach but the general merchandise, the (inaudible) in the water, the surf boards, sun glasses that sort of stuff, we didn’t have a good mix of products in those stores to offer up to the folks. So, that’s what's being prepared right now to get out of the stores so they are there for the season. We did a similar thing with Hispanic products or with the other lifestyle products that we’re working on. Part of it is, our ability to source it really fast and get it in. The clients been a big help to us there and then just sorting out which stores you get it and what order because you got to either make room or delete from the catalog items that are not performing.

Operator

Thank you. And your next question is from Ronald Bookbinder, The Benchmark Company.

Ronald Bookbinder - The Benchmark Company

While the merchandise comp is improving, the fuel comp has declined for years and appears to be forecasted to decline this year. What is the overall strategy to eventually change that?

Dennis Hatchell

Well, that’s our plan. We are obviously not happy that our comps have declined although we think that the numbers that we have, show that the marketplace is contracting a little bit anyway and our goal obviously is to work ourselves around to where we're at that rate of loss or better so that we're not giving up market shares. We’re not happy with what you just stated, but our goal is to reverse that trend.

Ronald Bookbinder - The Benchmark Company

So, you're going to continue to try and defend market share over margin going forward and just keep driving traffic to the store?

Berry Epley

Yes, I would say we're going to maximize gross profit here. I think we certainly to Dennis’s point want to stand the time of negative gallons. We have been more competitive in prior years over the recent time frame but we are seeing demand pressures externally, of this data, EI data that you look at says demand in the southeast is down. so we're bailing headwind there as we put these initiatives in place that are going to give us more flexibility to react to what happens with competitors in the marketplace, I think we’ll be better prepared to turn this tide.

Ronald Bookbinder - The Benchmark Company

Okay and the comp on the lifestyle merchandise stores over the company average, could you give us some indication while not going into specific merchandise or categories?

Berry Epley

No right now, we're still analyzing it. I mean we're pleased with the performance of the lifestyle categories. We’re making sure we're looking at any cannibalization that could be happening in other categories but right now the lifestyles are performing at or better than our expectations, I would say.

Ronald Bookbinder - The Benchmark Company

Okay great and on the remodels, how extensive are these remodels and are they seeing some sort of comp benefit or is it more of a store refresh program?

Dennis Hatchell

The remodels that are currently underway are pretty extensive, these are stores that have hadn't a lot of deferred maintenance done to them in a long time and so the disruption to the store as well as the amount of capital and effort involved is pretty extensive. Each store is obviously different and we're evaluating. We'll be evaluating the effectiveness of this kind of remodel as we go forward, but we have stores that we have to address this with. We have other stores where we can do slight remodels or equipment change outs and that will be enough but the first ones we took on are pretty significant in extensive remodels.

Operator

Thank you and your next question is from Anthony Lebiedzinski - Sidoti & Company.

Anthony Lebiedzinski - Sidoti & Company

On your last conference call you said that you currently had a 36 store remodels and 10 QSRs in some phase of development, so, as you look at the end of your fiscal year, where do you expect to be in terms of your store remodels and I think QSRs I think you said 20-30 but just wanted to confirm that.

Berry Epley

Yes, we're saying 20-25 on the QSR front, Dennis alluded to in his script, we have about 60 projects underway right now, we said last time we anticipated 70 to 80 remodels for the year. I don't think anything has significantly changed. We continue to look at the scope of the projects and learn as we go. We talked about, we finished four that we just recently in the last couple of weeks, had grand openings also, too early to see how those are going to do, we liked the way they looked, visually turned out. So we'll see the performance. Again, Bill will talk about that in the next quarter. But I think the numbers we gave in the last call are still consistent with where we are. You’re looking at 35 to 40 million now in our capital plan for remodels, QSRs and growth initiatives. So it’s pretty consistent with what we talked to you about a month and half or so ago.

Anthony Lebiedzinski - Sidoti & Company

And are you still looking to open five new stores for this year?

Berry Epley

Yes.

Operator

Thank you and there are no further questions waiting.

Dennis Hatchell

Well thank you all for calling in and for your questions today, I just want to take a moment before I sign off to remind you that Clyde will be taking over in his new position for us in the next call so I want to thank Barry and his team for all their work that they've done. They were a terrific resource for us. I'm really grateful for their help and guidance that we've had in the interim, look forward to having a full team and talking to you all again next quarter, thank you very much.

Operator

Thank you, thank you for joining today's conference, this concludes the presentation and you may now disconnect, good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Pantry CEO discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts