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The Pantry, Inc. (NASDAQ:PTRY)

F2Q13 (Qtr End 03/28/2013) Earnings Call

May 7, 2013 8:30 AM ET

Executives

Andrew Hinton - Director, Treasury Operations

Dennis Hatchell - President and Chief Executive Officer

Clyde Preslar - Senior Vice President and Chief Financial Officer

Berry Epley - Vice President and Corporate Controller

Analysts

Bonnie Herzog - Wells Fargo

Irene Nattel - RBC Capital Markets

Kevin Mcclure - Wells Fargo Securities

Ronald Bookbinder - The Benchmark Company

Anthony Lebiedzinski - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to The Pantry Inc. Q2 2013 earnings conference call. (Operator Instructions) Now, Andrew Hinton, Director of Treasury Operations will introduce today's participants. Please proceed.

Andrew Hinton

Good morning, everyone. Thank you for joining us to discuss The Pantry's second quarter financial results, which were released this morning. Please note that we have also posted slides for this morning's call on the Investor Section of our website, at www.thepantry.com. The earnings call slide presentation feature is new for us and is part of our continuing efforts to improve our communications with investment community.

Today's presenters are Dennis Hatchell, our President and CEO; and Clyde Preslar, our CFO. Berry Epley, our controller is also participating in the call.

Before we begin, I would like to point out that certain comments made during this call may be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. There are a number of factors that could cause actual results to differ materially from those implied by any 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 www.thepantry.com for these and other documents.

During today's call, we will refer to certain non-GAAP financial measures that we believe are helpful in understanding our financial performance. A reconciliation of each non-GAAP measures to the most directly comparable GAAP measure is included in the conference call slides posted on our website.

At this point we'll turn to Dennis for his comments.

Dennis Hatchell

Thanks, Andrew. Good morning, everyone. The second quarter was, to say the least, very interesting and challenging. Starting on Slide 4, we believe our second quarter same-store traffic decline of 4.6% was mainly caused by weather, as we experienced considerably colder temperatures in our market area, accompanied by more significant winter storm activity in 2012.

This year's March temperatures across our market area averaged 15 degrees colder than March of 2012. In addition, the economic uncertainty, the higher payroll taxes and the lack of consumer confidence were our four factors.

Moving to Slide 5, before covering the second quarter, I do want to note that we are gaining momentum in our key focused areas with increase in average sales per customer, upgrading our store base with new and remodeled stores and continuing to control cost. During periods of favorable weather, we have been pleased with the sales results that we achieved, but as near as I can tell, we haven't seen many of those favorable days and we are certainly looking forward to seeing a few of them.

We're also pleased and have completed the rollout of our fuel pricing system to all stores as scheduled, with a number of stores coming on late in Q2. Starting the third quarter, all stores will be supported by new fuel pricing system.

During quarter two, we completed six additional remodels, including the addition of three QSR's, plus we opened our new Charlotte store in early March. The performance of these remodeled and new stores has been encouraging.

Turning now to the second quarter's summary on Slide 6. Our quarter two adjusted EBITDA improved slightly to $39.1 million and was consistent with our expectations coming into the quarter. We were disappointed with our customer traffic levels and result in 2% decline in comparable store merchandise revenue and a 7.9% decline in retail fuel gallon.

We believe this decline in retail fuel gallons was driven by loss in traffic, as our competitive position relative to the markets we operate in remains generally consistent. We did benefit from a decline in fuel cost in the second half of the quarter and the fuel margins came in stronger than expected. We were also encouraged to see the 2.6% improvement in comparable merchandise sales per customer and are confident that continuing progress with our merchandising initiatives will drive stronger overall performance and customer traffic levels improved.

Slide 7 provides details on our category performance. Cigarette sales comps declined 6.4% during the second quarter and continued weakness in our category. This put pressure on our overall merchandise comps. Excluding cigarettes our comparable store sales were still favorable at 0.1%.

Our QSR sales comps declined 5.9% during the quarter, reflecting the challenges seen across the quick-service restaurant industry. On the plus side, our proprietary food service comps were up 3.3%, driven by solid growth in dispensed beverage, grill, deli and fresh food offerings.

While emphasizing topline growth, Slide 8 summarizes our continued intense focus on managing costs and improving profitability. Second quarter OSG&A was up approximately $600,000, but this is due to year-to-year changes in gains losses on asset sales and current year's severance cost. Excluding these items OSG&A was down $3.1 million from last year.

In a few area, wholesale fuel cost climbed until mid-February, before reversing course, and falling steadily through mid-March. Fuel cost lag began in late March, before falling during the first two weeks of April.

Following a typical pattern, retail prices in our markets like these cost changes, resulting in stronger margins for us during periods of declining fuel cost. As mentioned earlier, we completed the rollout of our fuel pricing system during the second quarter as scheduled, and while we are still looking to fully leverage this new tool, we are pleased with the capabilities the system now gives us.

Slide 9, show that in other key areas, our lifestyle, local merchandising efforts, are gaining momentum, as we focus on different lifestyles and local merchandising opportunities. Early results were positive and we are pleased with our progress. Year-to-date we have touched approximately 450 stores under this program and we will continue to look for opportunities to localize the offerings in our remaining stores, given additional lifestyle.

Turning to other key activities on Slide 10, we made further progress upgrading our store base. Opening our new Charlotte store in early March was a positive step and we are very excited about its early result. The new store is 4,900 square feet, features a Subway with a drive-thru, and both indoor and outdoor seating. This store also includes our Anaheim's proprietary food service offering.

We completed six remodels during the second quarter and another 17 were completed in April and early May, bringing the year-to-date total 27. We currently have more than 25 projects underway, including remodels, QSR additions and new stores. We remain on track for a minimum of 70 to 80 remodels during the fiscal year.

Adding QSR's has been a significant focus. Year-to-date we have completed three new QSR's, which include testing the first two locations of the new Taco Del Mar brand. Taco Del Mar, a Mexican food concept specialized in fish tacos owned by Subway.

We will continue to look for additional opportunities to grow this promising concept as we see more results and find additional locations where it will be a good fit. We currently have six new QSR's under construction and plan to have 17 more over the second half of our fiscal year.

Lastly, we have just kicked-off our third year of The RooCup. It's been a very successful seasonal product offering for us in recent years. Under this promotion, customers buy a RooCup for $6.99 and they get refilled for $0.25 all summer long. Early results have been strong and our objective is to leverage this customer enthusiasm around The RooCup to drive additional traffic and sales on our stores during the spring and summer driving season.

In summary, our negative comps this quarter were disappointing. While we have tried to help you understand the operating environment that we faced in the second quarter, I don't want to leave you with the impression that we are using this as an excuse for these results. Our goal is to improve our business and drive both top and bottomline growth. We are confident that we have effective initiatives in place to accomplish this, as we execute on these initiatives, we will show the kind of progress everyone expects.

Now, Clyde will review the second quarter financial results.

Clyde Preslar

Thanks, Dennis. I am excited to be part of The Pantry team and pleased to have this opportunity to speak with you this morning and I look forward to supporting our ongoing communications with you. Also, I really appreciate Berry's outstanding help, as I've worked to get up to speed on the company. He's on today's call and will continue to be a resource for you. Andrew Hinton, serves as our point person for Investor Relations and he can pull Berry and me at anytime.

As Dennis covered, we continue to make progress, strengthening the company and positioning it for a sustained profitable growth. He also pointed out that weak customer traffic levels hurt both our merchandise sales and retail fuel gallons during the second quarter. However, we are working through these temporary challenges and continuing to execute our core plans.

If you'll turn to Slide 12, we show that total revenues for the quarter were $1.9 billion. This was 8.2% below last year due to the decline in fuel gallons sold, lower merchandise sales and 47 fewer stores on average. Net interest expense increased $2 million to $22.2 million due to higher rates.

Our effective tax rate was a benefit of 49% compared to a benefit of 37.5% in the second quarter of fiscal 2012. The higher effective tax rate benefit resulted from retroactive extension as the work opportunity tax credits. They were reinstated on January 2, 2013, with cumulative tax credits of $1.6 million included in our results for Q2 of 2013.

Net loss for the second quarter was $6.9 million or $0.30 per share compared with a net loss of $9.7 million or $0.43 per share last year. Please note that the current year loss includes $0.02 per share of non-cash asset impairment charges compared to $0.13 per share of impairment and debt extinguishment cost a year ago. Excluding the impact of asset impairments, current year net loss was $6.3 million or $0.28 per share. Adjusted EBITDA for the quarter was $39.1 million, compared with $38.9 million a year ago.

Slide 13 covers the P&L in more detail. Merchandise revenue declined 3.7% to $419 million due to the 2% decline in comparable store sales and a reduction in store count. However, our merchandising gross margin rate improved 30 basis points to 33.7%, supported by the favorable mix impact of proprietary food service growth.

In the fuel area, retail gallon sold declined 7.9% on a comparable store basis and from a gross profit standpoint this volume decrease was more than offset by a significant improvement in margin per gallon. Our second quarter retail gross margin per gallon was $0.117 compared with $0.096 a year ago.

Please note that our fuel margin is net of credit card fees and equipment maintenance costs, which totaled $0.071 per gallon this quarter compared to $0.068 per gallon a year ago. Excluding these costs, retail gross margin per gallon would have been $0.188 and $0.164 in the second quarters of 2013 and 2012 respectively.

Total store operating and G&A expenses for the quarter increased approximately $600,000. Within this, store operating expenses declined $2 million as our initiatives in reduced store count growth, lower labor and facility-related costs.

G&A expenses increased $2.7 million to $25.2 million due to a $3.1 million unfavorable swing and gain loss on asset sales and $633,000 in severance cost during the second quarter. Excluding these items, G&A was down $1 million. This brought reported income from operations at $8.7 million, up 21% from the prior-year quarter.

Slide 14 provides further perspective on our second quarter adjusted EBITDA. While relatively flat with prior year as reported, it was up a solid 11%, when gains and losses on asset sale and severance charges are excluded.

Turning next to capital expenditure on Slide 15. Our net capital spending was $17 million with minimal proceeds from asset sales compared to $13.9 million last year only had $3.1 million in asset sales. From a store count perspective on Slide 16, we closed six stores during the second quarter bringing the year-to-date total to 13. Netted against store additions, we ended Q2 with 1,568 company-operated locations compared to 1,611 at this time last year. Our quick-service restaurant count is up to 219 and we have 70 wholesale fuel locations.

Slide 17 covers our cash and liquidity position, showing that we finished the second quarter with $9 million in cash. Our net debt declined to $951 million, which was down $48 million from last year. At quarter end, we had $129 million in liquidity, including cash and revolver availability to support our plans for growth and increased profitability.

Slide 18 shows our current outlook for Q3 and full year 2013. So far in Q3 we've been encouraged by our sales results during periods of favorable weather and our retail fuel margins have remained solid. For full year 2013, we expect total merchandise sales to be between $1.79 billion and $1.82 billion, merchandise gross margin in the 33.7% to 34% range, retail fuel volume between 1.66 billion and 1.71 billion gallons, fuel gross margin ranging between $0.115 to $0.13 per gallon, and store operating and general administrative expenses to $607 million to $615 million. We also have provided guidance for D&A, net interest expense, as well as capital expenditures.

So with that, we'll conclude our prepared remarks and open the call for questions. Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bonnie Herzog with Wells Fargo.

Bonnie Herzog - Wells Fargo

I guess my first question is, could you talk a little bit about April and May trends and how they are performing versus what you've see in the second quarter. Are you seeing things start to pickup in terms of traffic?

Clyde Preslar

As both of us mentioned, Bonnie, Dennis and I, as weather has been good, we've been very encouraged with traffic levels and continuing progress on average sales per customer. As we've reflected that latest thinking in our guidance with comp store sales on a merchandised side down 2% in Q2. We're kind of here with when we've had some bad weather here over the last few weeks, we're down about minus one. We remain comfortable with our guidance for the quarter on the merchandise comps.

On the fuel side, again, we were having better days right now. We're kind of in that down 7% range versus the 7.9%, than we had in Q2. So again on days when the weather was favorable, we were encouraged. And then as I mentioned our CPG is holding up, we've factored that into our guidance as well. And at the moment it's just shy above quarter-to-date of $0.16 per gallon.

Bonnie Herzog - Wells Fargo

And then, my next question is on the pace of your store closing, so you've closed I guess about 13 stores year-to-date. Is that expected to accelerate as the year progresses, are you still on track to I think close 30 to 40 stores this year?

Dennis Hatchell

We've had 25 to 35 stores in our plan all along and we're addressing them. Before we obviously chose to close them, we're putting some effort again and making sure that we're not missing a good opportunity there. But we're on pace to have that many stores closed by yearend.

Bonnie Herzog - Wells Fargo

Then, my last question is drill down a little bit more on the fuel margins and curious how the new pricing system had possibly a positive impact on the stores that that has been implemented. If you could touch on that a little bit further. Are you seeing those stores comping better than the chain average that would helpful?

Dennis Hatchell

We're just going to get the start to utilize it this quarter. We spent second quarter going as our plan of getting all the stores up and running, which we've got completed. And so we're pretty excited about the knowledge that it's given us. By the end of next quarter, we'll be able to let you know the impact it has on comp stores as we model a whole chain at one time.

Bonnie Herzog - Wells Fargo

And just to verify it, that system is now implemented in each and everyone of your stores, correct?

Clyde Preslar

That's correct. We finished them all off right at the end of the second quarter.

Operator

Our next question comes from Irene Irene Nattel from RBC Capital Markets.

Irene Nattel - RBC Capital Markets

I was wondering if you could just address the competitive environment, both on the fuel side and also inside the store. And in particular, what you're seeing in the cigarette category, an incremental competition from the Dollars Stores?

Dennis Hatchell

On the competitive side we're, if I start on this, I'll kind of answer your question back. I hope we didn't miss anything here. We're just beginning to see Dollar Stores load up to cigarettes in their operation. So we never really had a big impact from them. Right now, we're continuing obviously to monitor them and see how they go about selling cigarettes in the stores.

But I would say, right now, our impact from them is pretty minimal until they obviously rolled out a little bit further. One of the more interesting impacts that we've had, that we're cycling this year, was a change in the law in Virginia that didn't allow you to have more than five carton cigarettes in your vehicle at any one time. They're trying to stop the illegal transport of cigarettes. And that had a significant impact on our cigarette sales in most of the interstate stores that we have in Virginia and North Carolina.

As far as the other competitive activity, I don't think there is anything unusual. We have seen new stores open from the usual competitors that Sheetz, QT and Wawa. They are terrific competitors, but we think we're doing a nice job competing with them. And there has been no usual activity, other than we know where they are and when they're opening and are making plans to address the situation.

Irene Nattel - RBC Capital Markets

And if you could just talk about with the weather, the issues that impacted Q1. What you saw inside the store in terms of mix and whether you saw any heightened competitive activity during the period?

Dennis Hatchell

I think the biggest thing that affected us with the weather is just simply, it's been so miserable that between snow storms, heavy rains. Just recently as two days ago, Atlanta had four inches of rain and that kind of cut across all our market area into Georgia and Mississippi. I mean people just basically don't come out of their cars and they certainly don't fill them up in that kind of condition.

And some of the most notable things that we see, which is why we're pretty encouraged, once again in our store we see nice sales in our proprietary food service offerings. And the biggest swing is our hot beverage continues to be very high in its comp performance like 8% to 9%, while our cold beverage and our beer and other dispensed products just stall way off, and it's obviously because it's just so cold out. So we're very hopeful that we're part of mid spring, but we're sure hopeful that summer gets here pretty quick.

Operator

Our next question comes from (William Rutter) with Bank of America Merrill Lynch.

Unidentified Analyst

You guys have kind of a handful of things that are going on with the lifestyle and merchandising efforts, moving more QSR than to some stores, implementation of the new electronics signage. Are there certain stores or I guess groupings of stores that you could say are doing much better than the average of the whole chain or is everything performing similarly?

Dennis Hatchell

I think Florida has had the best weather and those have been our best performing stores. It's pretty noticeable and what's happening there. The rollout of lifestyle local and the electronic price signs are not being done geographically as much as they are done to stores that most need that kind of activity. So it would be difficult to give you a market-by-market result, other than that the stores that there have been touched with local merchandising or with lifestyle merchandising have performed very nicely.

Unidentified Analyst

And then your QSR comps were not particularly strong. I am wondering whether you think this is just attributable to the weather and the economy or whether there are some competitive dynamics that are changing with selective food that are impacting that?

Dennis Hatchell

We have system knowledge for each of our QSR's from our partner franchise awards that I can't share publicly, but I can tell you that we're performing right along with. There is system-wide performance, so I'd have to say it has to deal with kind of how the economy is creating QSR's right now.

Unidentified Analyst

And then lastly from me, in terms of RooCups, I am curious whether any competitors have copied your initiative here and are implementing anything different this year?

Dennis Hatchell

If I see a RooCup in somebody else's store, I'm going to be really upset. No, we have not seen anyone copy. There is obviously people who are selling all size drinks for one retail and some other things as they're trying to do to drive that. We're continuing to enhance this program. You can now buy certain pens to customize RooCup. Well, this year you can get a different straw for everyday. The kids are having lot of fun with it. And those kids, they just go all the way up to about 60 years old. So we're really enjoying the activity that RooCup is causing in our stores.

Operator

Our next question comes from Bryan Hunt with Wells Fargo Securities.

Kevin Mcclure - Wells Fargo Securities

This is Kevin Mcclure standing in for Bryan. Couple of questions; just want to drill down into the comp gallons for this quarter. I lot of color was very helpful. But I was hoping you can maybe bucket it out for us, it sounds like weather was the biggest factor driving the same-store gallon decline, how much of it would you say that was related to competition, market share effects? And then also how much would you say could have been attributable to consumers purchasing more fuel efficient vehicles.

Dennis Hatchell

We are also here trying to figure out how to answer that question, Kevin.

Clyde Preslar

Just as we jump in for some times sometime across our footprint we've seen gallons declining and I know that I've a heard number drawn out of kind of down 3%, which is a combination of the economy, more efficient cars and so on and so forth. We've tried very hard. And I know this is something very important to Dennis is to get information sources where we can do a better job of really understanding what's happening with fuel consumption in our area and we're hoping in coming quarters that we can point to third-party sources that make it a bit more fact base.

But all the anecdotes we have is that for this quarter whether economy uncertainty, as Dennis mentioned, the payroll tax kind of aberration and so forth is that it feels to us that decline was greater than that this quarter. Just how much we're not comfortable saying and I think all of us would have varying opinions on that. But it is a combination of the things that you talked about. We did want to make it clear though that from our standpoint we really haven't made any meaningful changes to our competitive position. And for comp we do see those comps improving as we move forward.

Dennis Hatchell

Kevin, I would only add one other, this is Dennis, is that early in the quarter we were above to 350 retail for fuel in this area. And you obviously see a noticeable fall-off in the number of gallons purchased when that was up. So we not only had the payroll tax issue that hit that everybody has heard about and then the fuel prices were above 350. So early on we saw a pretty good hit to this, to the gallon counts as well.

Kevin Mcclure - Wells Fargo Securities

And then just two other questions for us, one, related to the prototype store you recently open in Charlotte. Can you just elaborate and force what you've done with this store and how it may differ from a lot of your other stores and the pace of potential expansion or replication of this prototype?

Dennis Hatchell

Well, obviously the first noticeable thing is that it is a full QSR with the full inside seating as well as outside seating and the drive-thru so it gives QSR the kind of presence that it needs to compete well in the marketplace. Inside the store, we've aggressively gone after the kind of products that we thought people in that area were really looking for.

So there is in the proprietary food service area, we have the frozen yogurts with the ice teas, the different smoothie offerings, iced coffee as well as increased, what we call, mixology. So you we're brewing the coffee, we call it, WE BREW IT. YOU DO IT. There is an opportunity to really customize it. In that store there is also a good deal of Hispanic offerings, because we identified that particular demographic in the area. And it sounds a little bit strange, but we also have all of the single custom brews because we found there is a lot of folks who like the craft beers in that particular area.

We have dramatically changed the health and beauty care offering within the store to get after what we've identified as a consumer request and the need. So there is a lot of customization within there and then most of importantly, of course, we have a significant fuel offering out front, so it's pretty dramatic when you drive up to the store. Most importantly, we have invested a lot of time and effort in working with our people and training them. And we just have a terrific staff in that store who will make sure that anybody to comes though the door is going to be pleased of what they got.

Kevin Mcclure - Wells Fargo Securities

And lastly for us, one housekeeping question. What would say the minimum amount of cash that you need to operate all of your stores at any given point of time?

Clyde Preslar

It's a very, very fair question and Andrew who kick of the call here is on top of that every minute, but depends on how you think about it. With our revolver, you can kind of run that down pretty closed to zero. We can tap into our revolver, but we ended the quarter with about $9 million in cash. And we did have some revolver draws. We're now out of the revolver and showed up a meaningful transaction wouldn't expect to be back in the revolver through the fiscal year.

But with our revolver and availability on it, we can keep that number down very, very low. I haven't been here long enough, if say, we were fully drawn on the revolver what we would need, and actually I'll turn to Berry. Berry, what would you say?

Berry Epley

In that situation we talked about $30 million to $40 million number, but we have ample availability on the revolvers, Clyde mention so.

Operator

Our next question comes from Ronald Bookbinder with The Benchmark Company.

Ronald Bookbinder - The Benchmark Company

The proprietary food service seems comp better than most categories. What was that driving that, was that just an increase in offering versus last year or are there certain items that are catching on?

Dennis Hatchell

It was in our opinion execution, we're spending a considerable amount of time going back and retraining our employees both in terms of suggested selling, sampling and treating those products as fresh product. And that obviously, got us more in-stock, it got more attention to the proprietary food service side and cause a good bit of excitement. We were really pleased with how all the employees embrace this and took off with it and we're continuing to see growth.

Ronald Bookbinder - The Benchmark Company

And on the growth margin on the proprietary food as you increased the in-stock position, is there more waste or is gross margin increased helping to increase the company average as its above average on higher sales?

Dennis Hatchell

We're paying close attention to yield, which is gross margin, less labor, less shrink, and most of the wrap and supplies that it takes to handle proprietary food service. And so our focus is on continuing to increase the yield out of these departments. So many times, it doesn't have to do with driving the gross profits higher, it has to do with just handling this product, getting the right amount out and making sure that your yield performs.

Ronald Bookbinder - The Benchmark Company

And how does the yield been trending?

Dennis Hatchell

Yield has been increasing, generally. I don't have the exact percent, but it has been slightly increasing since we began focusing on it.

Ronald Bookbinder - The Benchmark Company

And on the lifestyle concept, such as beach, college, Hispanic, are there any that are trending better than others?

Dennis Hatchell

It's a little bit seasonal. Obviously, we're trying to monitor this, but we have the biggest percent growth in this area in and around the stores that have the college merchandise. We're obviously just getting into kind of the beach results now and if the weather stays the way it is we're going to have pretty miserable results there. So hopeful it will warm up. And then followed by the Hispanic after that, so obviously, college I think will appear out for the summer time and the beach will replace that as the strongest category and Hispanic just kind of continues throughout the year now.

Ronald Bookbinder - The Benchmark Company

And then you would expect college to pick back up, come football season?

Dennis Hatchell

I certainly hope so.

Ronald Bookbinder - The Benchmark Company

Electronic signage, what percentage of the stores have electronic signage and will you be able to control the pricing of the signage from the home office?

Dennis Hatchell

One third of our stores are operating right now. We have another third that are being installed right now. That will be done by the end of our fiscal year, so two thirds of our stores finish by fiscal year-end. And other than a button push at retail, because we need our associates to obviously know when the retail is changing. We do have the ability to move the retail through the point of sale all the way up to the sign.

Ronald Bookbinder - The Benchmark Company

And on the RooCups, how much more are you producing this year than last year?

Dennis Hatchell

We're staying with the same amount of cups this year as last year. We think that making the shortage right at the end of the summer is pretty important so that we keep the frenzy alive. So we didn't quite reach that point last year. We think we will this year and we're trying to get that early activity going. We saw a lot of activity, the folks reserving the RooCups this year to make sure that they get them. And we kind of want to keep that focus right now and hope that we get attachment to all the refills throughout the summer as our driver.

Ronald Bookbinder - The Benchmark Company

Yes I saw the signs to book your reservation for your RooCup at the stores. Did you have a lot of people reserving cups or was that just sort of marketing?

Dennis Hatchell

We never did that before. I think we had an excess of 25,000 cups reserved. With people just starting up, they could do that. So it is pretty tough.

Ronald Bookbinder - The Benchmark Company

And lastly, the Charlotte store. It sounds like it's a pretty big store. What is the square footage compared to the average company store?

Dennis Hatchell

Well, the store is 4,900 square feet. And Berry, what's our average?

Berry Epley

The average is right around 2,800.

Dennis Hatchell

2,800 is the average, obviously that's all over given our differences in our stores that have been acquired over the years, but 4,900 is as someone asked earlier that is the store that we can plan to replicate as we already have new stores placed on sites going forward that will look just like this one.

Operator

Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski - Sidoti & Company

You have done better with stores that are operating in several weather environments there. So with that said, can you just comment on how your Florida stores did in the quarter and also what you've seen quarter-to-date in Florida?

Berry Epley

During the second quarter our Florida stores outperformed the chain in terms of merchandise comps and fuel comps, which we have seen that now for a couple of quarters and they've continued to be strong in the Q3 compared to the company averages. So we have been pleased with Florida.

Anthony Lebiedzinski - Sidoti & Company

Can you quantify the comps there?

Berry Epley

We certainly haven't given out this specific, by state kind of comp information, but they are better than the chain.

Anthony Lebiedzinski - Sidoti & Company

And then, also in terms of the lifestyle merchandising program, can you quantify what percentage of your sales is coming from these products, well, give us at least some color with that and also the same-store sales for the lifestyle merchandising program?

Clyde Preslar

Today it's a very small percentage when you look at the specific items that we're putting in, but there is as we look at it a carryover effective cost across the broader store and it's just part of all the kinds of things we're doing and as Dennis is pushing, is really to think more broadly then just lifestyle, but local.

And there are just incremental opportunities to do that. And I think it came up earlier, we've certainly been pleased on the stores where we put in lifestyle specific merchandise. The increases there have been very strong increases, but it's off a small base. And so I think, at least, the way I think about it, it's just an integral part of the many other things that we're doing.

Anthony Lebiedzinski - Sidoti & Company

So by the end of this fiscal year, how many stores will have the lifestyle merchandising program?

Clyde Preslar

There are certainly a few more and I think at Dennis's comments, he mentioned looking at even additional lifestyles, but he is really, as I mentioned, really challenging the organization to think local and not just not limited with lifestyle. And so we're searching those opportunities. And I'll be surprised if as we move through the next few quarters that we can't say almost all of our stores have some element of localization, its just, what degree?

Dennis Hatchell

We are working with the operators now, because a lot of the data we used in obviously is out there, whether you expect or whatever you determine demographics, but now we're working with the operators. And if we find that we're at 450, if we find that there is more stores that ought to have significant items added to the store, we'll obviously do that.

The big work to what drive that is now minimizing the products that are really selling in anyone store and maximizing both the facings and the offerings within each category to make sure that each store has locally what it is they need to have, which is why we're investing in the JDA Software, that's going to help us to be able to customize our stores and our category-by-category offering as we go forward.

Anthony Lebiedzinski - Sidoti & Company

And lastly, how are you thinking about the new store growth, any potential numbers to how many stores you could open, let's say, in three to five years that are similar to the Charlotte store that you just opened?

Dennis Hatchell

We have in our plan right now for the foreseeable future, which is two to three years, at least, four stores. They will all look like Charlotte. And we're hopeful to do more of that, that's using up properties that we already have a hold of and a few new ones. But we're trying to get the properties that we own productive, but all of them can take this size store.

And if we think it will perform well in that particular location, we're going to build it. So right now, we're continuing to put a lot of effort into the pace that we're at which will allow us to annualize about 10% of our stores and remodels a year. And then if we stir in four and hopefully more new stores that will give you the pace that we're going at.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

Can you give us some color on the continuous decrease in volume for the past three years especially in fuel gallons and merchandise sales and what are you guys doing about it?

Dennis Hatchell

So I'm trying to think over three years, the published numbers that we have seen for the southeast were running 2.5% to 3% negative in terms of gallons being used especially during the economic downturn and then recovery. We felt like we were tracking reasonably close to the markets that we're in, all along with our gallon comps until really this last quarter.

We are hopeful that our new system is going to identify opportunities for us and we are going to try to bend that curve, at least that's our plan. And I don't know how to speak to a couple of years ago, but certainly looking forward we are not going to be happy with losing gallons. We've got to find a way to continue to grow the business.

Unidentified Analyst

Can you give us more flavor on the new system, I mean, we've learned that you have rolled out KSS about three ago, is it the same system or is it something different today?

Dennis Hatchell

KSS, we do as the information that is fed into us, what we have is a proprietary fuel optimization program that looks at the elasticity of every store. And it flexes what the prices and I mean its looks at a lot of things, everything, from the price of fuel, who the competitors are, distance to the competitors and just how elastic a store is so that we can maximize the gallons of that store. And hopefully protect our cents per gallon same time.

Unidentified Analyst

And when you compare your result to peers like Susser or a Circle K or Speedway, you're not seeing the same decrease in volume and I know maybe they're operating in different markets, but at the same time, the gap it is just so large between the two, what kind of an opportunity do you have within the company other than fueling systems to narrow that gap?

Dennis Hatchell

I can't speak to Susser or Casey's. And I can only tell you how we're performing within our marketplace.

Operator

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

Dennis Hatchell

Well, thank you everyone, and thanks for the questions and the interests in The Pantry. And we look forward to updating you going forward. Before we close I would like to take a moment to talk about our Third Annual 'Salute Our Troops Campaign. It's going to begin this summer. An important part of our culture is to support our communities. This has been incredibly successful campaign in the last two years, raised over $5 million for the UFO, the Wounded Warrior Project and other local military charities throughout our footprint.

Taking great deal of pride and the level dedication that our employees have displayed the last few years to make Salute Our Troops a success and I know this year's campaign won't be any different. We appreciate you stopping in The Pantry and supporting this project when you're going around, saying hello when you get here. With that I want to thank you for your time and look forward to updating you on the progress of the next call. Thanks.

Operator

Ladies and gentleman that concludes today's presentation. You may now disconnect. And have a wonderful day.

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