Susser Holdings Corporation Q4 2008 Earnings Call Transcript

Mar. 2.09 | About: Susser Holdings (SUSS)

Susser Holdings Corporation (NYSE:SUSS)

Q4 2008 Earnings Call

February 26, 2009 11:00 am ET

Executives

Chip Bonner – Executive Vice President

Sam Susser – President and CEO

Steve DeSutter – President and CEO of Retail

Mary Sullivan – Executive Vice President and CFO

Analysts

Ben Brownlow – Morgan Keegan & Company

Anthony Lebiedzinski – Sidoti & Company

Jeff Blaeser – Morgan Joseph & Co

Andrew Berg – Post Advisory Group

Mike Smith – Kansas City Capital

James Berman – JB Global

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Susser Holdings Corporation fourth quarter earnings conference call. During today's presentation, all parties will be in a listenonly mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

At this time, I would like to turn the conference over the Mr. Chip Bonner, Executive Vice President, please go ahead, sir.

Chip Bonner

Thank you. Good morning, everyone, thank you for joining us. This morning we released our fourth quarter 2008 earnings and our news release was broadcast to our email list. If you would like to be added to our list, please contact our investor relation firm, DRG&E at (713) 5296600 or send your request via the IR page of our website and we will be glad to add you. A replay will be available both on the web and via telephone replay. To access the replay on the web, go to our IR page at www.susser.com. You will find the phone number and an access code in the earnings release if you would like to listen by phone.

Today's call contains various forwardlooking statements and includes information that is based on management's beliefs and assumptions. It includes Susser's objectives, targets, plans, strategies, costs, and anticipated capital expenditures. These statements involve risk and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our 2007 10K and our subsequent 10Q filings. Please note that we expect to file our 2008 10K on March 13.

We will discuss certain nonGAAP financial measures that we believe are helpful to a full understanding of our financial condition. Please refer to our news release, which includes a reconciliation of each financial measure. Information reported on this call speaks only to the company's view as of today, February 26, 2009, so time sensitive information may no longer be accurate at the time of any replay. Now, I will turn the call over to Sam Susser, our President and CEO.

Sam Susser

Thanks, Chip, and good morning to everyone. Also with me on the call are Steve DeSutter and Mary Sullivan and other members of our management team. Let me begin by saying that even though we faced headwinds throughout last year, 2008 was the best year in our history. We achieved near record growth across most of our categories.

This was despite natural yet significant challenges associated with the integration of Town and Country; the start of a national recession that depressed commercial activity and consumer demand; record high gasoline prices that reduced demand for gasoline and diesel, especially along the U.S.Mexico border; Hurricane Dolly; and Hurricane Ike which directly hit our gulf coast area in the third quarter and required us to temporarily close a number of stores.

Hurricane Ike further interrupted fuel supply by nearly shutting down most of the Houstonbased refining and pipeline and distribution system for several weeks. Fuel supply was also challenged earlier in the year by an explosion at a significant west Texas refinery we had relied on to supply a meaningful portion of our newly acquired west Texas stores.

If all that wasn't enough to keep us hopping, we also remodeled a former WalMart facility to create a new retail support center and corporate headquarters. During this past summer, we consolidated four offices in Corpus Christi along with some staff from west Texas into the new facility. I am very proud of our entire team for keeping their focus on our customers despite the challenges and despite the unexpected twists and turns. Our team made 2008 a great, great year for us. That said, our focus is now on 2009 and on the future.

Let's go ahead and talk about that. We have provided guidance for same store sales growth of 3% to 5.5% and retail fuel margins of 12.5 to 16.5 cents per gallon. This is slightly lower than prior year's performance. This is not because we are seeing significant weakness in either of our geographic regions, but because we think it's smart to be a little more conservative in our planning given the recessionary pressures and the credit crunch impacting the global economy.

Our region has certainly felt these pressures and the impact of falling energy and falling commodity prices. Texas is not an island, and our local markets are seeing the impact of the economic downturn. There has been marked reduction in new home construction in many of our markets and we are concerned about trends in manufacturing, international trade, and unemployment.

However, job data and real estate statistics suggest that the Texas economy is holding up much better than the national economy. For example, in 2008, Texas added over 150,000 new jobs, which accounts for 71% of all the positions created in the 15 states in this country that added jobs.

To date, our underlying merchandise sales trends that our stores remain healthy; and we believe our region has numerous opportunities for new store development and selective acquisitionrelated growth in the coming years. We are enhancing our systems and strengthening our team, and we believe we will be one of the retailers that comes through the recession with a stronger market position and a foundation for additional growth.

Our model remains to provide high quality products at value prices and clean, modern, attractive stores in superior locations. We continue to be a great value for the money with our delicious Laredo Tacos and outstanding beverage, snack and private label offerings. We are focused on delivering great value that will be very attractive to consumers in tough economic times. We know that in 2009 we will be cycling up against very, very strong fuel margins. We believe same store sales growth and the positive impact of our new stores and improved systems should produce another very good year for the business in 2009.

Now let me quickly cover a few highlights of the fourth quarter. Our news release includes a table in the back that shows a comparison of results as if the Town and Country and acquisition had taken place on January 1, 2007. I should footnote that reported same store results for 2008 included 28 days or a month's contribution from Town and Country. Same store merchandise sales grew by 6.5% for the fourth quarter and 6.6% for the full year, which is the upper end of our growth trend for the last 20 years.

If you compare fourth quarter results to 2007's with Town and Country included for the full quarter, our same store sales grew by 7.3%. Our merchandise margins grew from 32.7% a year ago to 34.6% in the fourth quarter, which is the secondhighest quarterly margin we've seen in the last 7 years. Kevin Mahany, our VP of Merchandising, and his team had a superb year building successful partnerships with many of our critical suppliers. As gasoline prices returned to more typical levels, we saw fuel gallons come back after two consecutive quarters of weakness.

Average gallons sold per store in the fourth quarter increased 6.2% from a year ago or 4.8% including Town and Country results in the comparison for the fourth quarter of 2007. The average pump price last quarter was $2.19 a gallon, which is down $0.67 from a year ago. At the same time, retail gasoline margins improved as wholesale costs fell faster than street prices. Our fourth quarter margin was 17.7¢ versus 14.1¢ a year ago. For the full year, retail margin was 17.8¢ a gallon, more than 3¢ higher than in 2007. Our margins clearly benefited from the dramatic fall in crude prices and the volatility from Hurricane Ike.

We have provided a 2009 centspergallon forecast range of 12.5¢ to 16.5¢, which simply reflects our expectations for less volatility in 2009 and a return to a somewhat more normal margin trend. Lower energy prices will not only encourage a further rebound in gasoline demand, but they will also reduce our utility expenses and our credit card fees, which Mary will cover in more detail in a moment. Now, I would like to turn it over to Steve DeSutter for a few more highlights about the fourth quarter and recent developments.

Steve DeSutter

Thank you, Sam, and good morning everyone. Looking at results in the retail merchandise segment in a little more detail, of our 22 merchandise categories, 70% of these categories representing 90% of our sales were up again in the fourth quarter. The category showing the largest same store sales increases were cigarettes, package drinks, beer, food service, and snacks. During the quarter, we opened five new stores, which all have Laredo Taco Company kitchens. In addition, we added three minikitchens in existing stores. We also had two planned closings of smaller stores.

A couple more items of interest. If you remember in the third quarter, we rebranded three Town and Country stores to Stripes on a pilot basis; and we converted the Country Cookin' restaurants to Laredo Taco Company in those stores as well. We are pleased with the results, and we are making plans for more brand conversions beginning in the second quarter.

In these pilot stores, we are seeing a bump in sales trends versus similar stores. The new image makes the stores really stand out relative to their direct competitors. We are prepared to push forward on this project, but we also intend to remain flexible on our overall timeline and we will proceed with the Town and Country rebranding consistent with other capital needs and the economic climate as we move through 2009.

As you may know, following the Town and Country acquisition, a handful of former Town and Country executives that initially joined Susser took their careers in a different direction. The outstanding performance was nevertheless driven by a team of dedicated veterans with tremendous retail and acquisition experience.

In order to prepare for continued growth in the years ahead, we have recruited three new vice presidents into key roles in our retail organization. These are very smart, experienced executives who bring a lot of good ideas to a very strong retail management team.

Rod Martin, VP of Marketing, comes from Whataburger, where he had roles in marketing and brand management and strategic planning and previously was in advertising. Ken Frazier joined our team as VP of Food Service. Ken spent over 30 years at Yum Brands in franchise and companyowned operations. Most recently, he joins us from Quiznos where he was a VP of operations. Finally, George [F], our new VP for Information Technology. He spent 11 years in IT with RaceTrac, which operates C stores in 12 southeastern states.

Rod, Ken, and George have been warmly received by the Stripes team; and they are already fitting in well with the strong culture that exists here at Susser. Now, I will turn it over to Mary.

Mary Sullivan

Thanks, Steve. Good morning everyone. I will begin with a very quick overview of the fourth quarter and full year 2008 results, discuss a few expense trends, and then spend some time on the balance sheet.

Net income for the fourth quarter of 2008 was $6.3 million or $0.37 per diluted share. Excluding the impact of a nonrecurring tax benefit in the fourth quarter a year ago, this is up from earnings of $1 million or $0.05 a diluted share in fourth quarter 2007.

Adjusted EBITDA for the quarter was $30.5 million versus $17 million a year ago on a reported basis or $21.4 million including Town and Country for the full quarter last year. If you add back rent expense to adjust for the effect of our sale leaseback, adjusted EBITDAR was $39.3 million in the fourth quarter versus $24.6 million a year ago on a reported basis or $29.8 million including a full quarter of Town and Country.

For the full year 2008, net income was $16.5 million or $0.97 per diluted share versus $6.4 million or $0.39 per diluted share excluding the impact of tax valuation allowances released throughout the year in 2007.

2008 adjusted EBITDA was $110.6 million versus $58.3 million on a reported basis in 2007 or $99.8 million assuming the Town and Country acquisition had been completed on January 1, 2007. Adjusted EBITDAR was $145.3 million versus $84.1 million reported in 2007 or $130.6 million including Town and Country for the entire year.

I would like to provide an update on the impact of the two hurricanes that hit us during the third quarter last year. We booked hurricanerelated charges of about $500,000 in both the third and fourth quarters for things like spoilage, maintenance, generators, overtime, and incidental expenses for meals and hotels. Additionally, we spent close to $1.5 million in capital replacements this past year; and we expect another half million in 2009 to finish up.

All but a handful of our wholesale dealers are fully back to normal operation in the Houston area following Hurricane Ike, and we still expect two of these to reopen during 2009.

A few of our expense items worth mentioning. Utility costs were higher than normal throughout 2008. Yearoveryear they increased by 34% on a same store basis, although fourth quarter expenses were down 21% from the third quarter as energy prices in general continued to fall. For the quarter, utility expenses were $7.5 million versus $5.4 million in 2007 on a comparable basis including Town and Country. For the full year, utilities were $29.8 million and that is included in the operating expense line.

Credit card expense dropped to 3.5¢ a gallon in the fourth quarter from 5.2¢ in the third quarter, which is certainly a welcome trend. This represented a $2.1 million drop in operating expense quarter over quarter. Total credit card expenses were $6.3 million for the quarter and $28.3 million for the full year 2008. Again, these are also included in our operating expense line.

Personnel expense was $33.7 million for the quarter, up 36%, and $133.1 million for the year, up 61.4%. The increase on a reported basis is due to the addition of the Town and Country stores and the 12 stores we added in the last 12 months. Measuring retail personnel expense as a ratio of merchandise sales, we improved our utilization from 18.6% in 2007 to 18.2% in 2008. We will see a $0.70 per hour increase in the minimum wage this summer, which will trigger compression in our wage structure. This increase will have a greater impact than the minimum wage increases we absorbed in 2006 and 2007.

G&A was $10.4 million for the quarter, up 23%, and $36.9 million for the year, up 32.2%. The increase is mainly due to the combined operations with Town and Country. If we compare against 2007 including Town and Country, G&A for the year is only up half a million. Included in G&A is $3.9 million of noncash stock compensation expense for the year, which is up $1.5 million from last year.

Total operating expense for the quarter was $31.1 million, up 45%, and 125.3 million for the year, up 78%. Again, this is mainly due to the addition of the Town and Country and other new stores plus the increases in credit card fees and utilities we've already discussed.

Rent expense for the quarter was $8.8 million, up 16.4%, and $34.6 million for the year, up 34.1%. This also reflects the effect of Town and Country as well as our [inaudible] activity in 2008. For 2009, we expect to continue to finance stores using leases. Our annualized run rate for rent expense is currently approximately $36 million, but the actual expense in 2009 will depend on the amount and timing of future lease transactions as well as the lease rate.

Depreciation and amortization expense for the year was $40.8 million versus $29.5 million in 2007, which reflects the fact that Town and Country owned most of its stores rather than leasing them. For 2009, we would expect [inaudible] to increase by a couple of million, but that will depend on our actual capital spending this coming year and the amount of lease financing we are able to complete.

For the full year 2008, interest expense was $39.3 million versus $16.2 million, reflecting the cost of financing the Town and Country deal. Cash interest was approximately $37 million.

Turning to the balance sheet, we continue to be in a very comfortable position from a liquidity standpoint. We are in full compliance with all of our debt covenants. Our required principal payments for 2009 are about $9.2 million. Payments on the revolver and the term loan to finance Town and Country don't come due until November 2012, and the $300 million of senior notes currently outstanding don't mature until December 2013. With the exception of some fairly small accounts and annual amortization, we won't have to refinance and retire any debt for almost four years.

At yearend, we had $3.6 million of borrowings and $32.3 million in letters of credit, leaving $67.5 million of unused availability against our $120 million revolver. Our borrowing base at the end of December was $103.4 million which was lower than the maximum $120 million as the dramatic decline in fuel prices reduced our trade receivables and fuel inventories. It also reduced our working capital requirements and, therefore, our need for the increased revolver.

During the fourth quarter, we completed sale leaseback transactions for three stores totaling $8.1 million. We are working on additional stores that we expect to complete during the first half of the year. Although the credit markets have tightened, we still expect to be able to finance the majority of our new store builds in 2009 using lease financing.

If we find that the market becomes too tight or that the terms become unfavorable to us, we're prepared to utilize longterm mortgages or to slow down new store construction in order to maintain the liquidity that is appropriate in the current economic environment.

Just one more point to cover before I turn it back to Sam. 2009 is a 53week year for our retail division, which happens every five or six years. So for modeling purposes, that means you have seven more days of retail sales and seven more days of incremental cost than you did last year. But some fixed costs like rent and property taxes won't increase as they're calculated based on the same 12 months. Now I will turn it back to Sam.

Sam Susser

Thank you, Mary, very much. I think at this point we would like to ask the operator if we have questions from the group.

QuestionandAnswer Session

Operator

(Operator Instructions) Our first question comes from Ben Brownlow of Morgan Keegan.

Ben Brownlow – Morgan Keegan & Company

Good morning. Congratulations. Sam, can you touch on the wholesale business? Are you seeing any change in the health of those operators?

Sam Susser

Our operators, of course everybody is an individual, but in general, I think our operators were certainly stressed by the $140 crude oil that stretched everybody's working capital requirements last summer. We weren't providing unlimited amounts of trade finance to our dealer network. That was a very challenging time.

But I would say that I feel that a lot of our dealers have gotten very healthy in recent quarters with working cap requirements down substantially and enjoyed some very strong fuel margins in the back half of the year. So I thought that's brought a lot of health to the dealer community.

Overall, our volume in our dealer network is a little soft relative to a year ago, kind of consistent with national trends. Our retail fuel volume as you saw in the numbers really bounced back and are strong here in the fourth quarter. Overall, I would describe the wholesale volumes as a touch softer than the retail volumes.

But I think the health of our dealers is very strong. We just completed a great trade show. Had record turnout in Houston. We got a number of dealers looking at growing with us in the coming year, although capital markets are certainly a challenge for them. I think we're going to overall see more strength in the dealer network in 2009.

Ben Brownlow – Morgan Keegan & Company

Do you think that, obviously the regional market is doing very well there, do you think you're picking up market share?

Sam Susser

I think so. We're steadily growing our total volumes in both the retail and wholesale side. I think there's no question that we're picking up market share here in our region. No doubt about it. Merchandise as well.

Ben Brownlow – Morgan Keegan & Company

Just trying to get a little bit better idea on what drove the fuel comp, lower fuel prices, but do you think that it was more an absolute lower fuel prices that drove that comp or do you think it had to do more with the lower relative prices to Mexico? If you could, talk about the regional fuel comps that you saw within your markets.

Sam Susser

I would say that the biggest volatility on fuel volume we have seen was along the TexasMexico region. Last summer, when retail prices were $4, $4.50 a gallon, that was the area of the company that showed the greatest softness in the fuel volume and it snapped back very quickly as fuel prices came down and prices on the U.S. side were closer to parity with prices posted by [T-Mex] in Mexico. Just another sign of how smart consumers are and they know what's going on and they'll take the time to find that value. We definitely saw more volatility along the Mexico border than elsewhere in the company.

Operator

Our next question comes from the line of Anthony Lebiedzinski of Sidoti & Company. Please go ahead.

Anthony Lebiedzinski – Sidoti & Company

Good morning. I had a couple of questions. First, on the merchandise sales, I was wondering if you guys had any benefit from any price increases or whether the merchandise sales growth was entirely just because of unit volumes growing?

Sam Susser

Our growth last year was very balanced. There was a small amount of inflation and a small amount of customer account growth and [inaudible] growth and average transaction size. As we kind of poured over our numbers during the year, we were really pleased with the growth coming in a balanced manner as it wasn't all balanced on one leg of the stool. Very solid and the growth came across many, many categories as Steve mentioned in his comments.

It was just great fourth quarter, a great year with balanced growth, our new stores are maturing; and we're pleased with the results of the new store program overall. Of course with as many new stores as we have, some are better than others. It was just an outstanding year and we're doing everything we can to try to make 2009 feel like 2008. This was as good a year as we've ever had.

Anthony Lebiedzinski – Sidoti & Company

Also, one of your other competitors or another convenience store operator, let's just put it that way, they had recently commented about the diesel, how they were seeing diesel volumes drop off. I was wondering if you guys could comment a little bit how many stores actually of yours sell diesel and what do you see there in terms of volumes and margins with respect to diesel?

Sam Susser

We have 28 stores in our 512 retail network that have separate diesel fueling canopies that are really geared to offer high volume diesel to trucks. I would say that we have seen some softness in the diesel volume, but not anything surprising given what you are reading in the press and what's going on with local trade. Diesel pricing in Mexico is more competitive than gasoline pricing. A lot of those truck drivers are certainly, over the past year, have taken advantage of lower prices, which are tax free in Mexico, and we've seen some of our fuel volume shift down to Mexico.

We still very much love those travel centers. They are great units. Volumes are have not been real strong there, on a relative basis, but the absolute contribution is terrific and the merchandise sales has held up very, very well at those travel centers, including those that have seen a softness in diesel volume we're still growing our merchandise sales and growing our food business. It's been a surprising result, but one we're very pleased with.

Anthony Lebiedzinski – Sidoti & Company

My last question is with respect to Laredo Tacos . You mentioned that you put in a couple of minikitchens in 2008. I was wondering what is your expectation for that in 2009? How many retrofits do you think you can do by the end of this year?

Sam Susser

It will be a small number of retrofit kitchens that get added to our existing stores. Our real focus is going to be on our rebranding efforts as we convert Town and Country and Country Cookin' branded locations to Stripes and Laredo Taco . That's where most of the energy and capital and focus is going to be in 2009. Order of magnitude, we expect to get, Steve, you want to comment on the number?

Steve DeSutter

One or two additional.

Sam Susser

We'll convert how many of the 160 Town and Countries to Stripes and Laredo Taco this year?

Steve DeSutter

Between onethird and twothirds of the Town and Country group will be converted to Stripes and Town and Country, depending upon capital spend.  

Operator

Our next question comes from the line of Jeff Blaeser with Morgan Joseph, please go ahead.

Jeff Blaeser – Morgan Joseph & Company

Good morning. One question on the cost side, you mentioned credit card and utilities. If prices in current day, like as of right now, in terms of the gasoline and utilities were as is in 2008, can you quantify what the savings would have been? To get a look for next year's numbers and modeling purposes.

Sam Susser

Order of magnitude, it's millions of dollars, low singledigit millions, $3 million or $4 million in utility savings. Credit card costs, Mary, you want to comment on run rate today, can you annualize that out?

Mary Sullivan

For the fourth quarter, run rate was $6.3 million for the fourth quarter. So times 4 is about $25 million, say, versus $28 million we saw in 2008. If you pull out credit card expenses and utilities out of our operating expense line, that would have been $67.1 million versus the $125.3 million for the full year.

Sam Susser

If energy prices stay down, it would not be unreasonable to think that those two lines, utilities and credit cards, would be down $6 million to $10 million on a samestore basis for 2009 versus 2008.

Jeff Blaeser – Morgan Joseph & Company

That's helpful. Then, on the gasoline margin side. Clearly, 2008 was somewhat unique. 2007, you posted a pro forma or blended 16¢ per gallon margin. Was there anything in that year different or unique or is that a easier comparison when we look at the two companies together in more normalized conditions?

Sam Susser

There's been a lot of volatility relative, take a 20year view, the last three or four years have been extraordinarily volatile as far as energy prices go. Volatility has been our friend, although we certainly don't enjoy it when it's going up, at the end of the day, overall volatility has enhanced our fuel margins, not hurt it. I think the world is probably going to remain volatile, my guess, in 2009, and I don't think, to your specific question, 2007, was that an unusual year?

We have provided a range of 12.5¢ to 16.5¢ on fuel margins for the year. It's a pretty wide range, but that's because we don't know. We think last year was unusually good. We're not planning on a repeat of that. We don't need it to have a very successful, profitable operation. Certainly every penny a gallon matters a lot to us.

Operator

Our next question comes from the line of Andrew Berg with Post Advisory Group. Please go ahead.

Andrew Berg – Post Advisory Group

Just wanted to clarify again on the utility and credit card costs, Sam, you said if things were to remain where they are today yearoveryear, we could see as much as a $10 million improvement on the cost side?

Sam Susser

Yes. That's a guesstimate. Order of magnitude, I think that's a reasonable number.

Andrew Berg – Post Advisory Group

Can you talk about how much more, as you look at the sale leaseback market, how much more pricing has changed on that? I know Mary is indicating you guys are still seeing some ability to do that. Obviously, you have a couple, three out this quarter.

Sam Susser

Prices have inched up a little bit. It hasn't been overly dramatic. Inched up a little bit, but it still remains very much singledigit cap rates.

Andrew Berg – Post Advisory Group

For remodeling purposes, should we think that the number will still be in the order of magnitude of $2.5 million to $3 million a store is what you can get?

Sam Susser

Yes.

Operator

Our next question comes from the line of Mike Smith with Kansas City Capital. Please go ahead.

Mike Smith – Kansas City Capital

Sam, what do you think of the $0.61 tax on cigarettes that's going into affect in April; and do you think that will impact your business?

Sam Susser

I think there will be some modest impact. We have seen a sharp trend over the last couple of years away from carton pricing to single pack pricing or single pack purchasing on the part of the consumer. This will compound that trend. People are going to buy fewer cartons and more single packs.

Again, we really think consumers are smart; and they know the tax increase is coming. We would anticipate that there will be some people shifting purchasing to the two or three weeks right before the price increase goes in. For the industry, I think it's going to bring total cigarette sticks smoked down. I have seen estimates ranging from 3% to 5% of further deterioration in cigarette consumption because of the tax increase. I will remind you that cigarettes are only about 19% of our merchandise sales and about 8.5% of our merchandise gross profit.

We have been planning for this deterioration in cigarettes for many, many years and building bigger stores and focusing on other categories because we believe that government will be attacking cigarettes forever.

Mike Smith – Kansas City Capital

That's a big segue into the other part of my question which was you rebranded three of the Town and Country stores. It sounded like you were pleased with those. How much did you spend to rebrand those, and what kind of a lift in same store sales did you get out of those?

Sam Susser

The first three stores were certainly more expensive for us as prototypes than what we're going to do with the bidding process. We're going to have a large package of stores that we will bid at a time. Order of magnitude, we spent about $150,000 on those three locations each. We have seen very positive, double digit increases in food and merchandise lifts from those three stores. Obviously, the results vary, each of them are unique.

But the blended average is a double-digit return in increased sales relative to the control group around those stores. We are very pleased with that. At the end of the day, the Town and Country stores need a freshening, they need capital, they need image work, and they need some of the older equipment to be replaced and upgraded. We're firmly committed to making those investments and making sure that all the stores are the best in their markets.

These three units look absolutely fantastic, and they stand out night and day relative to the direct competitors. We are pleased with the branding work that our team has done and they're working hard to stretch those dollars as far as we can here, as we approach the balance of the project.

Mike Smith – Kansas City Capital

Sounds like a pretty quick payback, too.

Sam Susser

We're very pleased with these first three stores. I don't want to extrapolate that the whole project is going to generate these kind of results, but these first three were terrific. It's the right thing to do; and, over time, we are going to get it done the right way across the network.

Mike Smith – Kansas City Capital

We'll extrapolate for you, Sam. The acquisition situation in Texas, New Mexico, Louisiana look like down there? Anything interesting?

Sam Susser

There are a number of groups of stores that we think of are very well run, quality operations that we would love to have part of our network. In this climate, asset valuations clearly are coming down fast and hard. I am not sure that people that are owning businesses, quality business, have adjusted their expectations or just not willing to sell at the kind of valuations that are available in today's market place.

We do see some distressed properties out there quite a bit, distressed properties that are cheap, but we're not really enthusiastic about most of those distressed situations because of the quality of the real estate facilities that are involved.

We're very selective on the acquisition side. We feel great about our track record on integrating acquisitions and want to do that in the future as well, but we want it to be great facilities that, once integrated into our business, will help us continue to build same store sales growth for years ahead. Not just a good buy in year one, but something that will make sense for 10 and 20 years out.

Operator

Our next question comes from the line of James Berman with JB Global, please go ahead.

James Berman – JB Global

Hi. Are you able to estimate the ratio of your operating income to your fixed lease and interest costs and where you stand in terms of that ratio and its relationship to where it would trip up any of your credit lines or covenants?

Sam Susser

We have very substantial cushions between our actual performance on covenants. Where we stand today is EBITDA to cash interest is about 2.99 times and EBITDAR to interest and rent is about 2 times. Our debt to EBITDA is about 3.7. If you do a lease adjusted [get], we capitalize rent at 8 times, we're at about 4.7 times. Senior leverage of our plank debt is .88. Senior leverage to EBITDA. There's substantial delta, very substantial delta between our trailing performance and any of our covenants in any of our facilities.

Operator

Our next question is a followup from the line of Ben Brownlow with Morgan Keegan. Please go ahead.

Ben Brownlow – Morgan Keegan & Company

I just wanted to ask one quick question on the merchandise margin. Your guidance for 2009 falls around your 2008 margins, but I just wanted to see what would lead you to that lower end of the margin guidance given the procurement savings?

Sam Susser

A lot of procurement savings where achieved in the prior year. We think that clearly the cigarette tax will have a net effect of reducing our merchandise margins in 2009. That's something that you want to dial in. Our merchandise margins and same store sales trends continue to feel healthy and solid and have traction. But we our stance is we need to be more aggressive to maintain our great track record of same store sales growth and taking market share and we're prepared to do so.

We are relentlessly exploring options to offer more value to our consumers across all the different categories that we offer. Our team is looking at lots of options and kind of developing plan A, plan B, and plan C, depending on what kind of economic climate we see ourselves operating in during the balance of this year.

We really, firmly believe in same store sales growth is a key metric that is necessary to build a successful business the way we run it. We're prepared to dial our margins up or down as necessary to be sure that we are achieving that good, solid traffic growth and customer count growth.

Operator

At this time, we don't have any additional questions. I would like to turn it back to management for any closing remarks.

Sam Susser

We appreciate everybody's time this morning. Obviously, we are very grateful and proud of the results accomplished in 2008. It's a lot more fun to be out in our stores and in our marketplace and see all the activity that's there. Just read the newspaper and all the negative headlines. Based on what we see in the stores, we have got lots of reasons to feel very optimistic about hopefully will be another great year.

We do appreciate that Texas is not an island, and this economy could create some changes that aren't visible to us. But, hopefully, we're doing the right things and we'll come through this stronger than ever and poised to grow further in the years ahead. Thank you for your time. Please come see our stores and come eat some tacos with us. Thanks, everybody.

Operator

Thank you, sir. Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial (303)5903000 using the access code of 11126464 followed by the pound key. That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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!