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The Pantry (NASDAQ:PTRY)

Q2 2014 Earnings Call

May 01, 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

Karen F. Short - Deutsche Bank AG, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Dane Leone - Macquarie Research

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

William M. Reuter - BofA Merrill Lynch, Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

John R. Lawrence - Stephens Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2014 Pantry, Inc. Earnings Conference Call [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Andrew Hinton, Director of Treasury. Sir, you may begin.

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 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. I would like to review our second quarter performance, which begins on Slide 4. During the quarter, our loss per share was $0.45 versus a loss per share of $0.30 in the prior year quarter and adjusted EBITDA was $36 million compared to $39 million in the prior year quarter.

We continue to make progress growing the business inside our stores, with a 2.3% increase in comparable store merchandise sales. This was driven by an increase in sale per customer of 3.6%, as our merchandising effectiveness continues to improve. Fuel comps were down 3.2% for the quarter and fuel margins decreased $0.01 per gallon from last year's to $0.107 per gallon this year.

Slide 5 shows that we achieved another quarter of positive merchandise comp store growth. Despite Q2's challenging weather conditions, we had 4 weeks during the quarter that were significantly impacted by snow, ice storms and unseasonably low temperatures. We estimate that this lowered our comp store merchandise by approximately 1% for the quarter. For example, we had a period around one of these weather events where our merchandise comps were running 3% up one week, down 1% the next, up 6% the following week, followed by a flat week. It was quite a ride. In terms of category performance, our comparable store merchandise sales were up 4.5%, excluding cigarettes. Cigarette comps declined 2.9% during the second quarter. Other packaged goods performed well, up 4.2% on a comparable basis. Proprietary food service comps were up 7.8%, driven by the growth in our grill and other offerings. QSR sales grew 5.8% on a comp store basis and food service growth remains a priority and was a key driver of our Q2 increased sales per customer.

Slide 6 highlights our merchandising and brand awareness initiatives. We continue to improve our price position on cigarettes, to help drive customer traffic. Also, beverage merchandising was an area of focused for us, as we improve the presentation of our single-serve alcoholic beverage, expand its variety and offerings of alternatives and functional beverages and drove impulse purchases through the display of single-serve refrigerated beverages at the sales counter. As already mentioned, continuing to build on our proprietary foodservice offering and increase in the overall mix of our foodservice as a percent of merchandise sales is a major focus for us. We continue to use social media and mobile applications such as Facebook, Instagram and Twitter as ways to engage with our customers and build awareness and promotions and other business building activities.

Slide 7 show that even with the severe weather, fuel comp performance versus 2013 continues to improve. Steadily rising wholesale fuel cost over the second half of the quarter kept pressure on to fuel gross profit margin. As shown on Slide 8, our focus on managing comps and improving productivity is ongoing. This includes store level cost, employee training and development, G&A and capital expenditures. We're not going to do any additional remodels during the high customer traffic driving this season, the spring and summer. This will avoid business disruption to our stores and ensure that we optimize the returns and remodels that we completed over the last 12 months where we have seen a wide range of our inside sales lift with an average of approximately 3%. This will also allow us to define plans and apply what we have learned to date in future remodels.

Turning now to Slide 9. We completed 7 remodels during the second quarter bringing total remodels completed during fiscal 2014 to 35. We continue to anticipate completing approximately 40 remodels during fiscal 2014 and then ramping the pace back up as we head into fiscal 2015. We continue targeting 20 [ph] new QSRs openings this year. We opened 3 new Little Caesars during the second quarter, bringing total QSRs to 224. The results we have seen from this new partnership are encouraging and I might add that we are also further developing our partnership with Dairy Queen, as well. We closed 4 stores during the quarter bringing our total closed stores year-to-date to 15. Closed stores and property sales generated $2.7 million in cash proceeds. Closing and selling underperforming locations is part of our plan to strengthen our overall store portfolio and ensure that our resources are focused on our best locations going forward. We executed a new distribution agreement with McLane in advance of our contract expiration in late 2014. McLane distributes over 50% of our merchandise items we sell inside our stores and we are pleased with this new contract. We believe it will strengthen the partnership we already have with McLane. The contract will provide us with increase in flexibility, with delivery frequency, which becomes crucial as we further expand our proprietary food program.

Now turning to Slide 10, the 4 new stores we opened in 2013 continue to perform well. We're developing a pipeline of high-quality sites to support our new store growth in our high potential market.

Slide 11 summarizes our priorities for the remainder of 2014 where we'll continue to hire, train and develop the best and most energized people, continue implementing effective merchandising programs, optimizing our store remodel and QSR programs, as we prepare to ramp up the pace of remodels later this year. Balancing fuel profitability while we work to stabilize are fuel market share and controlling cost and increasing productivity. In addition, market analysis and new site identification are critical factors to supporting our future growth. Now, Clyde will review our second quarter financial results.

B. Clyde Preslar

Thank you, Dennis, and good morning, everyone. As you just heard, there were a number of positives during the quarter, even though the inside sales and fuel margins were below our targets. Dennis outlined the factors affecting our second quarter operating results, so I'll focus on the financials and getting into more detail there.

Turning now to Slide 13, total revenues for the quarter were $1.8 billion. This was 6.6% below last year due to lower retail fuel prices, the decline in fuel gallons sold in 34 fewer stores on average. Net interest expense declined $847,000 to $21.3 million due to lower interest rates and debt levels. Our effective tax rate was a benefit of 31.3% compared to a benefit of 49% in the second quarter of fiscal 2013. The lower effective tax rate is mainly due to the impact of Work Opportunity Tax Credits and factoring in the latest estimates of our full year effective rate. Putting all this together, net loss for the second quarter was $10.3 million or $0.45 per share compared with a net loss of $6.9 million or $0.30 per share in the prior year quarter. Adjusted EBITDA for the quarter was $36.2 million compared with $39.1 million a year ago.

Slide 14 covers the P&L in more detail. Merchandise revenue was up 1.7% to $426 million, as the 2.3% improvement comp store sales more than offset the lower store count impact. Our overall merchandise gross margin rate was 34%. This was up 30 basis points from last year's 33.7% due to a higher mix of package beverage and food service sales. This puts merchandise gross profit $3.6 million above last year's level.

In the fuel area, retail gallons sold declined 3.2% on a comp store basis. Our second quarter retail gross margin per gallon was $0.107 compared with $0.117 a year ago. Fuel gross profit was down $5.9 million as the lower margin and gallons sold reduced profitability. Please note that our fuel margin is net of credit card fees and fuel equipment maintenance costs, which were $0.07 per gallon this quarter compared to $0.071 a year ago. Excluding these costs, retail gross margin per gallon would have been $0.177 and $0.188 in the second quarters of 2014 and 2013, respectively.

Total store operating and G&A expenses for the quarter increased $700,000. Within this, G&A cost included $1 million in proxy contest expenses related to our Annual Stockholders Meeting held in March. Store operating expenses increased slightly as our continuing focus on productivity allowed us to support the higher level of inside sales and growth in proprietary food service with minimal increases in store operating cost. In summary, Q2 income from operations was $6.3 million, down from $8.7 million in the prior year quarter.

Turning next to capital expenditures on Slide 15. Our second quarter net capital spending was $22.5 million, with $600,000 in proceeds from asset sales, compared to $70 million last year when we had $100,000 in asset sales. These increased capital expenditures were driven by remodel investments and QSR additions.

From a store count perspective, on Slide 16, we closed 4 stores during the quarter, ending Q2 with 1,534 company-operated locations compared to 1,568 at this time last year. Our quick service restaurant count was 224, and we have 67 wholesale fuel locations.

Slide 17 covers our cash and liquidity position, showing that we finished the second quarter with $10 million in cash. Our net debt declined to $931 million, which was down $20 million from last year. This quarter end -- at quarter end, we had $111 million in liquidity, including cash and revolver availability.

Slide 18 shows our current outlook for the third quarter and full year 2014. So far, in Q3, we've been encouraged by our operating performance, with the exception of fuel margins. Quarter to-date, our merchandise sales comps were up approximately 2% and we anticipate further improvement as we move through the quarter. Our retail fuel gallon comps are down approximately 2% and CPG stands at approximately $0.09 on a quarter to-date basis.

For full year 2014, we expect total merchandise sales to be between $1.82 billion and $1.85 billion, merchandise gross margin in the 33.8% to 34.2% range, retail fuel volume between 1.63 billion gallons and 1.66 billion gallons, retail fuel margin ranging between $0.105 to $0.125 per gallon and store operating and G&A expenses of $614 million to $624 million.

Regarding our full year OSG&A guidance, as covered in our last 2 calls, we anticipate over $20 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 approximately $6 million in higher incentive compensation expense for fiscal 2014, with payouts above the minimal 2013 payouts; and third, our guidance assumes no positives or negatives from actuarial-based insurance reserve true-ups compared to the $7.2 million of favorable reserve adjustments recorded in fiscal 2013. However, there may be some upside in this assumption as our claims experience has continued to move in a positive direction and our claims administration practices continue to improve.

Also on that Slide, we've 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 are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Karen Short of Deutsche Bank.

Karen F. Short - Deutsche Bank AG, Research Division

Just a couple of questions in terms of the QSR initiative, I guess, can you just remind me how many stores are actually eligible to have QSRs? And actually ones that wouldn't require increased growth footage to do so?

Dennis G. Hatchell

I can get you pretty close without being exact, Karen. We identified that 700 of our locations have the potential to take a QSR. Obviously, 224 of those are now billed out. In terms of those that wouldn't require expansion, I would guess there's another couple hundred of the 700 that we can get them inside a store without expanding and the rest of them will require some kind of workaround either expanding the stores or trying to get a hold of some land around them, so that we can keep going.

Karen F. Short - Deutsche Bank AG, Research Division

So the ones that wouldn't need an extension, would you be looking more like the Dairy Queen type of format. I'm assuming some of the other formats would require bigger -- like bigger box size?

Dennis G. Hatchell

Yes. The -- we think Subway, Little Caesars, Dairy Queen treats can fit within these sites. Obviously, the Hardies and Churches require a bigger footprint.

Karen F. Short - Deutsche Bank AG, Research Division

And then I'm just curious. You guys have given -- I don't think you've given quite this data, but of the customers that are actually buying gas who come to your store for filling up at a pump, what percent of those customers actually walk into the store to buy something? I think you've given a number where the number of people in your store buying something, what percent of those are buying gas. I'm actually asking for the inverse.

Dennis G. Hatchell

Karen, we don't have a way to measure that. We actually have been doing some random sampling try to compare it to [ph] next data which runs in the mid-20s, 24%, 25%. And we don't find anything much different than that. So there's so many different folks who come in and pay for fuel with cash. We can track them but we can't track all the transactions. So it's kind of a "stand there and count them" as they go thing but we find it's about 25%.

Karen F. Short - Deutsche Bank AG, Research Division

Okay. And then just looking at tobacco. I see where you're comp was and I'm also, we now have finally have some data on the first quarter and second quarter on a tier basis, in all the categories within general merchandise and it looks like all your categories decelerated on a 2 year basis within general merchandise, but tobacco is fairly extreme. And I guess I'm wondering, where you think your price points are today versus your competitions, just again, because the trends on tobacco, I mean, that could obviously be pricing-related. But just kind of wondering where your price relative to your competition today?

Dennis G. Hatchell

In terms of the answer to the pricing, we're more aggressively priced now than we've ever been in the marketplace. 900 of our stores are at MLP, MLP2 and the rest of them are all indexed against MLP. So we're closer now than we have ever been on cigarettes in terms of retail setting. We're continuing to, as you know, you -- as you moved your cigarettes prices down, it takes a good while for you, both your comps and your profits to return on it, so we're moving to the network of stores, as we go to get that accomplished, so that they're all competitive.

Karen F. Short - Deutsche Bank AG, Research Division

But then within that cigarette segment, what -- do you have that units versus price composition of the comp?

Dennis G. Hatchell

Do we have that? Units were minus 3.6%.

Operator

Our next question comes from Bonnie Herzog of Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. My first question is on your board. Given the new members, could you update us on any changes you might be making regarding the direction or strategy for your company? And then have you put anything on hold while the board maybe reassesses the company's strategic direction? I guess, I just like to hear from you how we should think about this?

Dennis G. Hatchell

Sure. So just a recap of where we ended up with the board. 3 stand-in members, left the board, 3 brand-new members came on, in addition to 1 member that we had nominated, Ted Dickson. So he came on, so 4 of the 8 members, myself being 9, are new to the board. Ted Dickson became Chairman, which is great. Glad to have him leading the team there. And what we've accomplished so far is we got the group together. We had orientation with them. We've had a chance to work together as a group to see what everybody's opinion was, how much change is going to be anticipated or what people might be looking to do going forward and we've had our first board meeting and all of that was successful, it went well. The group has a lot of ideas and I'm very encouraged with how the whole thing came out. I was very pleased with it. In terms of the rest of your question, I think it's way too early to know. There's a lot to absorb for all these new board members and we're doing our best to ramp up the speed and they're doing best to ask a lot of questions. So I would think we'll be able to answer your question a lot better over the next coming quarters. As for our plans right now, it's business as usual. We are proceeding with our plans. We think they're right. We think they're directionally correct and we're going to stay exercising on them until, as a team, we either choose to change the strategy or stay with it.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then in terms of E-cigs, it does sound like you're continuing to focus on developing the category, in your stores. And I think you're now carrying a vapor or the larger units, so I'd love to hear from you, broadly speaking maybe what's your read on whether it's E-cig category or the e-vapor category and sort of what you're seeing in your stores and how these customers are changing their behavior and the interaction between the employees and customers.

Dennis G. Hatchell

I don't know that I can answer how they're interacting with the employees and customers. We've embraced this category. We actually are working on a unit and have a unit and sell them in most of our stores. We're trying to keep the product out in front of the sales counter, so the customers can feel this product and handle it and not have to work it from behind the counter. That's proven to be successful. Our sales are pretty good on this. It's not as good as we had planned. We're still short of our growth plan on this area, but I think just to experiment and all the different work going on, is going to pay off. Customers are seeming to like it. We do carry the vapor. We carry -- I think we're carrying everything that's possible you carry out there right now, so it's a matter of trial and error with the customers in terms of what they like and don't like. There's the tank refills and I think they're just moving all over right now trying to [indiscernible] which feels the best in terms of being a smoker.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

No, and I think that's a good point and that's kind of why I was curious because I do think there's more education with this newer category. So that's why I think the employee -- the education employees is probably more important just given all the questions. Smokers have with this new category. And then you just mentioned your sales are good but not as good as you had planned. Do you have a sense of why that might be? Is it smokers not converting as quickly as you were anticipating or is it maybe what you're carrying hasn't been as successful?

Dennis G. Hatchell

I think we're carrying as wide a variety as you'll find and I think your right on it. It's the conversion customers that are smokers -- typically smokers that are converting obviously, and they -- from the data we're seeing, they convert. They try for a while, if it is not as good, they go back . I'm not a smoker but I'm assuming that it's a learned habit and something you got to get comfortable with.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

Okay. And then just my final question is on store closings. So you closed 4 stores during the quarter and I guess it just seems like it was up [ph] a little bit of a slower pace than what I was maybe anticipating, so how should we think about the number of stores you expect to close, this year and possibly next. And then remind us again what percentage of your store base are candidates for closing?

Dennis G. Hatchell

We have, I think this year, our number will be in the mid-20s, 25 to 30 stores closing for the year. We're forward looking at stores that either aren't responsive to our programs or have leases coming due. The number we've been using is about 40 a year and that excludes any -- as we work through our market analysis, whether we find some small markets where there's segments of stores where we might not choose them, that's [ph] them. But we haven't reached that point yet. We're still keeping all the stores with cash flow positive moving forward. So it looks like about 40 a year going forward to the next 2, 3 years, anyway.

Operator

Our next question comes from Dane Leone, Macquarie.

Dane Leone - Macquarie Research

The first question I had, I just want to make sure I heard the quarter-to-date comps on the merchant resale fuel, right? The merchandise sales you said, you're running 2% quarter-to-date.

B. Clyde Preslar

Correct.

Dane Leone - Macquarie Research

Okay. And so basically you're telling us you're going to be closer to the bottom end of the guidance range for merchandise sales?

B. Clyde Preslar

Not at all [indiscernible] . I think we're to the midpoint but I just want to bring you up-to-date on where we are quarter-to-date. As I mentioned, we do see that improving as we move through the quarter.

Dane Leone - Macquarie Research

Okay. So on a week-by-week basis, it's been getting stronger and presumably, that's from improving weather?

Dennis G. Hatchell

It's just a combination of factors but weather at the beginning of the quarter wasn't the best but again, I would have you think more to the middle of the range.

Dane Leone - Macquarie Research

Okay. And then on the fuel comps, you're running down 2% quarter-to-date, correct?

B. Clyde Preslar

That's correct.

Dane Leone - Macquarie Research

And has there been improving progression there or is it been kind of steady stake?

B. Clyde Preslar

The 2% is really better than we're guiding in terms of the midpoint of our range for the quarter. But again, we're just taking what we know and what we anticipate as we look ahead. But certainly, steady state is not a bad description if we allow for unusual weather. I hate keep bringing that up but we are encouraged as Dennis mentioned and the steady progress in improving our fuel comps.

Dane Leone - Macquarie Research

And the fuel pricing strategy, is that becoming more competitive or aggressive, I guess, heading into the summer driving season? Is there a plan for that, I guess, is the question.

Dennis G. Hatchell

We plan to remain as competitive as we need to whichever season we happen to be in. Our -- we've been repairing our cigarette -- we've been repairing our fuel much like we were repairing our cigarettes on a careful fashion where we're trying to fix the market share lost that we've had and gain it back and do it in a responsible fashion, so that we protect the profit as best as we can. So it's slow-going but we think it's the right way to go about improving the overall performance or the short answer to what you asked is that we're more closely priced now than we've been in the past.

Dane Leone - Macquarie Research

Yes, that was kind of the genesis of the question as you brought down your full year guidance for the fuel margin. I wasn't sure if that was just a function of the second quarter being weak or expectation to be a bit more aggressive in the back half.

B. Clyde Preslar

Well, think you're right. Well, in terms of playing through where we are in Q2, as Dennis and I mentioned, we did come in below where we're targeting in terms of CPG in Q2. But I think from our standpoint, the full year impact is more kind of the cost picture as opposed to the pricing strategy.

Dane Leone - Macquarie Research

Okay. And do you have an estimate on, I think you said about a point of comp was impacted by weather on the merchant side? Do you have an estimate of what the impact on weather would have been on the fuel side on a comp basis in the second quarter?

B. Clyde Preslar

Yes, I think Dennis, maybe we didn't quantify, but it was also about a point with our best analysis.

Dane Leone - Macquarie Research

Okay, I think the question was asked before, but on to your stack, it still seems kind of like a weaker -- even if you factor in the weather. But you've seen enough improvement quarter to-date on kind of a run rate that you're comfortable with, your kind of improvement trend ending the year in September?

B. Clyde Preslar

Absolutely. I would focus on where we did, where we performed in Q2 and then the guidance we have as we move through the balance of the year steadily improving our comp performance.

Dane Leone - Macquarie Research

On the guidance for store closures, as touched on a previous question but more specifically, I think last quarter, the guidance was assuming 40 store closures and now we're down to 30. Is that again reflecting the shift in the board to reassess what properties truly are underperforming assets and need to be let go versus what could potentially be fixed?

B. Clyde Preslar

No. Really, it's just timing. As we move through the year, we see what we've done to date. We have -- as Dennis has said it several times, we will not make tests out of store, so we're convinced they are underperformers and in particular if they're coming up on their lease expiration, we just go ahead and take care of it. But at the same time, we want to make sure that on all the stores we've done, what we can control to make sure it is the right decision. But that's really what it is. It's just timing the progress to date and the evaluation that we have ongoing.

Dennis G. Hatchell

We've also improved our forecasting tools around these sites now as we continue to mature our real estate options here. So as we -- we don't just look at sites in terms of their performance. We also look at them for the potential around the site. And so there are those locations were we don't want to give them up if we put the right remodel or new store item. We'll hold onto that potential.

Dane Leone - Macquarie Research

Okay, great. And then last question from me, I promise. On the merchandise gross margin side, you did -- you seemed like you feel comfortable taking up the full year guidance. Is that reflective of upside surprise in certain categories, I guess, foodservice or is there anything we should be thinking about in the change in summer promo activity on the merchandise side versus, say, last year?

B. Clyde Preslar

No. It's a combination, one, we had a good performance in Q2 on packaged beverage, both in terms of growth and margins and we feel that could carry on the growth in proprietary food service and continue to improve the margins there. And then just working with our merchandising teams to continue to have the right products at the right margins in the stores. So yes, we were pleased that we did come in within an improvement year-over-year in this quarter and as you know that, we did take up our full year inside gross margin guidance.

Dane Leone - Macquarie Research

So the plans for activity going to summer, is that -- would you say it's more or less or the same as last year?

B. Clyde Preslar

You mean in terms of promotional activity?

Dane Leone - Macquarie Research

Correct.

B. Clyde Preslar

I don't know if you...

Dennis G. Hatchell

I would say it's about to say. We've not -- it's more targeted in terms of where we saw success last year versus other places. So we did more of what works well and a little less of what didn't but I think the intensity of it is about the same.

Operator

Our next question comes from Ben Brownlow of Raymond James.

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

On the increase flexibility with the new distribution agreement with McLane, should we expect a margin improvement there, as well?

Dennis G. Hatchell

We are -- I want to be careful how we answer this because we have a commitment to McLane for confidentiality. But we're really pleased with the -- both the contract and flexibility and the cost of goods that we're able to obtain. How's that?

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

That's helpful. And Dennis, I guess, when you look at -- flipping over to remodels, when you look at the remodels and I know you're still digging in kind of analyzing that. But the ones -- the stores that are on the low end of that sales lift or the lack thereof of sales lift, how does that -- can you just talk broadly about how that is initially impacting your approach or view to this sort of divestitures?

Dennis G. Hatchell

Yes, that's really good question. As the stores that are on the low-end of our lift, we have a wide range of results on our remodels and the ones that are on the low-end are a combination of one of them is just the way the world [ph] is. We remodeled them because we knew a competitor was coming, so that's obviously reflecting a lower return. We have -- we did make some decisions around remodeling kind of some submarkets or areas in total and going after the stores. We think that it was great that we remodeled those stores but they don't show the kind of response that stores that have high potential around them do. So we'll be much more store specific in our remodels going forward instead of grouping our stores. And then we also have some stores that were either impacted by competitors that moved into the marketplace just as we remodeled them and some other competitive things they've got. So I would say most of it is marketplace driven. I'm glad we remodeled the stores because they'll respond over time. But when you just bring them out and compare them to normal lift, it doesn't look all that good. I would say, we own some of that in a few of our stores, we -- we didn't execute very well on some of the proprietary food service offerings that we wanted to have. We fixed that with the training and development pieces, as well as we were really accelerating that program as we went. We'll continue to accelerate it, but we had some good learnings out of that and actually altered our whole approach to training in order to make sure it wouldn't happen again going forward.

Operator

Our next question comes from William Reuter of Bank of America Merrill Lynch.

William M. Reuter - BofA Merrill Lynch, Research Division

I have a couple of questions. The first, I'm -- I know you guys have been really focused mostly on your internal initiatives and remodels, QSRs. I'm wondering if you can talk at all about whether acquisitions would at all be on the radar at this point?

Dennis G. Hatchell

Sure. Acquisitions, in a small way, we've been talking about those for a good bit. They're still in our plan, but it's not -- it's not acquisitions like we're reading about lately, these big acquisitions that you're seeing in the newspaper. We're doing a market by market approach and should there be a small group of stores or even an individual store that are where we would like to be within a market, as we saw for the share that we have within a market, we would look to make those acquisitions. That's still on our plans. It's still going forward but we don't have any plans for any large major acquisition if that's what you were at.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then I had got an update on the localization initiative recently. Are you guys still working on this?

Dennis G. Hatchell

Yes. That's just kind of how we do business now. We have the tools in place that every store that we reset, all the categories we work every category and each one is adjusted according to -- excuse me, both the customer and the performance of that store and the demographics around that store. So it's -- there's no blanket approach anymore. Just every store is basically localized. I would still say that 15% of our SKUs are adjusted. The rest of them are pretty much the same in all of our stores. But you'll see 10% to 15% of our SKUs that adjust based on what's local.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then lastly, for me, I'm curious if you could comment a little bit broadly on how those stores, you have QSRs and are performing either on a productivity basis or on a comp basis, relative to the stores that don't have QSRs. That's all for me.

Dennis G. Hatchell

I don't know if we had that number. We can tell you that we're -- our QSR store is generally our best performing stores. They're almost always in our top quadrant of profitability and growth but we don't break it out to your specific question. But the reason we're moving forward is how well those stores performed.

Operator

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

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

I'm just wondering if you could talk a little bit about fuel shrinkage and how that's affecting your fuel margin and what your new Warren Rogers fuel systems can do?

Dennis G. Hatchell

Yes. So it's a remarkable piece of technology, that we're rolling out to 800 of our stores and based on that result, we'll probably keep taking it over to the balance of our operation. And I'm going to speak like a pro on this but we're really new into it but it has been remarkable in showing us where skimmers have been put on our pumps, where we've had discrepancies in deliveries and where we've had just different issues, including tanks that aren't level in the ground. So what we have learned from this program and our ability to reduce shrink, I think, it's going to be remarkable and we're really encouraged by this, but we're also really brand-new with it and we'll see what happens from our progress. I think just the fact that we have it in is going to improve our shrinkage.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Do you think that shrink could be costing you up to 0.5% per gallon? And could those savings, if you can recapture them, could they be rollback into lower prices to me make you more competitive to drive that fuel comp?

Dennis G. Hatchell

I don't think we have any idea what shrinkage would be in a cents per gallon. But obviously, any advantage we find there that improves our overall cost of goods, so it improves our overall cost of goods or in-ground cost we'll use that to be more competitive in the marketplace.

Operator

Our last question comes from John Lawrence with Stephens.

John R. Lawrence - Stephens Inc., Research Division

Dennis, to follow-on Ben's question, digging in the remodel success a little bit. Going market by market and that variability of success has widened it sounds like a little bit because a lot of different factors. Give us a sense of now, as you look at individuals stores to go after. I assume that what you're seeing is you feel like you can have a better sense of success by doing one at a time and what would be the factors in that?

Dennis G. Hatchell

We think the major factor is using the tools that we have, that predict volume potential around the store and our approach was more kind of market-driven to begin with, which we thought would be advantageous in terms of the communicating with the customers that we've remodeled a bunch of stores and the whole works, but it appears that kind of a one-off store by store, generally in each market but which stores has the most potential makes the most sense and when we went back and kind of looked at stores that performed the best against the stores that didn't, we saw that right away. So that's where we keep our focus right now in remodels.

John R. Lawrence - Stephens Inc., Research Division

And that could be more of a -- and once again, so removing the idea of a zone or a district, it's just different stores show up to, that are going to be on that list, and assume, so would that mean that the next set of remodels would have been way down the list -- I mean, in the prior strategy?

Dennis G. Hatchell

I think the way to think about it is what we discussed last quarter. So we're approaching all of our stores on a market-by-market basis and we've defined these markets and we have them prioritized by strongest markets to weakest markets. We obviously want to protect the strongest market. As we go into those markets then we're picking off the highest potential stores within each of those markets and move through -- it doesn't mean the stores in those markets aren't performing well, it's just they don't have as much potential around them for remodel as the others, so we'll move to the next strongest market and so on and we'll eventually return to pick off the second-tier stores and so on.

John R. Lawrence - Stephens Inc., Research Division

And, just a recalibration of the return profile?

Dennis G. Hatchell

Yes, that's right.

Operator

Thank you. And at this time, I'd like to turn it over to Dennis for closing remarks.

Dennis G. Hatchell

Thanks, everybody. Before I close, just a couple of acknowledgments. First, our management team is now complete. As you know, we've announced the additions of Dave Zodikoff, who's our Senior Vice President of IT and, Gordon Schmidt, is our Senior Vice President of Operations and Restaurants. Both these guys are terrific talents and we're looking forward to them being on the team and helping us attain our goals. And as we just spoke about, the shareholders spoke last month, we have 4 new members on our board, with Ted Dickson being elected Chairman and with orientation completed, 1 board meeting under our belt, we're embracing the energy and the ideas that they're going to bring and look forward to working with them. So I want to thank all of you for your questions. They're always helpful in terms of helping us think about our business. We look forward to talking to you next quarter but I want to remind you that today is May 1 and it's the first day of the 2014 Roo Cup, so you all come shop with us, okay? Thanks very much.

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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