Pantry Inc F1Q08 (Qtr End 12/27/07) Earnings Call Transcript

| About: The Pantry, (PTRY)

Pantry Inc. (NASDAQ:PTRY)

F1Q08 (Qtr End 12/27/07) Earnings Call

January 31 2008 10:00 am ET

Executives

Barry Epley - Corporate Controller

Pete Sodini - Chairman and CEO

Frank Paci - CFO

Steve Ferreira - SVP of Administration

Dave Zaborski - SVP of Operations

Analysts

John Heinbockel - Goldman Sachs

Patricia Baker - Merrill Lynch

Mark Miller of William Blair

Meredith Fowler - Wachovia Securities

Karen Howland - Lehman Brothers

Ben Brownlow - Morgan Keegan

Anthony Lebiedzinski - Sidoti & Company

Karen Short - Friedman, Billings and Ramsey

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 The Pantry Inc. Earnings Call. My name is Angelic; I will be your coordinate for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Barry Epley, Corporate Controller. Please proceed, sir.

Barry Epley

Good morning everyone and thank you for joining us. As you know earlier today we reported our financial results for our first fiscal quarter. If anyone does not have a copy of the release and would like one faxed or emailed to them, please contact Melinda Wilkerson at our office at 919-774-6700 extension 5242 and she will see that you get what you need.

Before we begin, I would like to point out that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, comments regarding the Company or management's beliefs, expectations, targets, goals, plans, outlook or predictions of the future are forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by these forward-looking statements. These risks and uncertainties are detailed in The Pantry's filings of 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.

With us today are the Pantry's Chairman and CEO, Pete Sodini; Frank Paci, our CFO; Steve Ferreira, our Senior Vice President of Administration and Dave Zaborski, Senior Vice President of Operations. I will now turn the call over to Pete.

Pete Sodini

Thank you, Barry and good morning. We are obviously pleased with the improvement in earnings this quarter versus last year despite very challenging conditions in the gasoline market for the most of the quarter. We did get some relief in terms lower gas prices in December, which enabled us to achieve a retail gross margins for the quarter of $10.6 per gallon, nearly full $0.02 above last year's first quarter.

While we are happy to see some improvement, this margin is still well below our normal seasonal first quarter if you look at past years. For the quarter we achieved double-digit gains in merchandise sales in gasoline gallons primarily due to the impact of acquisitions and new stores we completed last year.

Merchandise sales increased approximately 13% from the year ago and retail gasoline gallons rose about 14%. Although we are pleased with the improving trends in our gas margins, the sustained period of high price is coupled with overall softening of consumer spending has clearly had an impact on a comparable gasoline gallons which were down 2.8% for the quarter.

Comp store merchandise revenue increased 0.8 as a percent and again was dragged down somewhat by the Florida market. We should point out that our comps weakened as the quarter progressed. We are concerned about the gas gallons and merchandise sales comparables for the rest of the year, given the uncertainty about the direction of the economy. Frank will have more detail later on our updated guidance ranges for the year.

During the quarter we opened four new large format stores and also acquired three stores in Charleston, South Carolina market. In addition, we closed six smaller underperforming stores. We remain active in reviewing acquisition opportunities and there are plenty of potential deals out their given the challenging operating environment.

We continue to expect that the number of stores we acquire in fiscal 2008 will be substantially below the 152 we acquired last year, but we are continuing to looking at a wide variety of potential transactions.

Now I will turn it over to Frank Paci, our CFO to review the number in greater detail. Frank?

Frank Paci

Thanks Pete and good morning everyone. Our total revenues for the first quarter are approximately $2 billion up 43% from last year's first quarter. While the increase is due in part to higher gas prices this year, as Pete pointed out, it also reflects double-digit growth in both merchandise revenues and gasoline gallons as a result of our acquisitions and new store development over the past year.

Total gross profit for the quarter was $202.5 million, up 18.1% from a year ago. Merchandise gross profit was up 11.5%, while total gasoline gross profit increased nearly 40% from the unusually low level a year ago.

On the merchandise side, the total revenues rose 13.2% and comparable merchandise sales increased 0.8%. The merchandise gross margin was 37%, right in line with our expectations but down 60 basis points from a year ago.

Most of the margins decline came from the continuing impact of lower cigarette margins and a slightly lower mix of service revenue and food service revenue.

In the gasoline business, retail gallon sold for the quarter increased 14.3% overall but were down 2.8% in comparable stores. Total gasoline revenues for quarter were up 53% in part due to a 32% increase in the average retail price per gallon from $2.21 a year ago to $2.92 in this year's first quarter.

Our gross margin per gallon was $0.106, up almost $0.02 from the $0.087 cents a year ago. As most of you know we report our gas margins net of credit card fees and equipment maintenance costs, which were $0.08 per gallon in this year's first quarter compared to $0.038 cents a year ago.

Our expense control was solid during the quarter and we saw expected benefits from our restructuring and excellent results from our increased focused on expense control.

Store operating expenses rose 9.9% and general administrative expenses were up 6.4%, a good performance relative to our strong double-digit growth in both merchandise revenues and retail gas gallon.

Interest expense and depreciation and amortization charges were up significantly, primarily due to the acquisitions last year. Net interest was $21.6 million, an increase of $7.5 million from last year's first quarter, while depreciation and amortization at $2.6 million was up $5.8 million from a year ago.

Pre-tax income was $5.3 million compared with $364,000 in last year's first quarter. Net income was $3.2 million or $0.15 a share compared with $125,000 or $0.01 a share a year ago.

EBITDA for the quarter was approximately $53.6 million, a 52% increase from $35.3 million a year ago. Our adjusted EBITDA was $42.3 million, up 48%. You may recall that adjusted EBITDA is a non-GAAP measure we provide that treats the lease financing obligations on our balance sheet as if they were operating leases. So, investors may more easily and directly compare The Pantry's valuation to those of other retailers that do not have lease financing obligations.

Capital expense for the first quarter were $36.5 million on a gross basis and $34.2 million net of sale-leaseback proceeds and other transactions. For fiscal 2008, we expect net capital expenditures to be approximately $130 million, up $20 million from our previous target, because we've reduced the amount of planned sale-leasebacks this year to take advantage of the lower interest rates available on our debt.

At the end of the first quarter, cash and cash equivalents were $57.5 million compared to $71.5 million at the end of fiscal 2007.

Now, I'd like to review our guidance for fiscal 2008. As Pete noted, given the deterioration in the U.S. consumer spending over the last couple of months and given our own comp store numbers, we now believe our comparable store merchandise sales and gas gallons maybe below our previous estimates.

As a result, we now expect total merchandise sales to be between $1.6 billion and $1.7 billion and gas gallons to be between $2.1 billion and $2.2 billion gallons.

We remain comfortable with our previous projections for margins in both areas, with the gross margin approximately 37% for merchandize and between $0.11 and $0.13 per gallon in gasoline.

We also expect our total store operating and general administrative expenses to be between $615 million and $630 million substantially below our previous expectations of between $643 million and $633 million.

With that I will turn it back to Pete for some final comments.

Pete Sodini

Thanks Frank. Let me make cover more points while we are here. During the quarter we began rolling ethanol bended gasoline to some of our stores. Most of the benefit we received from ethanol for this quarter was offset by several other startup costs of blending ethanol, tank preparation, setting up logistics etcetera.

As most of you probably know we are entitled to a $0.51 per gallon federal tax break for blending ethanol with our gasoline and when we blend it at a 90:10 ratio with gasoline that works out to about a $0.05 per gallon overall cost benefit, less the additional cost of transportation.

It remains to be seen how much of a longer term benefit we realize from this program. We continue to pursue the rollout of ethanol to additional stores and are working to overcome the logistical challenges presented by a lack of good ethanol infrastructure in the Southeast.

Another topic, we also have been authorized by Board of Directors to begin hedging some of our energy cost and we continue to study various alternatives. At this point we have no hedges in place.

In conclusion, we obviously struggled a bit with the gasoline market over the last four or five quarters. But we remain very confident in Pantry's fundamental long-term strengths as a consolidator in the convenience store industry. We are the leading regional player in Southeast and clearly have the financial resources to continue executing into our business model, both organically and through strategic acquisitions.

Now, I will turn it back to the operator, we would be happy to take any questions you may have.

Frank Paci

I just want to make a correction; I think I misspoke on the credit card fees, its $0.048. I think I might have said $0.08, sorry about that.

Pete Sodini

Okay. We're happy to take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Heinbockel of Goldman Sachs. Please proceed sir.

John Heinbockel - Goldman Sachs

Can you guys talk a little bit about the macro from a -- really from a merchandized standpoint? I assume, comps may have gone negative here at some point in the fourth quarter. Have you seen a bottoming yet or it's hard to tell, if we've seen a bottoming yet? And at what level, do you think -- assume we are now at a level we are getting negative expense leverage at the stores, there is a lot to be done to pullback expenses at the stores to, and I know you lowered your guidance for expenses, but a lot to be done to pullback back to account for the lower comp or it's hard to do that?

Pete Sodini

I think if you look at operating expenses for the quarter compared to a year ago, it did reflect some significant enhancements. What was the other part of your question, I'm sorry.

John Heinbockel - Goldman Sachs

I assume comps did go negative. Since you said they decelerated during the period. I assume they probably did go negative at some point, have you seen the bottoming yet? Do you have a sense?

Pete Sodini

If you listen to the market reports early this morning and saw the reaction to the Fed's lowering of rates, it looks like the economy is going to continue to soften. We think we have some insulation by virtue of the nature of the merchandize which is immediate consumption that we sell, but we are certainly not immune from it. So, the answer is if the economy continues to slide, I think it’s reasonable to expect that we would have, and we've anticipated some declines in terms of comp merchandize sales. I don’t think it’s going to be at the end of day a horrific number, but yes.

John Heinbockel - Goldman Sachs

Do you think by the nature of what you sell and maybe some of the demographics that the fiscal stimulus, the tax rebate packages would provide a clear benefit when they hit the summer or not really?

Pete Sodini

No, I think they would provide some benefit, but I think it hits at our demographic better than most, but do we think that there is going to be a material item, as we sit here today? I don’t think anybody would say it’s anything like a windfall.

John Heinbockel - Goldman Sachs

Would you also argue the price elasticity of what you sell is pretty low, so doing anything to try to stimulate demand price wise or promotion wise really would be counterproductive?

Pete Sodini

We have engaged in selectively in some of that activity. I think your original assumption is correct. And I think it could get the key -- it would get very costly to start buying down or buying up significantly comp store sales, yes.

John Heinbockel - Goldman Sachs

And then finally, you said, you still -- look for acquisitions, are you seeing good assets at the price you want to pay or just bad assets, people that are suffering that are looking to get out?

Pete Sodini

That would be about it. Steve Ferreira works with that market very, very closely. He can give you a pulse.

Steve Ferreira

It’s a combination, there are a lot of small operators in the market looking to sell and some of those are very good operators and very good cash flows and others are struggling. So it’s a bit of a mix, probably more weighted towards the struggling competitors these days as contrasted with maybe a year ago.

John Heinbockel - Goldman Sachs

Alright and then finally Pete you said acquisition activity would be a lot lower than last year, which was abnormally good. Do you think it will be a lot lower than a normal year, which might be 90 to 100 stores, you think it will be a lot lower than that or hard to tell?

Pete Sodini

I mean, hard to tell. We are not under any compulsion to go out and just say and we have never been to hit a certain number, be that 80 or 90 or 100 or 150 like last year. We certainly did not start with 150. As we sit here today, we haven’t seen anything currently that would drive that number to north of a 100. But tomorrow morning something could pop on your screen and change that forecast. We are obviously looking at things very hard from the standpoint of all facets of the potential acquisition. So I think we indicated a couple of quarters ago that to that extent the bar has probably been raised in terms of our expectations and forecasts.

John Heinbockel - Goldman Sachs

Okay, thank you.

Operator

Your next question comes from the line of Patricia Baker of Merrill Lynch. Please proceed.

Patricia Baker - Merrill Lynch

Good morning. I just want to follow-up with John's first line of questioning, what you are seeing from the consumer and if were to look at some of the issues with respect to the merchandizing side of the business whether its Florida traffic, what's happening on tobacco? Can you sort of itemize for us what are the bigger issues specifically in this quarter and as you look to 2008, if you would just rank order what are going to be issues for you with respect to --?

Pete Sodini

Let me have Dave Zaborski, let me make one comment and then have Dave Zaborski give you a better pulse. If you view -- and it's somewhat tangential, but if you look at what’s happening in the -- particularly in Florida in new housing and real estate in general, and thinking about that activity we would maintain, although we'd be hard pressed to quantify it, that is not an insignificant item to us. When construction is active in the markets we are in, that is a very good harbinger for business, always have been and will continue to be. There is not a lot of new construction in a lot of our markets in Florida particularly I would say Orlando in South, a lot of that…

Patricia Baker - Merrill Lynch

So Pete, it would be fair to say that that's implying that what you're seeing there is a traffic issue then?

Pete Sodini

I would say, yes. No, no question in Florida. You've got some of that.

Frank Paci

Well, you can see that. I mean all you have to do is look at the gas gallons.

Patricia Baker - Merrill Lynch

Yes.

Frank Paci

When you look at the gas gallon numbers that leads you to suspect that there is less activity in general.

Pete Sodini

Dave, you have some observations?

Dave Zaborski

We do our best work when we have customers on the road and when traffic is down slightly, it impacts all the categories. There is really only four categories that drive this class is, really number one cigarettes; number two is beer; number three is soft drinks; number four is all food service combined. Cigarette category is a category that's being squeezed by lack of traffic and lack of construction activity. So that's an opportunity for us this year. Beer and wines are fairly stable, fairly consistent, and soft drinks for us has always been a strength and food service, we continue to focus on. If there is a softening of customer traffic out there then the four categories suffer slightly.

Patricia Baker - Merrill Lynch

Okay.

Pete Sodini

Actually, some of our best perspective on these markets in addition to what we generate internal comes from our major vendors who are very much on top of it, obviously, their business by state by even a smaller basis than that. What we are seeing here is fairly well confirmed by their numbers also in the aggregate.

Patricia Baker - Merrill Lynch

Thanks a lot Pete.

Operator

Your next question comes from the line of Mark Miller of William Blair. Please proceed.

Mark Miller - William Blair

Hi, good morning everyone. Can you elaborate Pete and others on your comment on ethanol? Specifically, how many of the stores today are you blending ethanol and what's a reasonable way to think about that penetration at the end of fiscal '08? And then I am interested to know whether you think you have first mover advantage, I mean how many of your competitors at this point are likewise blending ethanol? And then, what do you think is a reasonable guess of how much you can benefit on the cost side or how much gets therefore competed away?

Pete Sodini

Lets talk about the benefit on the cost side first. It is like its brother gasoline. It is a volatile, its proven to be a volatile item. The differential between ethanol and gasoline under the Chicago market, if you look at it from future standpoint in March, is about $0.123 to $0.124 ethanol being lower. So there is an advantage there. But that’s FOB. Chicago you've got to get it to the Southeast. By the time you get it here, we figured, depending again upon locale, another $0.15 to $0.20, you're actually eating in to the differential. If you are buying on a spot comp basis, you're underwater, but then you've got $0.051 coming off of the federal tax credits. So you end up -- if we were buying at spot today, for today’s delivery, we would look at -- our margin enhancements would probably be in the range of $0.03 to $0.035. You have seen other numbers out there substantially higher than that. I don’t know what the genesis or the basis of their computation is. Maybe they have corn fields and they grow their own corn. We don't have and thus we have to deal with commodity markets and pricing.

It has been volatile. There have been periods of time where ethanol has an advantage in terms of lower cost of $0.50 to $0.60 a gallon. There is a lot production forecasted to come on new ethanol and how that gets accomplished and where it occurs and part of the challenge in the short term in Southeast is that there isn’t hell lot of ethanol production in this area. Most of it is still coming out of Midwest which means its got to come in here by rail or in some cases by barges, if you have got water terminal. So, its expensive. Its a pain to handle. The oil companies are still waiting for state regulations in some states and those are unsettled. So, to sit here and give a forecast looking at the uncertainties and say there is going to be have X amount of advantage to us I think would be a shade on the aggressive side.

I think we will get there as quickly or quicker than others, but having said that the margin enhancement coming out of ethanol, looking to March/April can change dramatically as these new plants come on with production. But right now is probably around that $0.03. It's getting to our stores in whatever vehicle we used to do that. We are not going to talk about, I think I said in the comments earlier that essentially, our first quarter was a startup quarter and it didn't have any material impact on us, and I think that's true. You bring that on and you've got tank preparations, tank cleanings which cost you some money to prep it for ethanol because ethanol is little more sensitive than gasoline.

So there was certainly no windfall for us in Q1. How much do we get during the year depends upon, at the end of the day, how much production comes on and what's the differential over and above the $0.051 cents you get from the fed’s for the tax credit. And if they've got lot of production on and there are projections out there that suggest that you could in short-term basis end up with a glut and have significant differentials with ethanol being much lower.

But also, as you are aware, the markets tend to balance this thing off over time. And if that condition does come to pass, it is probably a short-term benefit. We think ethanol is good, will only be good for our business, but we don't think in as grandiose terms as some have said about what the benefit will be. But hell even a penny is $0.02 in our business, a penny is roughly $22 million or so.

Frank Paci

Pre-tax, yeah.

Pete Sodini

Pre-tax, so that's a very material number to us. So if we can get a couple of $0.03 net of all this activity we think that's a damn nice addition.

Mark Miller - William Blair

And then the other part of my question I guess is, well if you can help us understand how much of the base is integrated today and what is a reasonable level of penetration by year end?

And then looking at your competitors in the markets where you put it in, how many of them have moved forward as well? And do you think it's going to be competed away to a significant degree? Or will you be able to keep that lower cost

Pete Sodini

No, I think some of it will be competed away and some of it, of course, probably will not. It is in a very early stages here. Obviously, at the end of the day, the oil companies are going to be the major distributors of ethanol, and they are still getting their terminal operations up in business to handle it. And that will come on a varied phase and relatively slow basis with projections in some terminals in some areas as far out as fourth quarter '08, calendar quarter I am talking now, or even, I am sure there will be some companies and some terminals where they are dragging into first quarter '09. A very, very difficult forecast, because we've got a whole range of states.

Right now, we got two states that were essentially big oil has bought -- has reached accommodation with the state in terms of regulations and standards. Let's go through this. There is a whole range of them. One’s certainly of interest to us is State of Florida, is still working between them and the industry on regulations, on specifications. North Carolina, looks like we're going to be probably second quarter up here, and there is some we just put in an unknown status. Mississippi, I am not sure where we are there, and that's a very good state for us in gasoline.

It's all over the board. I think it is very, very hazardous to do much in a way of forecasting benefits in this year in ethanol because of the logistics and the state regulations. Commenting to your previous questions, how many competitors are in it? The best way, some are in it in some markets and now they are in it in others, again its all over the board. This thing, I think, this is going to take another two to three quarters before you start to see some clarity in terms of situation. I think that will come significantly when you get ethanol productions in the Southeast, of which are or plants under construction and forecasted to come out, I think some as early as May, June. That will make this a lot more sane topic because you -- much shorter delivery times, less cost involved in, obviously a more reliable logistics.

Mark Miller - William Blair

Okay. And I guess how much you keep remains to be seen. Doesn’t sound like you want to --?

Pete Sodini

No, because I could throw all kinds of numbers out to you, but at the end of the day if I were to challenge, I would have to make a whole range of assumptions to get there anyhow its -- the timing here is very unpredictable.

Mark Miller - William Blair

Okay. Fair enough. My other questions is on the expense savings, is that particularly coming through planning from lower comp gallons and less traffic? Are you therefore planning less payroll or what are the expense reductions that you are able to achieve? Thanks.

Frank Paci

I think it’s a combination of couple of things. Some of that is, there is some variable cost that go with volume and other part of that is some of the initiatives and Dave can talk about those, but we’ve talked previously about going to pay before the pumps and we've seen some of benefits of proactive actions that was taken. Dave do you want to comment on that?

Dave Zaborski

We've reformatted our labor at average store as a rollup and that has a significant amount of savings, but basically we are kind of where we need to be now, what we need to do now is focus on the revenue of those stores. We really can’t -- don' have a lot left in labor. We've made a material improvement in cash over our shortage. We improved our supply line quite a bit. We really focus on what we call service contracts, those are the people, who come in and cut our grass, paint our buildings, and do floors and that kind of thing, we've made a big improvement there. We've made improvement in advertising. So, we really put the brakes on spending and it had a [real] impact across all the, what we call the controllable categories.

Mark Miller - William Blair

Okay, thank you.

Operator

Your next question comes from the line of Bryan Hunt of Wachovia Securities. Please proceed.

Meredith Fowler - Wachovia Securities

Hi, this is Meredith Fowler for Bryan. Can you quantify the cost savings booked in Q1?

Pete Sodini

Cost savings of what? I'm sorry.

Meredith Fowler - Wachovia Securities

Can you quantify the cost savings that you booked in Q1 from your restructuring program?

Frank Paci

Yeah. We originally said that we thought it was going to be roughly $6 million per year. I think, we probably slightly exceeded that on a quarterly basis. And part of that was the change in guidance that we pulled out reflects those numbers. But most of the improvement was really at the store level, which really didn't have anything to do with the restructuring area.

Meredith Fowler - Wachovia Securities

And then also, you discussed that you increased your CapEx guidance, however, you reduced your overall guidance. How much flexibility is there in that CapEx line? Can you reduce it based on that your lower guidance if need be or just playing on scaling back on acquisition activities if need be?

Frank Paci

Obviously, certain portion of that has spent already, so we can't reduce that. And we've certain projects that are underway. There is variable, at anytime we can look, as we look out during the year and see what happens. So, there is obviously a certain portion of that would be variable if we wanted to do. So…

Pete Sodini

There is no acquisitions in that guidance.

Frank Paci

There is no…

Meredith Fowler - Wachovia Securities

Alright thanks.

Operator

Your next question comes from the line of Karen Howland of Lehman Brothers. Please proceed.

Karen Howland - Lehman Brothers

Good morning. I was wondering if you can update on the quick service restaurant strategy that you have in place. How many you have in place now? How many you expect in this upcoming year?

Dave Zaborski

Today we operate 220 what we call quick servant restaurants. We had a busy last 30 days, we opened up a big superstore in Slidell, Louisiana with a full service Krystal's, with a drive-through; a big project and it's the best opening we ever had. We opened a new Bojangles superstore in Jacksonville, Florida. And if it wouldn't have been for the Krystal's opening that would have been the biggest opening we’ve ever had. So, those two projects we are just seeing if we can learn from them and see if we have further applications. We have been focusing on Subway. In the quarter we opened one Subway, but we have a lot of development going on at Subway, just last week we opened another tow Subways, we have 17 Subways, were we own a franchise agreement today, under some form of development. We have another 31 that have a verbal approval that we are going through right now to make sure that we won't do the sites. And then we have another 48 that are on site review with Subway. So, we think we are beefing up for the next two or three years with a good run rate with Subway and that's been our focus. We are looking at a couple of other brands that may have application where Subways turns us down and some of the other bigger brands turn us down. So we are focused on QSR's selectively.

Karen Howland - Lehman Brothers

And how many stores do you think of your current store base that don’t have QSR's, you could actually install them in?

Dave Zaborski

We've said that we think we have an opportunity to probably double the number of stores that we've got. One of the opportunities that happens is as we make acquisitions there are certain stores that are in those acquisitions portfolio we think have opportunity for food service as well. And one of the things that we are doing as well is we are looking at our portfolio and as you would expect us to do in underperforming areas we are actually closing some food service, some of that was inherited with the acquisitions that we have as well. And in some places we are converting them from non-branded to branded food service. So it’s a kind of a constant analysis that we are looking at in terms of our food service opportunity.

Karen Howland - Lehman Brothers

Isn’t the pretty -- and a very impressive kind of cash-on-cash returns in the 25% to 30% range. Why isn’t it more aggressive rather than 20 to 30 new openings a year? It seems like that probably the most, the best returns you can get as far as you use the capital right now?

Pete Sodini

Yeah, but the process is that we just can't -- like Dave mentioned Subway is a very good franchise for us but you just can't get every Subway for locations that you think would perform very well. It’s a longer process. There's people, Subway operators in the area have the right to voice their opinion as to whether or not the franchise should come on and it is protracted and there is some cases where they might want to put a franchise into one of our stores but we may not think that stores is a particularly good candidate for a franchise.

And it'd be easy to fill up -- double the number that Frank gave you in terms of QSR's. But we don’t want to be opening up what we consider secondary or substandard performers in our market. We acquire some and we get rid of them, because quite frankly, it's very hard to make. I'm not going to mention any names, but very hard to make money with some of them. So, we have a singular focus. Bojangles, as Dave mentioned, is a first time we've had an opportunity to work with them, its very strong in the mid-Atlantic, the big penetration in the state of Florida. And it was a hell of an opening and it’s a great store. You got to have a square footage, though, and drive-through windows to support that which is some of our stores don’t have that capability and that also is a negatively being trying to rapidly expand it. But if we can get better deck of-- as you can get a better deck or broader deck of candidates, obviously, you can probably enhance that number.

Karen Howland - Lehman Brothers

So there is currently that 220, there is the ability in the current store base to add another 220 or so. And it's just a matter of not getting the -- having issue with the Subway franchisees of why you're not adding them?

Pete Sodini

Of getting awarded a franchise for a specific unit, yeah, that's not a 30 to 60 day process.

Frank Paci

Well, I think the other thing is to, one of the things that we're looking as well is additional brands because when we talk about those locations, you're not necessarily going to get approval on all those locations for one brand. So part of it, we've got to broaden our scope a little bit in terms of doing that. We're looking at things like that right now.

Karen Howland - Lehman Brothers

Okay. So, we should still continue to expect another 30 or so -- 20 to 30 this year. Not really enough to -- obviously incremental improvement but not a huge amount to move the needle.

Pete Sodini

Correct.

Karen Howland - Lehman Brothers

Okay. And then, with the gas forecast you all have there right now, $0.11 to $0.13, does that include any blending with ethanol?

Frank Paci

It hasn't. That's pretty much just based on our historical experience with gasoline.

Karen Howland - Lehman Brothers

Okay. But no benefit --?

Frank Paci

Yeah. So there is no benefit for ethanol in those numbers.

Karen Howland - Lehman Brothers

Okay. And Pete, you mentioned that part of this quarter it was getting to tanks all prepped, getting the sites ready to be able to except the ethanol. Do you feel that the pumps that can accept ethanol are now ready and it's just a matter of getting the product to you?

Pete Sodini

Well, in some cases, yeah, you -- I think the logistics right now today continue to be challenging, that’s the pondering in terms of ratcheting that number up materially. Again, I believe six to nine months from now I think the logistics of ethanol could be substantially better.

Karen Howland - Lehman Brothers

Right, but I was just wondering more -- are your tanks, the ability to accept them, accept ethanol, I mean have you done everything that you can that once the infrastructure is there, you are ready to go and you won't have additional costs or have you only at this point updated the tanks that are accepting ethanol now?

Pete Sodini

We are ahead of the curve in a number of markets with the tanks prep, but we've also got the challenge in branded areas with the respective state regulatory agencies and getting them in sync with the desires of our major oil companies to get proper specifications. And I think those -- a number of states are very close to being constellated, but there are some which could be out in another six months, hopefully just like where’s our priority. Florida is a very critical state for us in terms of a number of stores in Florida. There is still debate going on between the state and the respective oil companies as to what's the appropriate specification for gasoline.

Right now we have two states that have a new spec that everybody I believe is happy with and that is Tennessee and South Carolina. All the rest of the states in our area are in process, and those negotiations are going on with us as well as with the major oil companies.

Karen Howland - Lehman Brothers

And so the state who is in process, does that mean you can't currently sell any sort of ethanol blended, because I was under the impression of Florida, some stations are already selling E10?

Pete Sodini

What you heard selectively correct, but there is a debate amongst some of them as to whether or not those that are selling it are, are selling it legally with the appropriate and meet the current state specifications. I think this will all be resolved in the next three to four months. But it has slowed the process down, there is absolutely no question. They have the logistics, major oil companies have the logistics in determining to ratchet up the supply of ethanol blended product dramatically and that's going to take some accommodation with the states in terms of getting regulations and structure that big oil can operate with. And that’s part of the [problem]. Lot of variables in this thing, and I think some people may have been out with very aggressive forecast as to how quick they are going to get it. We operate obviously with a number of different terminals in different states and each state has a unique circumstance. Having said that, there is no political, there is a strong political constituency for ethanol blended product. It's one thing that the Democrats and the Republicans both agree upon. So, it will get done, and I think a lot of our state situations would be clarified, I would think in the next three to four months.

Karen Howland - Lehman Brothers

One last question and I know its such a small piece of your business, but I noticed the wholesale gallon were down quite a bit sequentially, I was wondering if there was a reason for that are you exiting that business or is it some sort of seasonality to it?

Pete Sodini

Most of our wholesale business was -- one, it is a small part of our business. Two, most of our wholesale business, there is a very tight margin business. We may have exited a small portion of it in some areas because the margins were not that desirable. So part of that is voluntary.

Karen Howland - Lehman Brothers

Okay. Great. Thanks very much.

Pete Sodini

You are welcome.

Operator

Your next question comes from the line of Ben Brownlow of Morgan Keegan. Please proceed.

Ben Brownlow - Morgan Keegan

Hi, good morning, guys. Can you comment or breakout a little bit the percent of branded versus unbranded locations in Florida?

Pete Sodini

We can get you precise number after the call, but I think Steve's estimate about half and half is probably pretty damn close.

Ben Brownlow - Morgan Keegan

Okay. And then just strategically, can you talk a little bit more on your outlook on hedging and possibly locking an ethanol pricing?

Pete Sodini

Ethanol pricing is pretty straightforward. I mean it is traded in a very small way; we had done some of that. You are talking a matter of months and it is the product that we are going to take and demand, so I think it's quasi-hedging, it's nothing material.

Hedging, we are talking about hedging gasoline, be it via crack spreads or some other mechanism and that's a subject, we went to the Board with and received approval to do a up to a percent of our selected season of our seasonal demand and we have been looking at that and looking for the opportune timing to begin taking that position. And I would suspect some of that is going to happen here in the next couple of weeks.

Ben Brownlow - Morgan Keegan

Okay. And what's your view or outlook on going ahead and trying to lock in some of the ethanol prices?

Pete Sodini

We have locked in some ethanol costs very strictly, tied specifically to what we believe we could move at a specific terminal. In terms of what we can consume in very short timeframes, we are not out anymore than three to four months in advance and then only on specific terminals. So, it’s not a big, big number at this juncture.

Ben Brownlow - Morgan Keegan

Okay. And then just lastly on -- I think I missed it. I think you commented earlier on the call about gas margin trends for the current quarter?

Pete Sodini

No.

Ben Brownlow - Morgan Keegan

Did you care to comment on that at all?

Pete Sodini

You can follow the commodity markets and as you look at crack spreads and read OPES data and Karen Short’s information; January is our latest commodity data would suggest that it probably was a decent month.

Frank Paci

Started out tough, but improved as it went on with the gas prices coming down.

Pete Sodini

So, based on that, you had some -- we are not unhappy with where we are.

Frank Paci

Yes, again, I think a lot of this obviously depends -- there is a lot of variables in terms of how the economy is, what's happening with demand. If you looked at the Department of Energy stuff, you saw build and inventories again this week, but you saw oil prices go up. So, as you look out at this, there is a lot of I think speculation as opposed to some of the fundamentals which would suggest with a slowing economy and lower demand you should see much more of a favorable gas margin environments.

Pete Sodini

Yeah, but its going -- crude is up couple of bucks, and gasoline is up $0.04, $0.05 on the spot, because of the reports that came through a pre-market indicating a softening of demand. So on that facet of our business a slowdown and/or recession is quote good for us. And the rest of our business, a slowdown and a recession is not good for us. So take your poison wherever you like.

Ben Brownlow - Morgan Keegan

Okay, great. Thanks and good luck.

Operator

Your next question comes from the line of Anthony Lebiedzinski of Sidoti & Company. Please proceed.

Anthony Lebiedzinski - Sidoti & Company

Good morning. In terms of acquisitions are you seeing valuation multiples or seller expectations come down recently or have they remained the same? What are the trends that you are seeing lately in terms of acquisitions and multiples?

Pete Sodini

Well, we think seller expectations should be down and we do see some of that in some -- by some sellers, but not all, some of them are still out there with their never changing expectations.

Anthony Lebiedzinski - Sidoti & Company

Okay. And then I think you guys said…

Pete Sodini

There is a clearly a need for them to be down.

Anthony Lebiedzinski - Sidoti & Company

Okay. And also, did you buyback stock during the quarter? And if so, how much do you have remaining on your current share buyback?

Frank Paci

No, we haven’t bought any back during the quarter. Typically given the seasonality in our business Q1 and Q2 are low seasonality and there is not a substantial amount of cash flow. Given the trends we saw in the business we wanted to be prudent in terms of reserving our cash and so we continue to look at that and evaluate that as an option.

Anthony Lebiedzinski - Sidoti & Company

And how much do you have remaining on your current authorization?

Frank Paci

We've approximately, I think, $28 million left. We authorized obviously to do more than that through our bank covenants. Out initial authorization was $50 million in total. We did 22 so far and so, now we've got 28 left.

Anthony Lebiedzinski - Sidoti & Company

And also, you did open some of these larger format stores. How much larger are these stores than your typical store and also how many are you looking to open this fiscal year?

Pete Sodini

Our average store is what? It’s 2,400…

Steve Ferreira

2500 square foot for an average store, the new stores range from 4,000 to 5,500 square feet, depending upon if they a QSR and we've 16 planned openings this year. We said we opened four in the first quarter since then we've opened three more. So, we've seven so far this fiscal year opened another two or three to open this fiscal quarter and the rest of the balance in the second half of the year.

Anthony Lebiedzinski - Sidoti & Company

And do most of these have a QSR?

Steve Ferreira

Most will, yes.

Anthony Lebiedzinski - Sidoti & Company

Okay, all right. Thank you.

Frank Paci

In answer to the previous question, 69% of our stores or 318 are branded in Florida and a 141 are unbranded.

Operator

Your final question comes from the line of Karen Short of Friedman, Billings and Ramsey. Please proceed.

Karen Short - Friedman, Billings and Ramsey

Hi, everyone

Frank Paci

Hi.

Karen Short - Friedman, Billings and Ramsey

So, not to harp on this ethanol more, but I just -- clarity on that, did you give us store count in terms of how many stores you rolled are now offering E10?

Pete Sodini

No, we did not.

Karen Short - Friedman, Billings and Ramsey

Would you like to?

Pete Sodini

No, at this juncture the whole ethanol subject is a highly competitive subject and we are just not going to touch where we are.

Karen Short - Friedman, Billings and Ramsey

Okay. Are you confident also that you will be the blender and therefore get the tax credit, when you do ultimately roll the E10 out to a larger percent of the store base?

Pete Sodini

As a percentage of them, we would hope to get the blending credit in one fashion or another. Yes. You are talking about the $0.051?

Karen Short - Friedman, Billings and Ramsey

Yes.

Pete Sodini

Yeah.

Karen Short - Friedman, Billings and Ramsey

Okay. And do you have any idea what the volume of the ethanol will be if it comes online in the spring? Like what the capacity is of the plant?

Pete Sodini

I have to go back and look at this. We had a presentation by one of the major financial houses, the alternate energy people, and I don't have that in front of me, Karen, but we do have it. There is, on any basis, if this stuff comes on, these plants come on, it's forecasted in calendar '08. There is clearly going to be an overproduction on ethanol. And the $64,000 question is do all of these are open as scheduled and come on. And so the differentials as we noted earlier, tightened up. I suspect their returns get impacted adversely. It is a very dicey topic to do forecasting on, and that's why we have been abnormally reluctant to do it.

Karen Short - Friedman, Billings and Ramsey

Okay. And then I just want to see and I mean, I know you said you are opportunistic with respect to closing underperforming stores. But do you think there is a greater opportunity to close additional underperforming stores, given what's happening with the economy or the market in the Southeast?

Pete Sodini

We look at that every quarter and have a meaning devoted to it. I think we have done a good job over the years in terms of pruning this store base. And obviously, if the economics were to be permanently displaced out there in some markets that could spawn some additional ones. But I don’t think we have got a dramatically material number over and above what normally we have been closing. We've been closing pretty good.

Frank Paci

Yeah, normally you're going to close some that come to lease expiration where you don't want to continue to stay and we lose some stores to condemnations. But in terms of a major number was in the portfolio problems are down.

Pete Sodini

If you looked at our card deck, Karen I don’t think -- and as Frank said, our lease expirations dates and what have you, I don’t think you have come away with a great deal of concern that we were running stores just to preserve, a lot of stores just to preserve store count. We look hard at it. We do not that, as Frank alluded, we do not generally renew a lease even exercising options if the operating income or cash flow isn’t at a reasonable level. So we prune this thing down and we'll continue to do, but I don’t think there is going to anything huge change in the number of closed stores as we go forward.

Karen Short - Friedman, Billings and Ramsey

Okay, and then I just was wondering if you could maybe make some comments on the tobacco RDA environment and what you are seeing.

Frank Paci

It’s not getting any better. We anticipate the same pattern they have done the last three years in that, at least once or twice a year they will continue to pull down, pull back on the buy-down dollars and there is not a whole lot of RDA’s left. RDA is a pure cash to the company. That's getting to be almost a non-event for tobacco retailers. So we anticipate more of the same.

Karen Short - Friedman, Billings and Ramsey

And that's factored into your guidance.

Pete Sodini

Yes.

Karen Short - Friedman, Billings and Ramsey

Okay, great and thanks a lot.

Operator

You do have a follow-up question from the line of Karen Howland of Lehman Brothers. Please proceed.

Karen Howland - Lehman Brothers

Thanks for taking my follow-up. I just wanted to clarify one thing. I think you mentioned when you're going through the merchandise comps, mentioned that soft drinks, you continue to see strengths there. And I jut wanted to confirm that was the case. We've heard from one of the sellers of bottle drinks that they were seeing convenient stores down about 3% in the fourth quarter and continued negative trends in the first quarter of this year. I was wondering if you think you are taking share there or you've seen any slowdown in the first quarter so far.

Frank Paci

Taking about Q4, Q4, we didn't see a deterioration of our soft drinks. We didn’t have a large build but we have a very solid base on the soft drink category. What the soft drink companies are moving to is more, higher cost, higher retail items which are energy drinks, good-for-you drinks and vitamin waters. They have had a big push this year on the new marketing plan to get all these new higher cost, higher retail items into the system. So we have to see how that plays out. Our bread and butter has always been our take-home soft drinks and we can do fairly well with that.

Karen Howland - Lehman Brothers

Thanks so much.

Operator

There are no further questions in the queue. I'd now like to turn the call back over to Mr. Peter Sodini for closing remarks.

Pete Sodini

I appreciate everyone's participation today. We look forward to seeing you again at the end of next quarter. Thank you again.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect.

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