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The Pantry (NASDAQ:PTRY)

Q4 2013 Earnings Call

December 10, 2013 8:30 am ET

Executives

Andrew Hinton

Dennis G. Hatchell - Chief Executive Officer, President and Director

B. Clyde Preslar - Chief Financial Officer and Senior Vice President

Analysts

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Karen F. Short - Deutsche Bank AG, Research Division

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

James C. Pappas - JCP Investment Management, LLC

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to The Pantry, Inc's Q4 2013 Earnings Conference Call. My name is Ashley, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. 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 fourth 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.

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 financial measure 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 G. Hatchell

Thanks, Andrew. Good morning, everyone. I'd like to review our fourth quarter performance, which is on Slide 4. Also for your convenience are the full year results for 2013.

During the quarter, earnings per share were $0.04 versus a loss per share of $0.21 in the prior year quarter, and adjusted EBITDA was $49 million compared to $53 million in the prior year quarter.

Earnings per share was impacted by pretax charges totaling $4.6 million or $0.12 a share related to a proposed litigation settlement and strategy consulting costs incurred during the quarter.

We were pleased to see comparable store merchandise revenue continued to improve, up 2% driven by our 3.3% improvement in sale per customer. Fuel comps were down 2.5% for the quarter, while margins increased $0.012 to $0.107 per gallon.

Slide 5 shows that our merchandising performance improved steadily as we moved to the second half of 2013. We were encouraged by this progress in our merchandise comps. When customers visit our stores, they are responding to our marketing initiatives and our product offerings, generating a higher sale per customer.

In terms of category performance, cigarette sales comps declined 2% during the fourth quarter and continued carryover weakness. Excluding cigarettes, our comparable storage sales were up 3.7%.

Other packaged goods performed well, up 3.8% on a comparable basis.

Our proprietary food service comps were up 3.3%, driven by solid growth in our grill, deli and fresh food offerings. Our QSR sales declined 0.7%, but we believe we performed well when compared to their system sales performance.

Slide 6 highlights our merchandising and brand awareness initiatives. We are shaping the customer experience with a variety of store-level initiatives to build customer awareness of our product offerings, meeting customer demand for "healthier for you" snack options and providing great value through the promotions such as our Roo Mug campaign.

In addition, we continue to implement store-specific planograms and utilize clustering in our center store offerings. Our vendors continue to be important partners in our merchandising efforts as we work with them to drive product innovation and to meet the ever-changing customer tastes.

Our fuel pricing system allows us to manage the rapidly changing fuel markets and maintain a consistent value proposition in our marketing areas. However, during the quarter, the Southeast continue to have the lowest retail fuel margins in the U.S. according to Opus.

Slide 7 highlights our continuing focus on managing costs and improving profitability. Store level productivity, supported by employee training, is an ongoing focus. We also continue to focus on managing our labor costs, reducing our energy usage and controlling other facility costs.

OSG&A costs increases during the quarter were driven by a proposed settlement of the Amason litigation that has been described in our SEC filing for a long time.

In addition, we incurred costs for strategy consulting and upgrading our stores under our new remodel program.

The work our team did this quarter to fine tune our strategic plan is another important building block for us. It helped reconfirm our direction and further refine the initiatives we're implementing to improve our existing stores, as well as guide how we invest to grow our business.

In other key areas shown on Slide 8, we continued upgrading our store base. We completed 31 remodels during the fourth quarter bringing the year-to-date total to 72. Our current pace of remodels will allow us to hit our target of remodeling 10% of our stores during 2014.

Additionally, we opened 5 new QSRs during the fourth quarter, bringing our total to 222. We plan to open 5 more QSRs in Q1 of 2014, and approximately 20 new QSRs during the new fiscal year.

Our continuing strength in our store portfolio by closing stores within [ph] update our profitably targets who are no longer the right strategic fit. During the quarter, we closed 18 stores and generated cash proceeds of $2.2 million through asset sales.

Turning to Slide 9. We opened 2 new stores during the quarter, giving us 3 for the year. These additions are large-format stores similar in design and product offerings to the store we opened in Charlotte earlier this year. They also feature QSRs with both drive thru and indoor and outdoor seating.

Slide 10 summarizes our strategic focus and our priorities for 2014. We will make further progress with our remodel in QSR programs while upgrading our merchandise effectiveness throughout the company. We will continue to leverage the knowledge we are gaining from our fuel price systems to balance profitability with gallon volume.

To accelerate our overall growth and build value, we're targeting up to 4 new stores this year, and will continue assessing acquisition opportunities from individual stores as well as chains. These combined strategies are strengthening our company and growing our top and bottom line.

Now Clyde will review the fourth quarter financial results.

B. Clyde Preslar

Thanks, Dennis. And as you just heard, we continue to make progress strengthening the company and positioning it for sustained profitable growth. Staying focused on executing our core plans is paying off, and this is reflected in our further improvement and our fundamentals in Q4 as we built on the encouraging Q3 results.

Turning now to Slide 12. Total revenues for the quarter were $2 billion. This was 3.3% below last year, resulting from the decline in fuel gallons sold, lower retail fuel prices and 30 fewer stores on average.

Net interest expense declined $1.3 million to $22 million due to lower debt levels.

Our effective tax rate was a benefit of 128.4% compared to a benefit of 39.3% in the fourth quarter of fiscal 2012. This put our full year 2013 effective tax rate benefit at 65.8% compared to 54.1% in 2012 due to a higher level of workers, opportunity tax credits and changes in pretax profit levels.

Our net income for the fourth quarter was $1 million or $0.04 per share, compared with a net loss of $4.8 million or $0.21 per share last year.

Adjusted EBITDA for the quarter was $49 million compared with $52.8 million a year ago.

Slide 13 covers the P&L in more detail. Merchandise revenue was up 1.3% to $476 million as the 2% improvement in comp store sales more than offset the lower store count. Our overall merchandise gross margin rate was very strong at 34.3%, although 30 basis points below last year's 34.6%. Both periods benefited from favorable LIFO adjustments. Overall, merchandise gross profit was $700,000 above last year's level.

In the fuel area, retail gallons sold declined 2.5% on a comp store basis. Our fourth quarter retail gross margin per gallon was $0.107 compared with $0.095 a year ago. The improved fuel margin more than offset the volume decline yielding a $3.8 million increase in fuel gross profit.

Please note that our fuel margin is net of credit card fees and fuel equipment maintenance costs, which were $0.072 per gallon this quarter compared to $0.071 a year ago.

Excluding these costs, retail gross margin per gallon would have been $0.179 and $0.166 in the fourth quarters of 2013 and 2012, respectively.

Total store operating and G&A expenses for the quarter increased $8.3 million. Within this, store operating expenses increased $2.8 million, mainly due to higher noncapital equipment costs, resulting primarily from our remodel activities and increased advertising. These increases were partially offset by a $1.2 million favorable adjustment to our self-insurance reserves for worker's compensation and general liability based on final actuarial analysis for fiscal 2013.

When you add this to the $6 million favorable adjustment booked in Q3, this brought our full year favorable actuarial adjustments to $7.2 million for the year. This favorable insurance reserve adjustments for fiscal 2013 resulted from improved loss experience and claims management process.

I wish we could count on these favorable insurance reserve adjustments repeating in 2014, but our best assumption is that there will be no further impact in 2014, either positive or negative.

G&A expenses increased $5.4 million to $29.5 million, largely due to a $3.1 million charge for proposed settlement of the Amason litigation, which has been described in our SEC filings for some time, and $1.5 million in strategy consulting costs.

This put income from operations at $18.1 million, up slightly from the prior year quarter.

Turning next to capital expenditures on Slide 14. Our fourth quarter net capital spending was $29.1 million with $1.4 million in proceeds from asset sales compared with $8 million last year when we had $2.6 million in asset sales.

These increased capital expenditures were driven by remodel investments, plus QSR and new store additions.

From a store count perspective on Slide 15, we closed 18 stores during the fourth quarter, bringing the year-to-date total to 38. Netted against store additions, we ended Q4 with 1,548 company-operated locations compared to 1,578 at this time last year.

Our quick service restaurant count is up to 222 and we have 69 wholesale fuel locations.

Slide 16 covers our cash and liquidity position, showing that we finished the fourth quarter with $57 million in cash. Our net debt declined to $891 million, which was down $40 million from last year.

At quarter end, we had $188 million in liquidity, including cash and revolver availability.

Slide 17 shows our current outlook for the first quarter and full year 2014. So far in Q1, we've been encouraged by our operating performance. Quarter-to-date, our merchandise sales comps were up approximately 3%. Our retail fuel gallon comps are down approximately 4% and CPG stands at approximately $0.10 on a quarter to date basis.

For full year 2014, we expect total merchandise sales to be between $1.83 billion and $1.86 billion. Merchandise gross margin in the 33.7% to 34.1% range. Retail fuel volume between 1.61 billion and 1.64 billion gallons. Retail fuel margin ranging between $0.11 to $0.13 per gallon and store, operating and G&A expenses of $611 million to $621 million.

Regarding OSG&A expenses, we are assuming $6 million to $8 million in additional health insurance costs related to the Affordable Care Act.

Additionally, we're assuming no positive or negatives from actuarial based insurance reserve true ups compared to the $7.2 million of favorable reserve adjustments recorded in fiscal 2013.

Also, we're assuming an $8 million increase in incentive compensation expense based on fiscal 2014 payouts at target versus minimal payouts in fiscal 2013.

We've also provided guidance for D&A, net interest expense, the effective tax rate and capital expenditures.

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 of Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

My first question is regarding your merchandise and fuel gallon SSS, which both improved throughout the quarter. So could you give us a little more color in some of the main drivers behind this? And then, more importantly, has this improvement continued this quarter? What changes have you made to your programs or are you planning on making next year? That would be helpful also.

B. Clyde Preslar

But just before Dennis gets into details in terms of our drivers, yes, we have seen a further strengthening of the pace on inside the store. Quarter-to-date, we're at 3% and you see our guidance reflecting an improvement as we move forward, so we certainly feel we're gaining momentum.

Dennis G. Hatchell

Yes. Bonnie, this is Dennis. So we're starting to see a lot of our plans, kind of the fundamentals, kick in. We've had a strong focus on in stock position on the shelves so that we can increase our sales that way and we've worked very hard on increasing our sale per customer making sure that the right items are where they happen to be in the store and when they need them. We're working really hard on our -- changing out our offerings to try to stay more relevant to each of the store locations, get them more local. We're introducing healthier items, so there's a lot of, there's just a lot of fundamental stuff that need to go on outside the store that's starting to kick in. And then, our remodels, while it's way too new, but there's some of those that are starting to get to be 4, 5 months into it, they're starting to mature and we're starting to see those sales pickup as well. So hopefully, that trend will continue as we remodel stores going forward.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

And are there any changes you're making to the new remodels that you didn't make before? I mean, are you continuing to refine that program? I think you mentioned it's new. I'm just trying to think about or understand how you're tweaking that remodel program.

Dennis G. Hatchell

I think, quite frankly, the biggest fix we've had so far is we've just gotten better at doing the remodels. We cause less disruptions of stores and our team has gotten really efficient in getting in and getting out. As you know, we've moved through acquisitions, so we have a lot of stores in various stages of -- in various conditions out there, so we continue to find fixes that we have to make to deferred maintenance or other surprises as we tear into these stores. I think the biggest change our team is now doing is they're really getting good at analyzing what kinds of fresh items should go into the stores, whether or not to have extensive coffee or partial coffee, how many fountain heads ought to be in these stores, all that analysis is starting to hold true as we remodel more and more stores. We're figuring out which ones work best and which ones don't. So I think sophistication might be the right word on that one.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then my next question has to do with the refinancing of your debt recently. I guess, I'm curious, would you also consider paying down some of this debt or are there strategic reasons you're maintaining higher debt-to-EBITDA level? And then also, in your mind, what's a better use of your free cash flow? Is it to reinvest in your existing store base or purchase new stores?

B. Clyde Preslar

Great, Bonnie. Yes, we're pleased with the repricing, lowering our cost of capital. And we really do like our capital structure with the term loan being fully pre-payable, and that's out there. As you see from the numbers, we had no drawings on the revolver at the end of the quarter other than the backstop for the LCs. And so that's always there and certainly a consideration, certainly from our management team's perspective, investing back in the business, we think that we have opportunities to invest well above our cost to capital, and that's our priority. And I don't know if Dennis wants to say anything, but as we think about acquisitions, we think about acquisitions as an extension of our real estate strategy. And really, building or buying, but very focused on top market areas and just improving our position in those market areas, both offensively and defensively.

Dennis G. Hatchell

Yes. This might preempt another question someone has along the strategy work that we did and paid for in the quarter, we're across 13 states and we are in a lot of markets, so we had some help to help us not only analyze but to prioritize every market that we're in, which that work is now done. And the site work within each of those markets in order to not only protect our share, but also grow it going forward. Acquisitions got into our language because as we get there, if we find a better opportunity to acquire a store or some number of stores to fill out the markets and replace stores we're in or improve our overall store offering, then that is what we think would be a terrific opportunity to take advantage of that. So it's really -- we're not going to go crazy here and start acquiring across the country. This is a very market approach tactic that we will take in order to improve our position.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay, that's good to hear. And it sounds like you mentioned the work has being done and now next calendar year for you is really just implementing this work that you have had done.

Dennis G. Hatchell

That's exactly right.

Operator

Our next question comes from Karen Short of Deutsche Bank.

Karen F. Short - Deutsche Bank AG, Research Division

A couple of questions on understanding your operating expense guidance for the next year. So I think you mentioned, you said, what was the dollar amount related, I think, to Obamacare that was embedded in your guidance?

B. Clyde Preslar

Yes. $6 million to $8 million, which we had actually provided that information back in the fall with an 8-K. But looks like we're tracking pretty close to that, Karen.

Karen F. Short - Deutsche Bank AG, Research Division

And then a remainder of the increase is just based on bonuses, as you said?

B. Clyde Preslar

Well, bonuses would be roughly $8 million. Again, that's store level bonuses, as we energize the organization and the store level bonuses paid on a quarterly basis are a key part of our structure, and then as we move into the rest of the organization and move forward is our anticipation is paying out at target versus minimal payouts, and then there is, in that total number, there's roughly $1 million increase in the long-term incentive-related programs. And then the last part is, again, for the last 2 years, we've had positive pickups on the actuarial work around our workers' comp and general liability. And again, we've improved our safety record and we've really tightened up on our claims management processes. So that totaled $7.2 million this year as one of the more challenging claim years rolled off, and again, we improved that. There's no basis for us to assume that, that repeats, and from our standpoint, really, we don't -- we're not estimating either a pickup or a cost as we move through 2014 on that. So those are other than just baseline as we cut and build in terms of investing in smart areas and taking out OSG&A costs and others, those are really the drivers year-over-year.

Karen F. Short - Deutsche Bank AG, Research Division

Okay. And then looking to your guidance on the comp for the first quarter, it looks like you've held your positive general merchandise comp. But did I hear your gallon comps correctly? Is it negative 7 quarter-to-date?

B. Clyde Preslar

No, no. Negative 4, negative 4. I may have mispronounced, but I didn't mean to. It's negative 4, and then our guidance would imply something plus or minus on that. We're well into the quarter, so that's what we're looking at right now.

Karen F. Short - Deutsche Bank AG, Research Division

Okay. Anything to point to you in terms of the environment this quarter as it relates to that negative comp, or gallon comp?

Dennis G. Hatchell

Good morning. This is Dennis. Well, what's changed here is nothing has changed. We continue to have some of the lowest CPG in the country, that's something we're particularly pleased with, but that's just the environment we're in right now. And it appears that demand per gallons was off 1% or 2%. We saw some interesting numbers come out yesterday that demand was way off in the Thanksgiving week. We were off, but we weren't off as bad as some of that was showing. And we're choosing to kind of move between protecting our CPG and buying some of the gallons go and go back and fourth right now. We're just kind of working between a low gross margin environment, trying to balance the gallons at the same time. So hopefully, things will -- in the whole Southeast will improve at some point, but they haven't for a while.

Karen F. Short - Deutsche Bank AG, Research Division

And so where are you in general price versus your competitors at the pump, or would it just vary by market?

Dennis G. Hatchell

It varies by market, and we have -- we probably have 10 to 15 very specific pricing initiatives that are different for stores that are going against competitors, new stores that are opening, stores that have -- it's mostly around elasticity. We have stores that are very elastic and stores that are non elastic. So our price range is from $0.03 over competition to $0.01 -- usually not much more than $0.01 under competition in the marketplace.

Karen F. Short - Deutsche Bank AG, Research Division

Okay. And then just looking at your CapEx guidance for next year, it looks like it took a little step up. Anything to point to there? I know you've given us some color on your initiatives, but ...

B. Clyde Preslar

Right. The big thing by far is we ended the year at that run rate of kind of 3 stores per week or roughly 10% of our store base over the course of the year. So that's the biggest thing is just having the full impact of that. We are assuming we will. In fact, we have opened a store already in the calendar or fiscal '14, so it's really around that kind of business building the maintenance capital is not changing all around that much.

Karen F. Short - Deutsche Bank AG, Research Division

Okay. And then last question on your gallon comps in this quarter and then for next year. What's the difference in diesel comps versus regular gas? Is there a spread on that?

Dennis G. Hatchell

I don't know if I have that broken out, I can get it for you. I'm not sure I brought that in. I hate to tell you a number.

Karen F. Short - Deutsche Bank AG, Research Division

Okay.

B. Clyde Preslar

And if we come up with it, we'll circle back as we answer another call.

Dennis G. Hatchell

We'll look it up and tell it to you as we get to it here.

Operator

The next question comes from Bryan Hunt of Wells Fargo Securities.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

This is Kevin McClure standing in for Bryan. I wanted to go back to Dennis' comment about the strategic review, I know the work is complete, Dennis. So I was wondering if you could share some of the findings there. Do you consider any markets non-core now? And alternatively, which markets that you currently operate in would you like to gain additional scale?

Dennis G. Hatchell

The answer to all of that is yes. We have -- we came up with a very interesting way with the help of our consultants to define markets, and then within those markets, we defined what our share was so that we knew where were very strong and also where we had kind of non-core presence within each of those markets. Those markets are now prioritized, but the work isn't done in terms of study in every market for the potential. And so there will be a result when we get to the point that there will be stores that are in the lowest priority and they're probably non-core if we can't find a good solution for those markets, and we'll continue to run those stores as best we can, but we'll put our focus on our high priority, high return markets. So I won't tell you what markets those are because I don't want to share that with everybody, but I can assure you that we're working through every market that we have and there are obvious priority markets and obvious low priority markets that we're working on.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

Got it, okay. And just to be clear, this is not necessarily state-by-state, this is more localized than that, the way that you define markets. So there'll be multiple markets within a state, as I understand it?

Dennis G. Hatchell

Yes. This is a sub-work of what you would know as MSAs, so it's not as big as an -- we break markets in even smaller than MSAs to study them by locations throughout, so it's not store based, it's kind of population demographic and kind of other drivers like that to define the market.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

Okay. And then lastly on this, and I'll move on. Are there any states or regions as I look at your footprint that you would consider based on this work to be non-core? And would you look to move into other states or regions based on this work as well?

Dennis G. Hatchell

I don't think we would move into any other states. We might move into regions if they are contiguous to the markets that we've defined. And the rest of the answer to your question lies in the work, the heavy lifting we have to do market-by-market to determine what the overall potential of every market is, which we're going through. But logic has it that there's going to be some markets that don't have as much potential as others, and we'll decide the best way to deal with them once we get to them.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

Got it. Two final questions for us. In your guidance, what kind of impact are you building in on the merchandise side from the next round of cigarette list price increases?

B. Clyde Preslar

Yes. It's -- we've factored that in, both on what it does at retail and what that might do to consumption, as well as on the margin. So we have factored the best information we have in our merchandise and gross margin guidance.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

Okay. And one final housekeeping. Of the 18 stores that were closed in the quarter, how many were actually sold? So I see all the asset sales, the $2.2 million proceeds, is that spread out over 18 stores?

Dennis G. Hatchell

I'll be within 1 store being correct here, but I believe all 18 were underperforming stores whose leases expired, so we just let them go.

Operator

Our next question comes from James Pappas of JCP Investment Management.

James C. Pappas - JCP Investment Management, LLC

Dennis, on the 3 new stores opened in 2013, remind me, the Charlotte, Myrtle Beach and Ocala, what were the -- just going back to earlier, the CapEx question, what were the costs in each of those stores?

Dennis G. Hatchell

I believe the average cost is roughly all in -- we're just looking at our numbers here, all in, it's about $4.5 million.

James C. Pappas - JCP Investment Management, LLC

Okay, great. And can you talk for just a second about how those were doing relative to the rest of the store base?

Dennis G. Hatchell

I can't -- I don't know how they're -- I'm trying to think of how to relate it to the rest of the store base because it's so different. But we do have, we put pro formas on these stores to make sure they not only exceed our cost of capital, but lift our overall sales throughout and get us a good mix, and we've exceeded all of our expectations so far in fuel, and we've met our expectations on the inside, both on the QSRs as well as inside the box, so we've been really pleased with how they're performing. I would say, if you look maybe to give you a little color without giving too much specific, they would be, all 3 of our stores would be in the top 20%, I guess, of our stores in terms of their performance so far. And they're just -- very early, I mean a new store takes a good bit of time to burn in, but we're really pleased with where they are so far.

Operator

Our next question comes from Ben Brownlow of Raymond James.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

On the strategic market review, is there a timeframe -- and apologies, if you touched on this earlier, but is there a time frame on that sort of heavy lifting that you were referring to on the more detailed analysis on market-by-market? Do you have a timeframe on that?

Dennis G. Hatchell

Yes. So we kind of divided the whole group in all 1,552 stores into pretty much thirds. And as you can imagine, because it isn't just studying some stores, it's studying the markets, so all the competition, all the changes that are coming, the economic factors around it and everything. Our plan is to have had what we view as the highest potential third completed this fiscal year, and we'll be -- we're coming right in behind those then with the site work around those. The others will be -- the others will kind of be happening because if you happen to have a high-performance market, which is next to a medium performing market, you would do the medium one at the same time. But our goal is to thoroughly work off the first third this year.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

And is the top deciding factor, is it -- what are the 1 or 2 top deciding factors on exiting or staying in that market? Is it market share or is it asset quality?

Dennis G. Hatchell

It's market share and our performance within those markets. Well, the heavy lifting is what to do about the asset quality as we get in there and obviously the number of stores, the lease expirations, the whole way to protect the market.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Okay. And just one more for me. On the food service, the same-store sales in the proprietary side was up 3.3%, which is pretty healthy growth. But obviously, a little bit of a slowdown from prior quarters. Is that more of a function of the year-over-year comparisons or is that consumer behavior, do you believe? And I guess you could say the same for the QSR, which actually improved a little on a same-store sales. I'm just trying to get the feel for what you're seeing in the consumer.

B. Clyde Preslar

Yes. Just working backwards, I think you summed it up pretty well on QSRs. I think that activity is picking up and as Dennis mentioned in his quote, from everything we can tell our performance has been solid relative to kind of system's averages and so forth. On the proprietary food service part, you are right. I mean, comparisons are a factor and we had some strong comparisons a year-ago and timing on our Roo Cup promotion and the details of that promotions have changed a little bit. So it did kind of dampen it a bit. And then I hate to say it, but certainly, some weather impact in there early in the quarter. So all that combined, we -- I think you're getting at an important point, we want that number to be higher than it was, but it did move in a good direction.

Operator

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

Anthony C. Lebiedzinski - Sidoti & Company, LLC

So yes, I just wanted to follow up on the prior question, there was just a big divergence between the proprietary food service performance and the QSR performance throughout the year. What is your expectation for those 2 sub-segments for your fiscal '14? Just want to get a sense of what's embedded in your guidance for fiscal '14.

B. Clyde Preslar

Yes. I think, Anthony, at this point, you could assume that the growth on the proprietary food service component would be above the overall guidance. That will be one of our -- it is a point of emphasis. We see it as a huge opportunity, and we'll be within our overall mix. One of our faster-growing areas. The QSRs, again, we continue focusing on our operating effectiveness and so forth, and then again, the broader kind of industry dynamics are there, but we are pleased that we look at how the comp performance has continued to strengthen or be less negative since the weak Q2. So proprietary food service, without being specific, the growth rate will be well above our overall merchandise growth that's embedded in our guidance. And then we do see QSR comps continuing to strengthen.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

That's helpful. And looking at the Fuel gallon guidance, just wondering, just wanted to make sure that you would still be compliant with your Fuel supply agreements?

Dennis G. Hatchell

Yes. We monitor the, obviously the gallon requirements that are -- well, we monitor weekly and monthly, but we'll be well within compliance on all the contacts that we have.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. And also, lastly, I may have missed this, but as far as the merchandise margin guidance, if you take the midpoint for both the quarter and also for the year, it is below the prior respective periods. So just wondering what's driving that?

B. Clyde Preslar

Yes. If you start with the quarter, first of all, cigarettes would be a factor and cigarettes will be a factor for the year. And I think we had an earlier question there. Cost increase is going on, but also, we're very much factoring in cigarettes as part of our overall merchandising push, and factoring in the good things that can do from a traffic standpoint. So cigarettes would be part of it. If we focus just on the quarter, we first -- areas like Packaged Beverage, for example, our strongest margin quarter on Packaged Beverage was in the first quarter of last year. What we've embedded in our guidance for the first quarter is much more consistent with kind of how we ended the year and more what we saw from an overall year perspective. And I can make that same comment for some of the other categories. The only other thing I would point out in terms of the full year gross margin comparison is, right now, we're not assuming a LIFO pickup. We did the last 2 years, we were blessed in that there wasn't much of a change year-to-year, but we were blessed with a favorable LIFO pickup and we don't assume that. So those are some of the things that would be playing into that.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

And also, what was the LIFO benefit for the quarter that you just reported?

B. Clyde Preslar

Yes, I've got it. Year-over-year, there wasn't much change. It was $2.4 million, it was a credit this year, it was $2.1 million a year ago, and that hit in the fourth quarter. So year-to-year, not much of a swing, but that is -- as we were coming into the quarter, if you recall, we guided gross margin below last year because we weren't counting on that pickup. We were fortunate we did get it. And as we look at our guidance for '14, we're not assuming that we get a LIFO credit.

Operator

I'm not showing any further questions in the queue. I'd like to turn the call back over to Dennis Hatchell for any further remarks.

Dennis G. Hatchell

Well, thanks, everybody for your questions. It's always helpful, keeps us sharp, and we'll continue to keep you in mind as we go forward here. I think we made solid progress in our fourth quarter, both in our fuel and merchandise sales. Much of this was due to the efforts of our team. I hate to do this, but we have to acknowledge the weather. It generally behaved in the second half of the fourth quarter. If we blame weather for soft performance like we did last quarter, we also need to give it some credit for when we're doing well. It's not nice to fool Mother Nature.

The Pantry team continues to stay focused on improving business fundamentals, working on our increased sales per customer and achieving better results over time. I think they've done a terrific job and we look forward to seeing what we can do going forward.

We hope all of you have a great holiday season and we look forward to updating you on our progress with the next call. Thanks a lot.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.

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