The Pantry Management Discusses Q1 2014 Results - Earnings Call Transcript

Jan.30.14 | About: The Pantry, (PTRY)

The Pantry (NASDAQ:PTRY)

Q1 2014 Earnings Call

January 30, 2014 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

Irene Nattel - RBC Capital Markets, LLC, Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Shane Higgins - Deutsche Bank AG, Research Division

William M. Reuter - BofA Merrill Lynch, Research Division

John R. Lawrence - Stephens Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to The Pantry, Inc. Q1 2014 Earnings Conference Call. My name is Destiny, and I will 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 first quarter financial results, which were released this morning. Please note that we have also posted slides for this morning's call on the Investors section of our website at 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 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. Good morning from 9-degree Cary, North Carolina. I'd like to review our first quarter performance, which is on Slide 4. During the quarter, our loss per share was $0.23 versus a loss per share of $0.14 in the prior year quarter and adjusted EBITDA was $42 million compared to $49 million in the prior year quarter.

We continue to make progress growing the business inside our stores. This can be seen in the 3.5% increase in our comparable store merchandise revenue, our strongest results since the third quarter of fiscal 2012. This was driven by an increase in sale per customer of 4.1% as our offering has become more relevant. Fuel comps were down 4% for the quarter while margins increased slightly over the prior year quarter to $0.118 per gallon.

Slide 5 shows that our Q1 merchandise performance built on the steady improvements made during 2013. Our merchandise and promotional activities are resonating with our customers and showing up across most of our product categories. In terms of category performance, cigarette sales comps declined 0.7% during the first quarter. Excluding cigarettes, our comparable store sales were up 5.4%. Other packaged goods performed well, up 5.5% on a comparable basis. Proprietary food service comps were up 6.5%, driven by growth in our grill, deli and fresh food offerings. QSR sales turned solidly positive, with a 4.1% comp. Overall, our total food service performance was encouraging as we continue to emphasize development in this part of our business.

Slide 6 highlights our merchandising and brand awareness initiatives. Holiday promotions were important for us during Q1, and we were successful in driving additional sales. Beverage merchandising was also an area for focus as we improve the presentation of our single-serve alcoholic beverages, expanded the variety and offering of alternative beverages and drove impulse purchases through display of single-serve refrigerated beverages at the sales counter. New product introductions helped drive our grill category and were important to our proprietary food service growth. Additionally, we have continued to implement store-specific planograms, allowing us to further customize merchandising activities to best fit each of our individual stores.

Slide 7. During the quarter, we experienced rapidly changing fuel markets and worked to maintain a consistent value proposition for our customers. We are obviously not satisfied with our fuel comp results, and we are working to improve our volume 1 market at a time with competitive and consistent pricing.

As shown on Slide 8, medical expenses rose to unfavorable claims -- due to unfavorable claims experienced. Labor costs were up due to training, as we added approximately 800 new part-time employees to address staffing needs in preparation for the Affordable Care Act. Labor costs also increased with the additional sales, but as a percent of inside sales, we showed improved store level productivity. As we upgrade our stores, we are incurring higher costs for non-capitalized repairs of small equipment items. We continue to refine our approach to selecting stores to remodel to ensure that we are being smart with these dollars.

Turning now to Slide 9. We completed 28 remodels during the first quarter. These remodels were focused in our high-potential markets, which is how we prioritize our spending. As just mentioned, we are evaluating the performance of all completed remodels and incorporated what we learned to constantly refine and improve our results. Additionally, we opened 4 new QSRs during the quarter, bringing our total to 221. Three of these new QSRs were Little Ceasars pizza restaurants, and we are pleased with the results that we're seeing with this new partnership. We continue strengthening our store portfolio by closing stores that do not meet our profitability targets and are no longer the right strategic fit. During the quarter, we closed 11 stores and generated cash proceeds of $2 million through asset sales.

Turning to Slide 10. We opened a new store in St. Augustine during the quarter. The store is off to a great start, and we continue to see potential in our new store format. We are actively pursuing high-potential sites in targeted markets to support future growth.

Slide 11 summarizes our strategic focus and priorities for 2014. We will make further progress with our remodel and QSR programs while upgrading our merchandise effectiveness throughout the company. We will continue to balance fuel profitability while we work to improve our fuel market share. To accelerate our overall growth and build value, our store upgrade and expansion efforts are focused on our top priority markets, and that is also where we are targeting new stores and assessing acquisition opportunities.

We believe that these combined strategies will strengthen our company by growing both our top and our bottom line.

Finally, I would also like to provide a brief update on our board. Yesterday, we announced that the board has nominated Tad Dixon, former CEO of Harris Teeter, as a new independent Director for election to the board at Pantry's 2014 Annual Meeting of the Stockholders on March 13. If elected, Tad will bring to The Pantry nearly 2 decades of operational and management experience in the supermarket industry, including more than 15 years as a public company director. Tad's significant executive retail experience in the southeastern United States makes him highly qualified to serve in our board, and we look forward to benefiting from his insights going forward.

Now Clyde is going to review the first quarter financial results for you.

B. Clyde Preslar

Good. Thanks, Dennis. As you just heard, we continue to make steady progress. Our focus is paying off as we build on the encouraging second half results from last year and achieve further improvement in our fundamentals during Q1.

Turning now to Slide 13. Total revenues for the quarter were $1.8 billion. This was 5.8% below last year due to lower retail fuel prices, the decline in fuel gallons sold and 30 fewer stores on average. Net interest expense declined $1.7 million to $21 million due to lower debt levels and interest rates. Our effective tax rate was a benefit of 39.2% compared to a benefit of 39.9% in the first quarter of fiscal 2013. Putting all this together, net loss for the first quarter was $5.1 million or $0.23 per share compared with a net loss of $3.1 million or $0.14 per share in the prior year quarter. Adjusted EBITDA for the quarter was $42.4 million compared with $48.9 million a year ago.

Slide 14 covers the P&L in more detail. Merchandise revenue was up 2.8% to $441 million as a 3.5% improvement in comp store sales more than offset the lower store count impact. Our overall merchandise gross margin rate was 33.5%. This was down 80 basis points from last year's 34.3% due to promotional activity and sales mix, and this included more competitive cigarette pricing. Total merchandise gross profit was $886,000 above last year's level.

In the fuel area, retail gallons sold declined 4% on a comp store basis. Our first quarter retail gross margin per gallon was $0.118 compared with $0.114 a year ago. Fuel gross profit was down $486,000 as improved margins largely offset the gallon decline. Please note that our fuel margin is net of credit card fees and fuel equipment maintenance costs, which were $0.066 per gallon this quarter compared to $0.068 a year ago. Excluding these costs, retail gross margin per gallon would have been $0.184 and $0.182 in the first quarters of 2014 and 2013, respectively.

Total store operating and G&A expenses for the quarter increased $6.8 million. Within this, store operating expenses increased $4.8 million, and G&A was up $2 million. The G&A increase resulted mainly from a $1.1 million unfavorable swing in gain/loss on asset sales and a $700,000 increase in incentive compensation expense. While some of the store operating expense increase resulted from higher merchandise sales activity, the main drivers were: a $3 million increase in facility expenses, which were primarily repairs and noncapital equipment costs resulting from general facility improvements and remodels. We also had more than $700,000 in additional training expense to support the Affordable Care Act staffing changes, as Dennis mentioned, and we have $500,000 in additional self-funded medical insurance costs caused by higher claims and claims severity at the end of the plan year, which ended December 31.

Cost control continues to be a major focus as we address these increases. And on the positive side, we've identified opportunities to better optimize investments in our facilities, and much of the ACA-related training is now behind us. In summary, Q1 income from operations was $12.9 million, down from $18 million in the prior year quarter.

Turning next to capital expenditures on Slide 15. Our first quarter net capital spending was $29.7 million, with $2 million in proceeds from asset sales, compared to $18.4 million last year when we had $2.1 million in asset sales. These increased capital expenditures were driven by remodel investments, plus new store and QSR additions.

From a store count perspective, on Slide 16, we closed 11 stores during the first quarter and opened 1 new store. We ended Q1 with 1,538 company-operated locations compared to 1,572 at this time last year. Our quick service restaurant count was 221, and we have 69 wholesale fuel locations.

Slide 17 covers our cash and liquidity position, showing that we finished the first quarter with $32 million in cash. Our net debt declined to $912 million, which was down $20 million from last year. At quarter end, we had $174 million in liquidity, including cash and revolver availability.

Slide 18 shows our current outlook for the second quarter and full year 2014. So far, in Q2, we've been encouraged by our operating performance. Quarter-to-date, our merchandise sales comps were up approximately 1%, and we anticipate further improvements as we lap over the especially challenging weather conditions of last year. Our retail fuel gallon comps are down approximately 1%, 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 $615 million to $625 million.

Regarding our full year OSG&A guidance, as covered on our last call, we anticipate approximately $23 million in year-over-year increases from 3 specific factors: first, we're assuming $6 million to $8 million in incremental health insurance costs related to the Affordable Care Act; second, 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; and third, we're assuming approximately $8 million in higher incentive compensation expense for fiscal 2014, with payouts in the target range versus minimal payouts last year. 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 the line of Irene Nattel.

Irene Nattel - RBC Capital Markets, LLC, Research Division

I was wondering if you could just provide a little bit more color on what you're seeing in terms of competitive activity in your key categories. And then also if you could talk about what's happening in underlying gross merchandise margins, excluding tobacco.

Dennis G. Hatchell

Irene, this is Dennis. So we're -- in terms of your category question, if I understood it right, we are continuing to improve our cigarette pricing in the marketplace to make sure we're competitive. We'd see -- we are obviously seeing a lot of people staying very competitive on that high-traffic category, so we're staying with that as best as we can. We're seeing really nice movement in our -- all our proprietary food service offerings as we add those into the store, and the focus that our team has put around beverages has paid off in really nice returns. So kind of throughout the store, we're seeing general lifts all around. As for the margin, obviously, moving more stores to more competitive cigarette pricing puts pressure on the margin, but we have well-developed programs now that we think will bring us right out and restore those margins, as not only can we build the cigarette volume up, but we also recover on other categories.

Irene Nattel - RBC Capital Markets, LLC, Research Division

So if we...

B. Clyde Preslar

If I could just add -- Irene, excuse me. If I could just add, a couple of things to keep in mind on the margins. They were strong last year in the first quarter. The first quarter and fourth quarter were our strongest quarters of the year from an inside gross margin standpoint. We really weren't surprised this quarter that the margins were within our guidance. And as you look ahead, we're guiding to be stable to up in Q2, and our full year guidance suggests stable margins for the year. As implied here, cigarette margins were the most significant factor, and as we mentioned, the center store was impacted by promotions and sales mix. But even in Q1, our margins were pretty consistent with what we saw in Q2 through Q4 of last year. So really, we're pretty much where we expected to be and where we're tracking and then tying that in with Dennis' comments on where we're going from here.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great. And then just finally, if I might. Are you continuing to see as -- the stores in which you implemented the lifestyle merchandise approach earlier on, are you continuing to see those stores tracking better from a comp basis?

Dennis G. Hatchell

This is Dennis. The answer is yes, but it's -- obviously, as we roll over the improvements we made in prior year, it's smaller. But we're consistently resetting our stores now using information that's specific to a store site. So every time we do that, we improve the performance of the store.

Operator

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

Anthony C. Lebiedzinski - Sidoti & Company, LLC

I just had a couple of questions. First, could you give us some more color -- perhaps quantify as far as what incremental sales lift are you getting from the remodeled locations?

Dennis G. Hatchell

So we're seeing -- it depends on how these stores mature, but our range of lift right now is between 0% and 10%.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. So that's a wide range. So what's -- can you explain the reasons for this wide range?

Dennis G. Hatchell

Sure. The -- there's a combination of factors, but most of it has to do with timing. You have to -- as you break into a store and do remodels, you disrupt the traffic patterns. You've got to win those customers back. That takes a good bit of time. So the longer a store matures after a grand opening, the higher their lift goes, and that's one. Another is just simply, if we didn't broadcast right what our new offering is in the store or we didn't somehow get the word out that these stores were open, then we go back and have to change our message around that. But all in all, the stores are received well. They're just all in kind of a different maturity curve in terms of the remodel.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. So is it safe to say that the ones that you have remodeled -- that you've had remodeled, the first remodels, are they -- so those are the ones that are tracking close to 10%, is that safe to say?

Dennis G. Hatchell

Yes. I hate to be that specific on it because there's so many factors that some of them have had some competitive hits that hit them after they got going. I mean there's just all different combinations, but if you divided our stores into thirds, the ones performing the best are typically the ones that have had the longest period of time being open.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. Also just wondering how many of your stores now have these store-specific planograms. And the ones that do, I mean, what kind of sales lift are you getting from those?

Dennis G. Hatchell

Last year, we went through -- I think our number was roughly 1,200 stores that had store-specific merchandising. And the only reason the whole group isn't there is because of decisions we have to make and which markets they're in. We saw, on average, 4% to 5% lifts in the stores as we did that. And I would think that it's going to be low-single digits as we cycle over those because there's -- the effect won't be as dramatic, but we'll continue to make it positive.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay, great. And my last question, just wanted to get some more clarity as far as your SG&A expense. When you reported on December 10, the outlook was $611 million to $621 million for SG&A, and then now the guidance is $615 million to $625 million. So what is driving that $4 million difference?

B. Clyde Preslar

Yes. I'll jump in, Anthony. It's Clyde here. We did with -- the training around the -- to get ready for the Affordable Care Act was something that was difficult to predict. And so that hit us higher in the quarter than we might have anticipated. And then, as we have moved forward with the remodel activities and as well as some upgrades at stores that we're not really remodeling, those facility expenses that we highlighted did run a bit higher in Q1 than we were anticipating. So we basically played that through the full year. You can rest assured that Dennis has us all focused on offsetting that as we move through the year, but we just thought it was too early to assume that. So we basically played that first quarter variance through our expenses for the year. And just, again, from a perspective standpoint, productivity and controlling those expenses is a major focus of ours. If you look at our full year guidance, even where we have it today, and you allow for that $23 million that we talked about in Q1 and when we released Q4 and then updating today, embedded in, whether you're looking at the high end or the low end of the expense guidance, there's some pretty significant productivity built into that OSG&A.

Operator

Our next question comes from the line of Ronald Bookbinder of The Benchmark.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Did the profitability per gallon greatly increase in the last 2 weeks of the quarter? Or was guidance just very conservative?

Dennis G. Hatchell

I'm thinking. We're looking for our data here.

B. Clyde Preslar

I'll jump in. As Dennis -- I mean he's, again, trying to keep us steady in terms of that price proposition and so forth. But yes, margins got very, very tight right around Thanksgiving in those 2 weeks and then did open up as we kind of finished up the quarter. So we did get some release between -- some relief between when we would have talked with you on the quarterly call and the end of the quarter. So we did get some relief there. We weren't intentionally being ultraconservative.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And so that's coming through into Q2 as we look at fuel margins being a little bit better?

B. Clyde Preslar

Well, if you remember, Q2 to date, we're at about $0.10. So -- but as we look at what typically happens from a seasonality standpoint and monthly standpoint, we are looking -- and again, it's one of those things that's a challenge to call, but we are looking for margins to improve from where we are today as we move through the quarter to get to our guidance level.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Okay. And you've had success with the merchandising in the stores to stem the traffic and market share losses. How can this be achieved at the pump? And is -- the remodels at the pump, is it already comping positive?

Dennis G. Hatchell

The remodels include improving the presentation of our fuel, both in the -- in terms of the MPDs [ph] that we're offering and the conditions that they're in, that sort of thing, as well as more aggressive pricing as we do those. And all of those -- all of the remodels, I think, I'd say -- well, not virtually all of our remodels have -- we've repaired these lost shares on those stores as we're going forward, so we're pleased with that. And that's obviously a big part of our remodel program.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And on the coffee, you have some changes going on with the Roo Mug program from the clear to the brown cups and changes in pricing. Can you talk about what you're trying to achieve there versus last year?

Dennis G. Hatchell

Sure. And you're very observant. I'm glad you're a good customer. We wanted to -- the Roo Mug was received really well. The brown Roo Mug was -- or I'm sorry, the clear Roo Mug was received really well by our customers. That program was winding down, and customers continued to ask for it, so we went out and built another Roo Mug program that we think we can sustain for even a longer period of time. That's the reason we had to switch the presentation of the mug. And we changed the offering up just to see if it was more rewarding to them, and it seems to be going really well. That's why we're selling the mug now at $1.99, but the refills are a little higher at $0.99. But still the best buy in the neighborhood, and it's seems to be really well received.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And so that continues to help drive the traffic into the store?

Dennis G. Hatchell

It does, especially in the last week. It's been really good.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And lastly, McDonald's seems to be getting very aggressive on coffee. They had the free coffee weekend. Did that affect you guys at all? And how are you positioning yourself as McDonald's gets aggressive on coffee?

Dennis G. Hatchell

We watched that a little bit. We knew that was going on, and I don't think we saw a significant impact to that. Obviously, McDonald's is a pretty terrific competitor on the cost -- well, in a lot of different ways, but on the coffee side as well. But this $1.99 with the $0.99 refill seems to be really well received, and I think that probably -- at least blunted some of their promotional activity as we got it going.

Operator

Our next question comes from the line of Karen Short of Deutsche Bank.

Shane Higgins - Deutsche Bank AG, Research Division

It's actually Shane Higgins on for Karen. Guys, I just had a couple of questions. I know -- I was looking at the cadence on the merchandise comps. It looked like they accelerated into the -- over the holidays into the year-end. And did I hear that right, you guys, they were running at plus 1% quarter -- 2Q to date?

B. Clyde Preslar

Yes. Right now, we're a little over 1%. And as we look both in what we're doing and then what we're comping against, it was a very difficult period a year ago. And so that -- we do look for that comp percentage to expand as we move through the quarter.

Shane Higgins - Deutsche Bank AG, Research Division

Okay. So there is nothing related to competitive activity out there or anything you're seeing with the consumer or weather related?

Dennis G. Hatchell

Well, the -- I vowed I wasn't going to talk about weather. But with the polar vortex and everything else going on, it's been just really cold right now. So we're just watching our forecast to be careful with that because we just don't know what the impact is going to be. Right now, for example, we have all kinds of supply interruption with both our merchandise and our fuel because of road closures all across the Southeast. We've got -- I think we still have 8 stores as of this morning that could not open because we couldn't get employees -- or roads open to them -- to the stores. It's a big impact the storm has on us across the Southeast. So all of that is planned into what we're worried about right now. But we'll recover from it and hopefully, not have to talk about the weather going forward

Shane Higgins - Deutsche Bank AG, Research Division

Got it, got it. And it sounds like, though, the fuel gallons, we're actually improving slightly from first quarter into second quarter. Is there anything you guys can talk about there just in terms of the cadence on the fuel gallons?

Dennis G. Hatchell

We've been really pleased with our gallon performance, not quite off 1%, so it's a nice improvement from where we've been. We're not confident enough to be cocky about it, but we think that we're making some good headway there and are pleased with the results we've seen so far.

Shane Higgins - Deutsche Bank AG, Research Division

Great. And just one last one, just a housekeeping question. What percent of merchandise sales were cigarettes in the first quarter?

Dennis G. Hatchell

It was right -- I think it rounds up to 30%. I think it's 29.9% or something like that, right at 30%.

Operator

Our next question comes from the line of William Reuter of Bank of America.

William M. Reuter - BofA Merrill Lynch, Research Division

I'm curious, with the decline in your comparable gallons of 4%, how you think that your markets may have done in terms of either miles driven or in terms of your understanding of, I guess, market share and shifts.

Dennis G. Hatchell

Yes. Well, let me take a shot at that. This is Dennis. We're still working really hard at trying to get a solid source for how our markets in the Southeast are performing against this data. We've actually purchased data from one of the major credit cards that -- they run analysis and say here's where they think it is. Their numbers show 1.5%, 2% less demand on fuel, and we're seeing that range up to, actually, no demand, actually a 1% increase, if you look at some of the stuff that the government puts out. So I think that's a safe range. We simply don't know for our market right now because we don't have a source that's reliable. But we're using the credit card data right now. It's kind of our fixed marking, and we're tracking against that so we can tell whether we're gaining or losing market share.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And as your proprietary food offerings or QSRs continue to grow faster than your inside merchandise sales, how are the margins -- the gross margins on those products generally?

B. Clyde Preslar

Yes. We believe that will help our overall margins. They run above the overall. So that is, as we look at balance and things going forward and being more competitive on cigarettes, for example, that the growth in proprietary food service can help us.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. So would those have helped our first quarter gross margins, the fact that they grew faster than the overall merchandise?

B. Clyde Preslar

They were a factor in there. We also -- as we roll out food service, we have a bit of a learning curve as we try to get really good on yield and that sort of thing. So they were not a huge factor in this quarter, but as we move forward, that is one of the pluses that we're pursuing.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then, lastly, for me, I was just curious if you could make any comments regarding your appetite for acquisitions and what you guys are seeing, whether there are a lot of opportunities, modest opportunities. Any commentary there?

Dennis G. Hatchell

This is Dennis. We're doing a couple of things. One is we stay focused on our leader markets, our main markets that we want to develop, and if any acquisition opportunities come available in those, we're taking a look at it. We've had several presented to us, and we're analyzing all of those. And basically, any others that don't fit into our market strategy and our approach strategy, we're not entertaining going after those. So that limits, obviously, how many are available. But we do have several in our current markets that are of interest. They're not very large, but they're of interest to us.

Operator

Our next question comes from the line of Bryan Hunt of Wells Fargo Securities.

Unknown Analyst

This is Clive Barry. [ph] My first question is, if you -- and you mentioned this, Dennis, in your prepared remarks that you're looking kind of market to market to turn around your fuel gallon comps. Is there any way you can talk about difference in between maybe what the best market is on a comp basis versus the worst market?

Dennis G. Hatchell

I'm -- I obviously have that information. I'm hesitant to do it for competitive reasons. I don't really want to give our competition which markets we think are performing the best and let them target it. So we have the information, I'm just hesitant to share it.

Unknown Analyst

Well, instead of giving me the individual market, is there any -- just give us the difference between the best and the worst.

Dennis G. Hatchell

Sure. Yes, we could do that. So we have markets that are now running single-digit positive comps, and we're particularly pleased with that, and we're nursing those along. And we have other markets that are within the loss of 2%, with, I guess, reduced demand in those areas. And then we still have, obviously, markets where we've lost some amount of gallons, either because of competitive situations or road closings or whatever it is. And those are the ones that you got to gently move forward and get back up to where they belong.

Unknown Analyst

And where you're performing the best, are those the markets where you've executed all your merchandising strategy, as well as altered your fuel strategy? Is that a fair statement?

Dennis G. Hatchell

I think that's a fair statement. Where we've put the whole package in, it performs the best.

Unknown Analyst

Okay. And are the other markets that are performing poorly have yet to get these same packages or they're slow to react, perhaps, to what you've installed? Or is it competitive pressures and road closings? I mean, what's the difference driver, if you would?

Dennis G. Hatchell

We've chosen to fix -- and we define markets, obviously, different than most because we segment them off in a different way, so we've chosen to fix markets at a time. And so there are, obviously, markets that are important to us that we're taking care of. But in order to put our whole repair in, we just kind of gently go in one market at a time to make sure we don't upset the entire performance of the company.

Unknown Analyst

Great. And then my next question is, when you talk about planned openings of food service locations in 2014, as well as remodels, has your number changed versus what you gave us at the end of the fourth quarter?

Dennis G. Hatchell

In terms of QSRs, the number of QSRs, I don't think we changed it. I can't remember what we gave you last...

Unknown Analyst

It appears that your CapEx guidance for the year stepped up, and I was wondering what the difference is.

B. Clyde Preslar

CapEx guidance is unchanged.

Operator

Our next question comes from the line of John Lawrence of Stephens Inc.

John R. Lawrence - Stephens Inc., Research Division

Dennis, would you comment a little bit, as you look -- obviously, the progress is being made inside the store. How much further -- as you look out a couple of years, where do you think is the #1? Obviously, as you build food service and inside the box, you can get that cigarette mix down a little bit. To what extent do you think you can move that? And maybe in some of these remodels and where that food service has been, those best markets, how low have you seen the cigarette mix get to?

Dennis G. Hatchell

I don't think we know the answer to that yet, but it's right at 30% now. That's one of our lower numbers. It's going to be pretty different by each store. But the industry has proprietary food service numbers that are in the 18% range, and we think that -- we think we can get our proprietary food service up to a number like that. To whatever extent that offsets not just cigarettes but all the other commodities, well, that's yet to be seen. But we're continuing to grow beverage, and we think -- we actually think cigarettes will hold on for a while because we're a lot more competitive, and will be going forward, than we've been in the past.

John R. Lawrence - Stephens Inc., Research Division

Great. And secondly, when you look at the Slide 9, where you talked about the different remodel markets, can you remind me a little bit of how you're picking these markets? And which -- what's the strategic sort of focus on which markets to hit with remodels?

Dennis G. Hatchell

Sure. So as we said last quarter, we actually had a third-party consultant come in and help us with how to sort through all the different markets because we're spread across such a large geography in 13 states. And through that work, we were able to identify potential -- we analyzed the conditions of the sites, the locations and then put our plans together kind of market by market in terms of approaching that. And that helped us prioritize those markets with the highest potential versus those that don't have as big a growth factor. And those are the markets that we're solely focused on going forward with our capital.

John R. Lawrence - Stephens Inc., Research Division

Right. And if you had plenty of capital, what percentage of the stores do you think can -- could still use remodel or you could get a capital return?

Dennis G. Hatchell

Let's see. I would say that -- I would say there's probably another 600 stores that we'd see return on as we go forward by putting a decent amount of capital into them.

John R. Lawrence - Stephens Inc., Research Division

Great. And last question, could you give us a little bit of a profile of the 11 stores that you closed and I guess, a little asset sales? Just a little bit on that as far as what did those stores look like, et cetera, lease expirations, whatever.

B. Clyde Preslar

Yes. Most of them were stores, as we watch them, kind of in that breakeven range, both in terms of earnings and cash flow. And so it was prudent for us just to anticipate the lease expiration and let them roll off. As we've talked about, this is something that we have been doing and will continue to do. Our guidance indicates closing roughly 40 stores. It's what we're assuming for the calendar year. This is pretty close to that pace. And these closures, over the last year, have been generally modestly EBITDA positive for us, so hopefully that helps.

Dennis G. Hatchell

If I could add one other thing to that. We have improved our decisions around that. What Clyde said is all true, but we also have Alex Garcia and a strong real estate department with some new tools. And we do analyze the site it sits on before we make a final decision to let it go because if that store is just old or hasn't been cared for over the years, we don't want to walk away from a site that has a lot of potential around it. So we also do that work now to make sure that it really doesn't have the right amount of volume around it to invest in it.

Operator

We have a follow-up question from Irene Nattel of RBC Capital.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Just wanted to focus for a moment on the fuel side. One of the other publicly traded companies was noting that, as comps have slowed for the mass players and the grocers, those that have fuel seem to be coming very aggressive on pricing to drive volume and traffic. Are you seeing that in your market?

Dennis G. Hatchell

We see it in markets where grocers or club stores, I think that's what you're referring to, have their fuel program. And that's a -- of course, the club stores has a different program, unless you've got to pay to be a club store and then factor that cost into your fuel savings. But they're putting out a low retail, so we have to be -- we have to figure out how to compete against that and not give up a lot of gallons. And then on the grocery side, it's a different thing. It's an inside-store lift [ph] game. So how much you spend inside the store, you get cents off per gallon. So they're less impactful. They have to put out still a pretty respectable retail price. But they're saving because if you shop in the store long enough, then you get a certain number of gallons off. We do counter that a little bit because with our branded fuel, all of our brands have cents-off offerings per gallon depending on your participation using their debit cards and their credit cards and that sort of thing. So we have a little bit of that, that helps us offset that if you're shopping in our stores that have a brand.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great. That's very helpful. And then can you just please remind us what proportion of your transactions include fuel?

Dennis G. Hatchell

We're trying to get you the right answer. Are you saying what percent of our inside transactions include fuel?

Irene Nattel - RBC Capital Markets, LLC, Research Division

Well, just whichever -- what -- of all your transactions, what proportion include fuel? Or of your -- yes, of your inside transactions, what proportion include fuel? Or of your customer -- can you identify, of your customer trips, how many do or do not include fuel?

B. Clyde Preslar

If we don't have -- we'll circle back with you on that, Irene. We don't have that at our fingertips, but we'll get back to you on that today.

Operator

And our last question comes from the line of Anthony Lebiedzinski of Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

I just had a follow-up question. With regards to your quarter-to-date comp, you mentioned that it was up 1% so far. Can you just help us to kind of put things in perspective as to how January 2013 comp was?

Dennis G. Hatchell

Yes, hold on a minute. We've got that.

B. Clyde Preslar

We're positive 1% [ph].

Dennis G. Hatchell

So about the same.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. So you're comping up 1%, okay. All right. So the comparisons do get easier as the quarter progresses?

Dennis G. Hatchell

They do. That's right.

Operator

I'm showing no further questions at the time. I'd like to turn it back over to management for closing remarks.

Dennis G. Hatchell

Okay, everyone. Well, this is Dennis. I just want to thank you for your interest. We appreciate all the questions. It always makes us a better management team. And I just want to close by, again, reminding you that the best way to combat a polar vortex is to stop in at a Kangaroo store and get your Roo Mug for $1.99, $0.99 refills. It just doesn't get any better than that.

So thank you very much. We appreciate it, and look forward to talking to you next quarter.

Operator

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

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