The Pantry's (PTRY) CEO Dennis Hatchell on Q3 2014 Results - Earnings Call Transcript

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

The Pantry, Inc. (NASDAQ:PTRY)

Q3 2014 Results Earnings Conference Call

July 30, 2014, 8:30 am ET

Executives

Greg Rowe - Vice President, Financial Planning and Analysis

Dennis Hatchell - President, Chief Executive Officer, Director

Clyde Preslar - Chief Financial Officer, Senior Vice President

Analysts

Bonnie Herzog - Wells Fargo

Irene Nattel - RBC Capital Markets

Karen Short - Deutsche Bank

William Reuter - Bank of America Merrill Lynch

Bryan Hunt - Wells Fargo Securities

Ben Brownlow - Raymond James

Ronald Bookbinder - The Benchmark Company

Anthony Lebiedzinski - Sidoti & Company

John Lawrence - Stephens

Operator

Good day, ladies and gentlemen, and welcome to The Pantry, Inc. Q3 2014 earnings conference call. My name is Destiny and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after management's prepared comments. As a reminder, this call is being recorded for replay purposes.

Now, Greg Rowe, Vice President, Financial Planning and Analysis will introduce today's participants. Please proceed.

Greg Rowe

Good morning, everyone. Thank you for joining us to discuss The Pantry's third 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 ww.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 will turn to Dennis for his comments.

Dennis Hatchell

Thanks, Greg. Good morning, everyone. I would like to review our third quarter performance, which begins on slide four.

During the quarter, we reported earnings per share of $0.61 versus $0.26 in the prior year quarter and adjusted EBITDA was $71 million compared with $65 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. This was driven by an increase in our sale per customer of 3.9% as our merchandising effectiveness continues to improve. Fuel comps were down 2.3% for the quarter and fuel margins increased to $0.129 per gallon from $0.123 per gallon last year. Our balanced approach towards stabilizing our fuel performance continues to have a positive impact as reflected in the sequential quarter gallon comp improvement.

Turning to slide five. While we achieved a 2.3% merchandising comp store growth during the quarter, however we were targeting even stronger results. We were pleased with our increased sale per customer, but as with other retailers during this timeframe, we saw softening in our traffic. Excluding cigarettes, which declined 1.5% on a comparable basis, our comp store sales were up 3.9%. Other packaged goods performed well, up 4% on a comparable basis. Proprietary foodservice comps were up 3.2%, driven by growth in our grill and other offerings. Dispense beverage sales, which are included in our proprietary foodservice categories, were not as strong as planed and our merchandising team is developing programs to stimulate sales in this high potential category. QSR sales grew 7.7% on a comp store basis which includes the impact of opening new QSRs in existing stores. Overall foodservice growth remains a bright spot for us and was one of the drivers of our Q3 increase in sale per customer.

Highlights of our merchandising and brand initiatives are on slide six. We are increasingly realizing benefits in our customer traffic from improved price position on cigarettes and the attachment sales they generate. We further developed our beverage merchandising with the introduction of frozen, noncarbonated beverages, as well as frozen and iced coffee. We expanded the number of immediate consumption beverage coolers and continue to innovate in alcoholic beverages as we increase the number of flavored malt beverages. As already mentioned, we are continuing to build our proprietary foodservice offering and increasing the overall mix of our foodservice as a percent of merchandise sales is a major focus for us. During the quarter, we added grills and expanded condiment programs to additional stores. Our promotional activities increased with our Buy More Save More beverage program and we introduced several $1 ROO deal programs to increase impulse purchases.

Slide seven shows that our fuel gallon comp performance continues to move in the right direction. This is our second consecutive quarter of improving sequential comp store performance.

As shown on slide eight, our focus on managing costs and improving productivity is ongoing. This includes store level cost, employee training and development, G&A and capital expenditures. As noted during our last call, we have paused the remodel activity during our busy summer season. This avoids the voice store disruptions during these peak months and it also allows us to focus on optimizing the returns on remodels that we have completed over the last 12 months. We plan to resume our remodel program in fiscal 2015. The performance of our completed remodels continues to improve as the stores mature and we are encouraged in how they are performing as a group.

Turning now to slide nine. We continued with our plan to open 20 new QSRs this year. We opened four this quarter, including two Little Caesars, one Dairy Queen, one Subway. This year, we have opened 11 new QSRs while closing eight underperforming units, bringing our total QSR count to 225. We closed seven stores during the quarter for a total of 22 year-to-date. Closing and selling underperforming locations strengthens our overall store portfolio and ensures that our resources are focused on our higher potential locations going forward.

Slide 10, the four new stores we opened in 2013 continue to perform well. We made further progress during the third quarter as we completed a scrape and rebuild of our new large format store in the Fayetteville, North Carolina. This store is just outside Fort Bragg, so we gave it a military theme and we also upgraded the beverage offerings, the fresh food variety and included a Subway. We are continuing to develop a pipeline of quality sites to support the growth of the new stores like this in our high potential markets.

Slide 11 summarizes our priorities for the fourth quarter of 2014. We will continue to hire, train and develop the best and most energized people. We will continue to implement our merchandising programs and increase sale per customer. We will focus on increasing traffic to our stores. We are optimizing our store remodel and QSR programs as we prepare to resume remodels in fiscal 2015. We will continue with our focus on hiring balancing fuel profitability while stabilizing our fuel market share. We will control our cost increase productivity and continue with our market analysis and our new store site identification.

With that, I am going to turn it over to Clyde so he can review the third quarter financial results.

Clyde Preslar

Thanks, Dennis, and good morning, everyone. As you just heard, we continue to make solid progress as we push to accelerate the positive momentum in our business. Dennis outlined the factors affecting our third quarter operating results while I will address the financials in more detail.

Turning now to slide 13. Total revenues for the quarter were $2 billion. This was 1.3% above last year due to increases in both fuel and merchandise revenues. This growth more than offset the impact of 35 fewer stores on average. Net interest expense declined $600,000 to $21.4 million due to lower interest rates and debt levels. Our effective tax rate was 34.8% compared to 54.9% in the third 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 for our full year effective rate. Putting all this together, net income for the quarter was $14 million or $0.61 per share, compared with net income of $5.9 million or $0.26 per share in the prior year quarter. Adjusted EBITDA for the quarter was up 9% to $71.2 million.

Slide 14 covers the P&L in more detail. Merchandise revenue was up 1.7% to $485 million, as the 2.3% improvement in comp store sales more than offset the lower store count impact. Our overall merchandise gross margin rate was 33.9%. This was up 10 basis points from last year's 33.8%, mainly due to a higher mix of packaged beverage and foodservice sales. This put total merchandise gross profit $3.4 million above last year's level. In the fuel area, retail gallon sold declined 2.3% on a comp store basis. Our third quarter retail gross margin per gallon was $0.129 compared with $0.123 cents a year ago. Fuel gross profit was up $1.1 million as the improved margin more than offset the impact of lower gallons. Please note that our fuel margin is net of credit card fees and fuel equipment maintenance costs which were $0.07.2 per gallon this quarter compared to $0.068 a year ago. Excluding these costs, retail gross margin per gallon would have been $0.201 and $0.191 in the third quarters of 2014 and 2013, respectively.

Total store operating and G&A expenses for the quarter declined $1.3 million. Within this, G&A cost were down $1.5 million, mainly due to lower professional and consulting fees. Store operating expenses increased slightly as our continuing focus on productivity allowed us to support the higher level inside sales and growth in proprietary foodservice with minimal increases in store operating cost. Within store operating expenses, we benefited from a $4.3 million favorable adjustment to actuarial reserves for our self-insured workers compensation and general liability programs. This was $1.7 million below the favorable adjustment in Q3 of last year, but continues to reflect well on our improving claims experience and claims handling practices. In summary, Q3 income from operations was $42.9 million, up $7.8 million from the prior year quarter.

Turning next to capital expenditures on slide 15. Our third quarter net capital spending was $20.3 million, with $1 million of proceeds from asset sales compared to $19.7 million last year when we had $1.4 million in asset sales.

From a store count perspective on slide 16, we closed seven stores during the third quarter, ending Q3 with 1,527 company operated locations compared to 1,562 at this time last year. Our quick service restaurant count was 225 and we have 67 wholesale fuel locations.

Slide 17 covers our cash and liquidity position, showing that we finished the third quarter with $50 million in cash. Our net debt declined to $887 million, which was down $18 million from last year. At quarter-end, we had $190 million in liquidity, including cash and revolver availability.

Slide 18 shows our current outlook for the fourth quarter and full year 2014. So far in Q4, we have been encouraged by our operating performance. Quarter-to-date, our merchandise sales comps were up approximately 2.5%, our retail fuel gallon comps are down approximately 3% and CPG stands at approximately $0.17 on a quarter-to-date basis. For full year 2014, we expect total merchandise sales to be between $1.83 billion and $1.84 billion. Merchandise gross margin in the 33.8% to 33.9% range, retail fuel volume between 1.64 and 1.65 billion gallons, retail fuel margin ranging between $0.116 to $0.124 per gallon and store operating and G&A expenses of $609 million to $612 million.

Regarding our full year OSG&A guidance, as covered past calls, we are managing through significant expense headwinds in fiscal 2014 due to the year-over-year increases from three specific factors. First, we are assuming approximately $5 million in incremental health insurance costs related to the Affordable Care Act, which is down from our previous guidance of $6 million to $8 million. Second, we are 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 further positives or negatives from actuarial based insurance reserve true ups beyond the $4.3 million recorded in our just completed third quarter. For fiscal 2014 on a full year basis, this is $2.9 million below the $7.2 million of favorable reserve adjustments recorded last year. We have also provided guidance for D&A, net interest expense, the effective tax rate and capital expenditures.

With that, we will 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 Bonnie Herzog of Wells Fargo. Your line is open.

Bonnie Herzog - Wells Fargo

Good morning.

Dennis Hatchell

Morning.

Bonnie Herzog - Wells Fargo

My first question is on your sales per customer. It was up pretty strong this quarter. So could you drill down a little bit further in terms of what drove this? You did callout certainly the beverage category and a lot of the initiatives but are there other items that also contribute to this strength?

Dennis Hatchell

Yes, I think, Bonnie, we put a lot of emphasis on our team members out in the stores this quarter on asking them to really pay attention to the impulse sales items that are available to the customer and tie those in with the Roo Cup as well, and I think we think we had some nice sales contests for the folks and our merchandising team sourced an awful lot of really effective impulse items. So between the team members being excited about some sales contests and having the right mix pout there for this quarter, it worked really nice.

Bonnie Herzog - Wells Fargo

So based on that, it sounds like some of these items you are going to be continuing in terms of the incentives to your sales force going forward?

Dennis Hatchell

I think, on the sales contest items, we will continue with those. They seem effective and the items are kind of, some of them are in and out and some of them we will continue to carry on a regular basis.

Bonnie Herzog - Wells Fargo

Okay, and Dennis, I am curios in terms of the beverage category specifically on energy. How has that been performing in your stores in the last quarter?

Dennis Hatchell

That's actually been a pretty good category for us. I don't know if I have the specific numbers for energy. We can get them for you, but we have seen a lot of movement towards energy products, and all those new items that have been introduced into that category.

Bonnie Herzog - Wells Fargo

Right, okay, and then in terms of your QSRs, you stated that you are accelerating your QSR efforts. Could you quantify the comp lift you saw in the quarter? And then maybe remind us again of the potential you have in your store base to add QSRs?

Dennis Hatchell

Yes. So we measure our comps a couple of ways. If you look at stores open for a full year, they were up about 1.5%, which is, almost all of them are better than what the system performances are for the brands that they are carrying. So we are really pleased with that. If you to measure how many stores we opened versus last year in total, we are about 7%. So we are seeing nice growth there. In terms of how many more stores that we can develop, that hasn't changed from last time. We still think about 700 stores can take a QSR, 225 of those are built out and about 200 of those, just under 200 of those can be added within the walls and the rest would require some kind of capital expense to fit them in.

Bonnie Herzog - Wells Fargo

So going forward, I imagine you are going to be increasing your capital spend as you continue on this initiative?

Dennis Hatchell

We have plans continue to ramp QSRs up 15 or 20 a year if not more.

Bonnie Herzog - Wells Fargo

Okay. My final question, Dennis, is just, could you update us on your current thoughts for potential acquisitions?

Dennis Hatchell

Yes. That's not changed. So we focus, as we mentioned before, we are focusing on studying markets and so if there is an acquisition to be made, it would be small, it would be store a group of stores that happen to be within a market that helps strengthen the strongest markets that we have. Otherwise, we are going to pay attention to remodels and new store growth.

Bonnie Herzog - Wells Fargo

Okay. It makes a lot of sense. Thank you so much.

Dennis Hatchell

Yes. Nice talking to you.

Operator

Thank you. Your next question comes from Irene Nattel of RBC Capital Markets. Your line is open.

Irene Nattel - RBC Capital Markets

Thanks, and good morning, everyone. I was wondering if you could talk a little bit about the competitive intensity that you are seeing out there now, as the overall economic indicators that are particularly in your reach?

Dennis Hatchell

Good morning. This is Dennis. I will take a shot at that. I don't know that the intensity has changed much, Irene. We continue to see new store openings from some very good competitors, Sheetz, Wawa and QT and they are continuing to expand but it doesn't feel like its any faster or slower. We think they all will be coming at the same pace as we hit both predicted and are anticipating with our store reaction. We prefer they didn't do it but it's unchanged and they are good competitors.

Irene Nattel - RBC Capital Markets

Absolutely, and as you think about Pantry's positioning relative to their offering, how do you differentiate yourself and really try and maintain that customer loyalty that you have?

Dennis Hatchell

Well, we are very focused. We know who our customers are. We are staying very focused in taking care of them. We think that there is a position for us in the marketplace. We obviously pay attention to the new competitors in the marketplace, but we are not trying to be them. We think there is plenty of room for us to get our share and that's what we stay focused on. So we know what's happening in the marketplace, but we still need to be Pantry, and we keep our stores very local to what our particular customers are looking for.

Irene Nattel - RBC Capital Markets

That's great. Thank you very much.

Operator

Thank you. Your next question comes from Karen Short of Deutsche Bank. Your line is open.

Karen Short - Deutsche Bank

Hi, there. A couple of questions, just on your gross margin guidance for the year. Your renewed contract under McLane, you are not operating under the new contract as of this quarter. Correct?

Dennis Hatchell

Yes. I am thinking about the date on it.

Clyde Preslar

Yes, but we are getting the benefits of that contract and you are maybe focused on our gross margin guidance versus last year. Is that correct?

Karen Short - Deutsche Bank

Yes.

Clyde Preslar

Okay. ,Really if you remember, we did have the benefit last year in the fourth quarter of our true up to LIFO. That was about 60 basis point benefit we had last year and we are not counting on that right now, but beyond that we are getting the various benefits from that agreement. And then mix would account for the rest of it, but we are pleased with where we are headed with the margins in the fourth quarter.

Karen Short - Deutsche Bank

Okay, and then in terms of your store operating and general expense guidance in dollars, just so that I understand the dollar amount that you are guiding to, as you said, it's just more of a run rate similar to what you had originally guided to for the third quarter because you won't have the benefit of these one-offs that you had in the third quarter. Is that accurate?

Clyde Preslar

Well, there is certainly the run rate, but once again as a reference to last year, if you recall, we did book $3.1 million for a legal settlement and then we also mentioned that that was a period of time when we had spent about $1.5 million on our strategic planning initiatives. So we factored in the run rate but also the absence of those items.

Karen Short - Deutsche Bank

Okay, that's helpful, and then you reference that new unit pipeline that you have been building. Can you maybe give a little bit more color on that? Like highlight how many units do you actually have a land bank for? And a little more detail there?

Clyde Preslar

It has been a real focus for us where we are pleased with the contributions of our real estate team and right now we are positioning ourselves to be lined up to do eight to 10 new units in fiscal 2015.

Karen Short - Deutsche Bank

Okay, but not necessarily, we should still expect closures for fiscal 2015. Or you think you might actually be up eight to 10 units? Maybe a little more color there.

Clyde Preslar

Thank you and I want to point out to most of the new stores with the development time and so forth we see those in the second half, but no, we would continue to close stores at the rate that you have seen in recent years.

Karen Short - Deutsche Bank

Okay, but right now your CapEx that you have in your guidance for fiscal 2014, that reflects some of the land banks and things for the units that you plan to open in fiscal 2015.

Clyde Preslar

Yes. Minimal amount, but yes, with the development cost and so forth. But yes, that is correct.

Karen Short - Deutsche Bank

Okay, because just, to Bonnie's question, I am wondering, should we be expecting CapEx to meaningfully increase next year?

Clyde Preslar

Yes. We will be able to give you more on that on our year-end call, but I would look forward certainly to move off as we continue with remodels and with the QSR additions that Dennis mentioned earlier, but we will look for other areas to offset it as we try to put more and to grow capital.

Karen Short - Deutsche Bank

Okay, great. I will get back in the queue. Thanks.

Clyde Preslar

Thank you.

Operator

Thank you. Our next question comes from William Reuter of Bank of America Merrill Lynch. Your line is open.

William Reuter - Bank of America Merrill Lynch

Good morning.

Dennis Hatchell

Good morning.

William Reuter - Bank of America Merrill Lynch

I know that retail fuel margins are obviously volatile but the strong margins thus far in the fourth quarter, can you talk about what you attribute the improvement to?

Dennis Hatchell

Yes, it's really just the market. The price of fuel finally dropped the way it should have in the third quarter. So we are just seeing nice improvement in margin as a result of the drop in the fuel comp.

William Reuter - Bank of America Merrill Lynch

Okay, and then with the continued store closures, I think there's seven in the quarter, can you tell me how many of your stores are currently not four-wall EBITDA positive? And I guess, how we should think big picture about the numbers of store closures in the coming years?

Dennis Hatchell

Yes, we mentioned earlier in terms of continuing to close presently stores as they come off lease, that are not performing as strongly as we would like or where we would want to focus our attention and capital and so forth, in that 30 to 40 per year. Fortunately, we have very few stores that are EBITDA negative. We also are aware of it. We are borderline EBITDA as the maintenance capital required. It's not doing much for us. So we continuing to monitor and act on these stores, again, when it's convenient to close and when they come off lease. In the case where we might have an own store, obviously, monetizing that and then if it becomes attractive for us, we certainly will look at early terminations and that sort of thing. But fortunately, we do not have many stores at all that are EBITDA negative.

William Reuter - Bank of America Merrill Lynch

Okay, and then lastly for me, I have always felt that it was a pretty strong credit positive period. You guys have so much owned real estate. I am curious, last time I think I asked, you had not done any work on the value of this, but just wondering whether you guys may have done some work at any point over the last six months.

Dennis Hatchell

Yes, I really don't have anything report new on that. Certainly, as you say, it is an asset for us but I don't have anything that I could offer up today.

William Reuter - Bank of America Merrill Lynch

Okay, just checking. All right, thanks a lot, guys.

Dennis Hatchell

Thank you.

Operator

Thank you. Your next question comes from Bryan Hunt of Wells Fargo Securities. Your line is open.

Bryan Hunt - Wells Fargo Securities

Thank you for the time. Dennis, when you look at your average ticket being up for the quarter in the same-store merchandise tempo, it implies your customer counts are down. Is there any way you can give us what your customer counts were on a same-store basis? And additionally, how do you think that holds up relative to your core peers in highest density markets like North Carolina, South Carolina and Florida?

Clyde Preslar

I will just jump in, and Dennis might want to comment, it is Clyde here, comment on some of the dynamics. But again, with the sale per customer up 3.9%, our traffic was down 1.6% to give us the 2.3% comp performance. Hopefully that helps you.

Dennis Hatchell

The only other color I would put on it is, like a lot of other retailers, we saw kind of a sudden decrease in traffic that coincides, we don't know what was going on, but it does coincide a little bit with the fact that we had an uptick in unemployment throughout our areas for the last part of the quarter. Not a lot, but it went up. So we are hoping that will adjust itself out and we will see this traffic come back. I don't have any numbers of how other folks are doing in the marketplace. So I can't help you there.

Bryan Hunt - Wells Fargo Securities

All right, great, and then with regards to your comments on competition earlier, I was wondering, is there any way you can give us a look back on a market like either Charlotte or what's going on in North Florida, where QT is coming in, put 24 stores roughly in the Metro Charlotte area, and Wawa has put in one was put, I believe about 20 stores in North Florida. How has that impacted your share in those markets directly? And do you, just so we can understand how your competitors impact your business as they ramp up aggressively in some of your markets?

Clyde Preslar

I am not quite sure how to answer it. I mean, obviously when they come into the marketplace, share shifts around and there is just so many competitors in the market. We know where our volumes are compared to when they open and after they open. As long as we protect our volumes, we know that the market is shaking up somewhere, I don't know how market share shifts around there. We know it shifted because if they have and we have ours, then somebody else lost it, but I know who is impacted as a result of that.

Bryan Hunt - Wells Fargo Securities

Do you feel as if the market remains so fragmented in many areas in which you compete that it's mostly independents that are feeling the pressure?

Clyde Preslar

That would be my speculation. I don't have any facts, but there is obviously hundreds of independents that are within every footprint of our stores and new competitors have come on that we feel that. So all of them could lose some small bit of share and it would makeup what's going on in the hotspots.

Bryan Hunt - Wells Fargo Securities

All right. Clyde, just two last questions. One, it was asked about acquisitions earlier, but when I look at your store footprint, there are some stores that tend to be outliers geographically like Kansas. Would you all ever consider divesting some markets and redeploying that capital in areas where you have more density?

Clyde Preslar

I think it is easier to answer the process. We have all our markets sorted out by how strong they are and where they are important and we are working through those, the best way to develop and defend them and bring along. And those markets that don't stay high on that list, at some point we have got to decide if we are going to invest in them or if there is some other choices we can make around them. We haven't reached that point yet, but that's not off the table, if that's what we choose to do.

Bryan Hunt - Wells Fargo Securities

Okay. Is there any timeline around going through that process or finalizing that process?

Clyde Preslar

It's ongoing and that's really not something to put a timeline on just because the marketplace changes so much. So all I can say is, we are on it and if it presents itself, we will deal with it.

Bryan Hunt - Wells Fargo Securities

All right, and my last question is, when you look at all the number of closures this year, did you own any land and building under those closures? And if so, if you sold any of that land and building, what is the average value of anything that you have then sold year-to-date? Thanks.

Dennis Hatchell

Yes, I will just jump in. If you look at how we are tracking with the proceeds from property sales, some of that is just surplus property, but some of it goes along with stores that we own that we closed, but like everything else in our business, its all over the map and we just make a decision on a case-by-case basis, but I can't give you an average per location.

Bryan Hunt - Wells Fargo Securities

All right, Clyde and Dennis. I really appreciate your time. Thank you.

Dennis Hatchell

Thank you, Bryan.

Operator

Thank you. Our next question comes from Ben Brownlow of Raymond James. Your line is open.

Ben Brownlow - Raymond James

Hi, good morning. Just wanted to dive into the cigarette category a little bit. If you could break out, you may have done this earlier in the call, but the unit versus price and any insight into the margin movement year-over-year on that category?

Clyde Preslar

So our units were down about 3.5%. So we obviously saw some inflation in there. And, sorry, what was the other part of your question that you wanted to ask?

Ben Brownlow - Raymond James

Just the gross margin, what's in that category?

Clyde Preslar

For us, we were down as we priced more competitively. So that's what you would expect. Well over a percentage point on the gross margin for the cigarette category.

Ben Brownlow - Raymond James

Okay, and when did you drastically change that pricing strategy? Or when would you lap that?

Clyde Preslar

I think it was first quarter of this year was the last time we made some changes to pricing in this category. Otherwise there haven't been any significant changes.

Ben Brownlow - Raymond James

Great, and just one last one from me. Any additional metrics or insight into, you had mentioned earlier how the remodels and you are pleased with them, but could you break out the comps what you are seeing there? Any update on the returns?

Clyde Preslar

Yes, we remain encouraged on it. We continue to target across the remodels done to-date, 5% sales lift, which can give us attractive returns. We have seen on and this is, as Dennis mentioned, using this time to really learn from the work done to-date that's more encouraging results with the more extensive remodels and so that's likely to impact our planning around remodels as we go forward. But again, we are remaining encouraged around how the remodels are doing and continue in addition to that 5% sales lift, looking for 10% after-tax internal rate of return on those remodels.

Ben Brownlow - Raymond James

Great. Thank you.

Clyde Preslar

Thank you.

Operator

Thank you. Our next question comes from Ronald Bookbinder of The Benchmark Company. Your line is open.

Ronald Bookbinder - The Benchmark Company

Hi, good morning.

Clyde Preslar

Good morning.

Ronald Bookbinder - The Benchmark Company

The fuel comps and margins are improving. Are systems helping and in what way?

Clyde Preslar

Yes. As we have said in the past, we are pleased with our fuel systems. We like the market knowledge that it gives us and the speed at which we can react to the marketplace and the ability it give us to fix one store of time going through the marketplace and I think that the effort by our team and the system is showing the results what you are seeing there.

Ronald Bookbinder - The Benchmark Company

Do you think you newer and larger fuel inventory, is that helping in the margin at all?

Clyde Preslar

It is helping in a lot of ways. It obviously make sure that we have the right amount fuel but in particular it helps us guard against some wayward activities out of in the marketplace where we will detect those, we are able to watch for any kind of meters that get out of synch, that sort of thing. So I think it's obviously a benefit. We are going to continue to roll out to the rest of our stores. We think there is nice return there. In this business, it is not nickels, it is fractions of pennies, but every bit counts. And we are very pleased with those showing up.

Ronald Bookbinder - The Benchmark Company

And the $0.17 quarter-to-date fuel margin, is that due to the recent drop in fuel prices?

Clyde Preslar

Yes, we haven't really changed our approach in the retail part of our businesses. This is just a very nice time to be selling fuel compared to other quarters.

Ronald Bookbinder - The Benchmark Company

And have you guys looked into some sort of fuel rewards program to help drive fuel comps?

Clyde Preslar

Loyalty is on our future plans, and it's being worked on by our folks in the IT department and we don't have any deadline to do it but how that will come around, I am sure it will relate to fuel as well.

Ronald Bookbinder - The Benchmark Company

Okay great. Thank you very much.

Clyde Preslar

Thanks, Ron.

Operator

Thank you. Your next question comes from Anthony Lebiedzinski of Sidoti & Company. Your line is open.

Anthony Lebiedzinski - Sidoti & Company

Good morning, gentlemen. If you could just review the comp sales trends by month, that would be very helpful: If you could give some color on that?

Clyde Preslar

In the just completed quarter?

Anthony Lebiedzinski - Sidoti & Company

Correct.

Clyde Preslar

Our May comps were stronger and then April and June were about the same level. So that's pretty much what we saw.

Anthony Lebiedzinski - Sidoti & Company

All right, got you, okay. As far as your store remodel strategy, when we look at fiscal 2015, can you give us a ballpark estimate as to how many store remodels do you anticipate doing?

Clyde Preslar

Your question is focused on 2015?

Anthony Lebiedzinski - Sidoti & Company

Yes.

Clyde Preslar

We will be able to get more guidance on that as we do our year-end call. Right now we are in sorting through how we are going to go after that. As I mentioned, based on the result today, it's likely that we will focus on more extensive remodels and that would adjust, that would play through the number of units. And again, there has just been a lot of good learning here as we have done some of the light remodels and had encouraging results, but even more encouraging results where we have done more extensive remodels. So if you give us until the next quarter to really be more specific on that, that would help.

Anthony Lebiedzinski - Sidoti & Company

And can you give us a sense as to the difference in CapEx for a extensive remodel versus a light remodel?

Clyde Preslar

Yes, and Dennis can jump in here, but if we look back and much of what we did, looking back over the last year, was in the lighter category where we would be in that $225,000 to $250,000 per store with a roughly $100,000 of that for deferred maintenance. So as we look ahead, it would not be unexpected. And again, you have got to bear with us as we finalize these plans but to be $0.5 million or more per site and obviously that would play through on the number of sites we try to do. And we are likely to go at a slower pace than, at one point during this past year, the current year, we were at a three store per week pace and we think going at it again, likely with more extensive remodels at a very disciplined and probably slower pace is where we will land. But we still have got work do on that as we put our 2015 budget together.

Anthony Lebiedzinski - Sidoti & Company

Okay, and as far as the number of QSRs that you plan for fiscal 2015? I may have missed it but what's the number that you are targeting?

Clyde Preslar

I will take a stab and Dennis can jump in. Again we think we will up end up around 20 this year and we want to move that on up to the, call it, 35 range, give or take, next year. Once again we will have a better number in our year-end call.

Anthony Lebiedzinski - Sidoti & Company

Okay, and lastly, your tax rate this year has been kind of all over the place. Any thoughts as to how we should think about for fiscal 2015 for the tax rate?

Clyde Preslar

Yes. Once again, we will have a more precise number, Anthony, but you see it is leveling out right now, but I think if you think ahead and we all obviously have to make assumptions on our level of pretax income and whether we have workers' opportunity tax credits or not but somewhere between 35% and 38% is what I would pick right now. But again that's very preliminary.

Anthony Lebiedzinski - Sidoti & Company

Okay, thank you for your help.

Clyde Preslar

Thank you.

Operator

Thank you. And our last question comes from John R. Lawrence with Stephens. Your line is open.

John Lawrence - Stephens

Yes, thanks. Good morning, guys.

Clyde Preslar

Hi, John.

John Lawrence - Stephens

Clyde, starting off to follow Karen's question on the store op, just asking in a different way. Could you just reconcile, at the end of last quarter that range was $614 million to $624 million, and now it's down to $609 million to $612 million? Can you just walk what the differences? You talked about several categories, but just looking at it from last quarter to this quarter on that guidance and bringing that range down, what's the difference?

Clyde Preslar

Yes. I would say the biggest single thing as we were not contemplating the insurance reserve true up benefit. I did mentioned that there might be some upside in that number favorably potential in that number as we were getting an early read on our claims experience. So that alone was $4.3 million. And then now that we have closed out the quarter and we only have one quarter in front of us, that allowed us to tighten up the range, but the midpoint is mostly due to that insurance reserve adjustments.

John Lawrence - Stephens

Got it, and just to close out, one more on the remodels. Dennis, can you take one more slice of your comment on Ben's question regarding what's your like on the returns, et cetera. can you give us one more data point as far as the extensive remodels, when you look at that from a capital return, is it more sales issue or you get more in the box and its coming from gross margin because of mix? How would you define that success on those line items on the better performing remodels?

Dennis Hatchell

I think the best way to think about that is the stronger presence we put out there in terms of fixing the four stores and the overall presentation of the store gets us a higher lift on the site totally. So we obviously get a better return off of that. So that's what's leading us to want to do fewer but more expensive remodels, because it seems to be the best return.

John Lawrence - Stephens

And then just the last piece there I am trying to grab is that, the divergence of those better performing versus those that are not performing as well, is that divergence widening as they stay open a little longer?

Dennis Hatchell

That's a tricky question, because the non-performing stores, if you compare to the others, they actually look like they are not performing, but they actually doing pretty well compared to what they would have done because they have competitive openings where they are remodeled again. So they might have had a road closure or something around them. So we have a couple of stores that the lifts were positive but just not all that stronger and majority of them are performing as we wish when you allow for the outside interference.

John Lawrence - Stephens

Great. Thanks for your time. Good luck.

Dennis Hatchell

Thank you, John.

Operator

Thank you, and I am showing no further questions at this time. I like to turn the call back to Dennis Hatchell for closing remarks.

Dennis Hatchell

Thank you. Thanks everybody for your questions. It's always nice to hear from you. I do want to go on record saying that we made it through a quarterly report without talking about the weather. So I am very excited about that. I would also like to mention that we welcome Ross Pillari, who is chairman and CEO of BP America to our Board in the past quarter. We are very excited to have his knowledge and expertise with us, and it puts us at full strength at the Board. Before I close, I just want to take a minute to the talk about our Salute Our Troops campaign, which is going on this summer. This is our fourth one. It's an important part of our culture. We are very proud of how our employees dig into this and make it a terrific success and this year's campaign will be just the same. I want to just thank all of our associates for all their efforts and for everything they do for the company. We greatly appreciate all of you. So we look forward to updating all of you next quarter on our progress and thank you for your interest in The Pantry.

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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