The Pantry Inc. F2Q08 (Qtr End 03/27/08) Earnings Call Transcript

May. 6.08 | About: The Pantry, (PTRY)

The Pantry Inc. (NASDAQ:PTRY)

F2Q08 Earnings Call

May 6, 2008 10:00 am ET

Executives

Berry Epley – Vice President, Controller

Peter J. Sodini – Chairman and Chief Executive Officer

Frank G. Paci – Chief Financial Officer

Analysts

Bryan Hunt – Wachovia

John Heinbockel – Goldman Sachs

Anthony Lebiedzinski – Sidoti & Company

Karen Holland – Lehman Brothers

Karen Short – Friedman, Billings, Ramsey & Co.

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2008 The Pantry Inc. Earnings Conference call. My name is Gina and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference at which time, you may press *1 to enter the queue. If at any time during the call you require assistance, please press * followed by zero and the coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Mr. Berry Epley, Vice President, Controller. Please proceed.

Berry Epley

Good morning everyone and thank you for joining us. As you know, earlier today we announced financial results for our second fiscal quarter. If anyone does not have a copy of the release and would like one faxed or e-mailed to them, please contact Melinda Wilkerson in 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 Ligation Reform Act, 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 with the SEC and in our earnings release issued this morning. We refer you to the SEC’s website or our site at the www.pantry.com for these and other documents. We also will discuss certain non-GAAP financial measures today that we believe are helpful to a full understanding of our financial condition. We refer you to our press release present on our website which includes a presentation and reconciliation of each non-GAAP financial measure to the most directly comparable financial measure and an explanation of why we believe these measures provide useful information to our investors and how they are used by management. With us today are The Pantry’s Chairman and CEO, Pete Sodini and Frank Paci, our CFO. I’ll now turn the call over to Pete.

Peter J. Sodini

Thank you Berry and good morning. Today we reported a net loss for the quarter of 23 cents per share, slightly better than the low end of the range of 24 to 30 cents that we pre-announced last month. The results include 23 cents per share in losses from gasoline hedging program. Excluding our losses from the hedging program, we operated nominal net loss for the second quarter which is seasonally our weakest quarter of the year. As we discussed in our last call, we’re currently facing a tough retail environment which in our case is magnified by the challenging conditions in the gasoline market. Crude oil prices moved up from around $97 to a peak of $111 a barrel during the quarter. Our retail gas margin was obviously hurt by the rising trend in energy cost and increased credit card fees which were up 1 cent per gallon from a year ago. In addition we believe higher retail gasoline prices are clearly taken up by the consumer’s disposable incomes impacting demand for both gasoline and merchandize in our stores. Our comparable store basis gasoline gallons sold and merchandized sales were both down 3% for the quarter. Now let me switch to the subject of hedging. Clearly, our gasoline hedging program did not perform as we had expected. Based on the continuing volatility in energy markets coupled with the attendant risks, we have exited all our hedging positions as of the close of business yesterday. As a result, we’ll take an additional after-tax charge of approximately $900,000 in the third quarter and we have no plans to pursue any further hedging activities. Now let’s look at a few positive developments during the quarter.

We were able to partially offset the impact from unfavorable market conditions by aggressively moving to capture benefits from ethanol blending. Ethanol blending reduced our gallon costs by about a penny per gallon across the chain for the quarter. As a result, our retail gasoline margin for the quarter excluding the hedging losses was 10.6 cents per gallon, which is actually better than our second quarter gas margins in 4 of the last 6 years. We’ve introduced ethanol in traditional stores since our last call, and as of today, 873 of our locations are offering ethanol blended product to our customers. Further, we currently believe that by the end of fiscal 2008, we will have approximately two-thirds of our locations with ethanol blended product with a chain-wide cost benefit of approximately 2 cents per gallon. It is unclear how much of that will benefit our gasoline margin after factoring in the effects of competition. Our merchandize gross margin came in at 37.5% for the quarter, up from 37% in the first quarter and above our guidance range for the year. While we are pleased with our margin performance, we believe our merchandize sales have been impacted by lower demand for gasoline and the increased cost to fill the customer’s tank. We’re attempting to drive merchandize sales with a very attractive promotional line-up for the summer. We’ve received great support from our suppliers as we work to build together so we can become more promotional without adversely affecting our margin.

We continue to do an excellent job at controlling our store operating cost and G&A expenses. Frank Paci will help a few specifics in his session. Finally, we produced $93.7 million in EBITDA for the first half of fiscal 2008, 8.5% higher than 86.3 million generated in the first half of fiscal 2007. Excluding the hedging loss, our EBITDA was $102 million. So, I don’t want everyone to lose sight of the fact that the company continues to produce significant EBITDA. We’ve further reviewed our capital budget and have cut net capital expenditures this year by another $20 million to approximately $90 million. In addition, we’re curtailing our acquisition activity at least through calendar year end 2008, and we do not have any plans to repurchase stock at this time. Our short-term goal is to maximize the cash flow generated from the business in the second half of the year as our business ramps up during our summer peak season. Now I’ll turn it over to Frank Paci, our Chief Financial Officer to review the numbers in greater detail. Frank?

Frank G. Paci

Thanks Pete, and good morning everyone. Total revenues for the second quarter were approximately $2 billion, up 39.9% from last year’s second quarter. While much of the increase is due to higher gas prices this year, it also reflects a 9.4% increase in retail gas gallons and a 5.4% increase in merchandize revenues as a result of our acquisitions and new store development over the past year. Total gross profit for the quarter was $189.4 million, down 0.8% from a year ago. Merchandize gross profit was up 4.6%, but out total gasoline gross profit was down 14.3% from a year ago. On the merchandize side, total revenues rose 5.4%, but comparable merchandize sales were down 3.4%. The merchandize gross margin was 37.5%, down 20 basis points from a year ago, but up from the 37.0% in the first quarter. In the gasoline business, retail gallons sold for the quarter increased 9.4% overall, but were down 3.4% in comparable stores. Total gasoline revenues for the quarter were up about 51% in part due to a 35% increase in the average price per gallon, up from $2.29 a year ago to $3.10 in this year’s second quarter. This retail price increase of 81 cents is certainly of the largest the company has ever seen. Our gross margin per gallon was 9 cents including the hedging loss, but 10.6 excluding the hedging loss. As most of you know, we report our gas margins net of credit card fees and equipment maintenance costs which were 5.5 cents per gallon this year in the second quarter as compared to 4.1 cents per gallon in the quarter a year ago.

As Pete noted, our expense control was again solid during the quarter. Our average per store expenses were relatively flat with last year as an improvement in cash controls and supply expenses helped to offset increases in medical costs and utilities. As we said previously, we restructured our auto store overhead last September and you can see the benefits in our general administrative costs. While the P&L shows a cost increase of $1.7 million from the second quarter of 2007, last year’s second quarter G&A included $3.5 million benefit primarily from hurricane insurance settlements. If you exclude the impact of that benefit last year, our G&A expense was actually down $1.8 million despite operating on average 104 additional stores this year. Interest expense, depreciation and amortization charge were up primarily due to the acquisitions in fiscal 2007 and increased capital expenditures related to new store development. Net interest expense was $21.9 million, an increase of $6.9 million from last year’s second quarter, while depreciation and amortization of $26.8 million was up $4.5 million from a year ago. Our pre-tax loss was $8.6 million compared with a pre-tax income of $13.8 million in last year’s second quarter. The net loss was $5.1 million or 23 cents a share compared with a net income of $8.4 million or 36 cents a share a year ago. EBITDA for the quarter was $40.2 million compared to $51 million a year ago. If you exclude the impact of the hedging loss from this year and the one-time benefit from the hurricane settlements a year ago, our EBITDA was $48.5 million in the second quarter of fiscal 2008, up approximately 2% versus $47.5 million in the second quarter last year. Capital expenses for the first half of fiscal 2008 were $64.3 million on a gross basis and $53.8 million net of sale-leaseback proceeds and other transactions. As Pete noted, we have lowered our target for the year for net CapEx to approximately $90 million. The reduction in capital spending reflects some favorability in our spending to date which we expect will continue for the full year, and reduction in spending for new stores originally planned to open in fiscal 2009. We are currently reevaluating the number of stores we expect to open next year, and we have not yet determined the level of capital spending we will target for next year.

So far this year we’ve acquired 19 stores and opened 13 new large format stores and we expect to open another 5 before the year end. Total spending on acquisitions year-to-date was approximately $13.9 million. As Pete noted, we don’t expect to be doing any more acquisitions for the balance of the current calendar year. With respect to the balance sheet, the company has substantial liquidity at quarter end consisting of undrawn availability of our revolver and cash on hand. At the end of second quarter, cash and cash equivalents were $48.9 million, and we also have approximately $125 million of our revolving credit facility after adjusting for letters of credit. As we noted in our release today, we’ve exercised our delayed draw option under our credit facility. This option would have expired on May 15th if we had to take it. As a result, we were able to add $100 million to our term loan with pricing of LIBOR plus 175. While we do not need the delayed draw to meet immediate cash needs, we thought it was prudent to exercise the option given the facilities payable terms and the current conditions in the credit market. We used the proceeds to repay $20 million of outstanding on our revolving credit facility at quarter end and we’re going to look at it to provide additional liquidity. After reflecting the impact of the delayed draw on a pro forma basis, we’ll have approximately $129 million of cash on hand and $145 million available under our revolving credit agreement. We are currently, and expect to remain, in compliance with all of our applicable debt covenants under our outstanding debt instruments. At quarter end, we had $33 million cushion on a trailing 12 EBITDAR basis against our adjusted debt to EBITDAR covenant which is our most restrictive at quarter end. We remain comfortable with the guidance range we provided last month. We expect comparable store, merchandize sales, and gas gallons to be down low single digit percentage rates for the year and will continue to expect total merchandize sales between $1.6 and $1.7 billion and gas gallons to be between 2.1 and 2.2 billion gallons. We also remain comfortable with our most recent projections for margins in both areas with gross margin at 37% of merchandize and between 10 and 12 cents per gallon in gasoline, and we continue to expect our total store operating and G&A expenses for the year will be between $615 and $630 million. And now, we’ll turn it back over to the operator to take any questions you might have.

Question-And-Answer Session

Operator

Operator instructions. And your first question is from the line of Bryan Hunt with Wachovia, please proceed.

Bryan Hunt – Wachovia

Thank you. Frank, first of all, I was wondering if you could give us what your pro forma balances are for each year debt buckets revolver – there’s nothing outstanding – what’s outstanding on your term loan?

Frank G. Paci

Our term loan would be $350 million plus $100 million delayed draw.

Bryan Hunt – Wachovia

Okay, that’s good. And then, second; Pete, one question I’m sure a lot people are going to have is, looking at the business model, do you feel like there has been a change in the fuel margin paradigm given $120 a barrel oil – could you give us your opinion on that?

Peter J. Sodini

Yeah, I think Bryan, a couple of observations; one, when you have the kind of rapid run-up we’ve had in crude cost and related gasoline costs, we’ve always had – and nothing peculiar this year – always had difficulty assimilating that cost and getting it pushed out into the retail sector – and yesterday crude hit another all-time high. At some point in the process we would expect that – I think everything at some point comes down – this has proven to be very resistant to the conventional variables that govern it, and it has been very difficult to forecast, thus part of the rationale for exiting the hedge – I mean the volatility has been modulated upward over the last couple of months. “Has that produced the change?” – the answer is clearly, it has been difficult to move it rapidly through retail, although we see some flexibility in the markets now. No one has ever contemplated nor operated with crude at $120 a barrel for a sustaining period of time and all we’ve been doing is trying to deal with it and deal with the volatility as it comes through. It’s a paradigm change in terms of demand, I think you’re starting to see some real pressure on individuals’ discretionary driving, which is not that surprising, and then even the fundamental driving of back and forth to work, it is a very expensive proposition for most people on their fixed budgets, you’re seeing it across the retail spectrum expecting not only this in this channel but all other channels, so yeah – I guess – the certain answer is yeah; right now we are in a different game than historically we’ve been in.

Bryan Hunt – Wachovia

And maybe examining your statements a little more, one, the discretionary spending as taking place at the store, we saw merchandize comps come down about 3%, is there any particular merchandize item that consumers are pulling away from in the store? And then I’ve got a followup along these lines as well.

Peter J. Sodini

We’ve looked at the related subject of average transactions, we’ve looked at categories, and we’ve looked at our competing channels in terms of what they’re doing with respect of items – a lot of the information is offered up by our vendor community, and clearly, it is impacting our business in a meaningful way. Having said that, we also had weather complicating in March, and we think our merchandize business is a very healthy business. If gasoline stays at these levels, it is reasonable to assume that there’s going to be some decrease in immediate consumption.

Frank G. Paci

I think, Bryan, the other thing is that if you look at our business, it is kind of down across, and interestingly one of the areas that was up was actually lottery sales were up; but I think the other thing that we’re looking at is as we look at our suppliers in a lot of areas, we seem to be actually gaining some market share compared to other people in our category, so..

Peter J. Sodini

And I think the last thing we’ve looked at Bryan because we are heavily invested in resort type venues which we’ve always loved and have sought to grow our business more, and there’s no question in our mind that resort venues are being moderately impacted by the price of gasoline, and there’s absolutely no depression, because we’ve looked at that, we stratified that against internal markets, and clearly you can see a distinction there – they’ve been hit a little more than some of the more insulated markets.

Bryan Hunt – Wachovia

And then, my last question and you touched on it Pete with regards to weather – I look at the North Carolina market, your second largest state in terms of store count and rain was significant on many of the weekends in the first quarter, especially in March – could you just hazard a guess on what the impact was to your same store sales, and it looks like we had some rainy weekends throughout April – matter of fact, I think it rained every weekend in April – did you see a drag in the end of April as well?

Peter J. Sodini

Yeah, both in terms of rain and in temperature variance through the year. We for much of April looked at 15 to 18 degrees differential, this year being lower. There’s no question in particular that it occurs on weekend, that’s going to impact our business, and I hope fortunately, this month we’ve had some decent weather, but the combination of weather and the increased cost of discretionary driving has impacted our business.

Bryan Hunt – Wachovia

Is there any way that you could quantify it or hazard a guess on what the hit to sales was just from weather?

Peter J. Sodini

I would be in the realm of speculations – I’d rather not go there, but I think it’s safe to say with the kind of weather conditions we had and the temperature variance and normal business without the impact of gasoline, I would think you’d look at a couple of points down in comp.

Bryan Hunt – Wachovia

Okay, thank you very much. I’ll get back in the queue.

Operator

Your next question comes from the line of John Heinbockel with Goldman Sachs. Please proceed.

John Heinbockel – Goldman Sachs

A couple of things – can you guys talk about the trade-off between CPG in gallons in the environment we are in today – in price elasticity, does it make sense to try to conserve margin at the expense of gallons if it does not work in this environment?

Peter J. Sodini

I think it does work John and we’ve clearly done some of that, particularly in the area where we’re trying to move the selective market up in reaction to increased cost, we will oftentimes take the leadership position on retails and try to push the cost to the extent we don’t get instantaneous compliance and there’s a lag of 24 to 48 hours with the sensitivity in gasoline prices and we’re going to take a hit to revenue, we know that, but with the volatility we’ve got, we think that’s a reasonable combination.

John Heinbockel – Goldman Sachs

When you look at the negative 3.4 gallon comp for the quarter, how much of that was – you’re kind of hurting yourself or has that not really happened yet – that’s happening this quarter?

Peter J. Sodini

No, I think if we choose to grow for a period of 24 hours so to speak uncompetitive because we’re trying to move retails up to half a pack with 3 or 4 cents in response to the cost increase – that’s a self-inflicted wound. If we get instantaneous movement, then it is mitigated, but with the sensitivity of gasoline pricing today, quite frankly it’s always been sensitive, probably more so today, you know and we know that there’s going to be a comp cost trying to move that up.

John Heinbockel – Goldman Sachs

So do you think that gallons could get worse before they get better but CPG will be pretty firm?

Peter J. Sodini

That sounds to me like a reasonable proposition. If it stays up at these levels and continues to be – right now we’re trading at 121 for a barrel on crude – we’ve got to be nearing, I would think a peak, but then we haven’t been the best forecasters, otherwise we need to talk about hedge loss. Yeah, I think you could have some softening in gasoline comps in exchange we’re trying to bump the margin up there.

John Heinbockel – Goldman Sachs

Secondly, I think we talked about this in the last call, but is there any way for you to capture the benefit of the tax checks that are going out now other than just being there and picking up some of that business – is there any way to proactively – marketing, advertising, whatever… to get at that business?

Peter J. Sodini

I think I alluded to it earlier about the increased promotional activity on merchandize, particularly on sensitive items. I think that will help to some extent – I think it’s reasonable to assume that we could get some bump off the money that’s circulating out there and may be mitigate some of the costs of discretionary driving for a planned vacation – it might be the difference between somebody taking one, but those things are more in the realm of speculation, we’ll just have to see what happens.

John Heinbockel – Goldman Sachs

Alright, and finally what room do you guys have to – how low can you take CapEx and how long can you forego acquisitions assuming the environment stays really difficult, how much more can you cut operating cost, if you look at those three – CapEx, acquisitions, and operating expenses, is there a fair bit more to go there or we’re reaching the limit?

Peter J. Sodini

I think we’ve always talked about consistently over the last couple of years where we maintained total CapEx being somewhere around $50 million. In the worst case scenario, if there is some potential movement downwards, the answer is yes, our stores are generally in very good shape. Some of the last acquisitions we’ve had we think are in excellent shape from the standpoint of plant and facilities and we don’t think we’re paying any penalty by virtue of having to run second rate facilities for this year – a $90 million CapEx – that’s not going to be a factor with respect to our business. We think we’ve consistently invested in our plan and equipment, and we think we’re in better shape than most and we could flex down if necessity dictated.

John Heinbockel – Goldman Sachs

What about the operating cost side?

Peter J. Sodini

Operating cost side..

Frank G. Paci

Operating cost side John – obviously you’ve got a lot of costs in there that are fixed, will actually flex up our expenses in the summer months to pick up with volumes, so obviously we’ve already structured our overhead and we’ll continue to look at the cost that we have and make sure we’re spending that money as productively as possible.

John Heinbockel – Goldman Sachs

Are you planning to not flex it up as much seasonally as you had in the past at this point.

Frank G. Paci

We’ve got run the fine balance there where we don’t want to disappoint our customers in terms of not having good service. Obviously, your big flex is what you want to do with labor. So, we’ve gone through and revised our whole labor budgeting process to make sure we have the labor in the right stores where we have opportunities to drive volumes.

John Heinbockel – Goldman Sachs

Okay. Thanks.

Operator

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

Anthony Lebiedzinski – Sidoti & Company

Just focusing on the operating expenses a little bit more through the first 6 months they are at roughly $299 million and I know, seasonally speaking, there is more of an increase in the summer months. Would you foresee actually for the full year having operating expenses below your guidance of $615 to $630 million. Is that reasonable to assume?

Frank G. Paci

Anthony, the reason we’ve reiterated the number we’ve got there is obviously there is some flex in terms of where we go as you rightly pointed out. If you just take the first half of the year and run that flat you would end up with a number that’s significantly lower than the guidance we’ve got. Part of that guidance was out there for unexpected things – at this point in time it’s early to tell, but that’s the reason we’ve got a range out there.

Anthony Lebiedzinski – Sidoti & Company

And also, with respect to the CapEx reduction, the $20 million that you alluded to, what specifically did you cut from your CapEx budget.

Frank G. Paci

As I said in the calls script basically, the main thing is that we had capital spending – if you look our capital spending year-to-date and said, “Okay, great. Here’s what we spent here today. What are we going to spend the rest of the year. We’ll continue at that run rate.” That got us some of the benefit what we talked about. The other thing that we’ve done is we’ve looked at new stores that we would have begun spending capital on this year that would have been ’09 openings and we delayed that spending so we can reevaluate – so we’re going to take a deep dive and look at all those sides and reevaluate whether or not we want to go forward with those.

Anthony Lebiedzinski – Sidoti & Company

And how many stores are in the resort areas right now?

Frank G. Paci

Let’s go by markets. If we go by markets, we have significant number of stores in Myrtle Beach, Wilmington, North Carolina, Charleston, Hilton Heads…

Peter J. Sodini

And then you jump down to [inaudible] right down the coast and ultimately end up with a small presence in Orlando. So, resort type venues have always been important…

Frank G. Paci

We’ve said before about 32% of our stores are in resort type venues.

Anthony Lebiedzinski – Sidoti & Company

Got it. Okay. And also, with respect to ethanol, when would you expect to have all your stores or nearly all of your stores with the ethanol mixed gasoline.

Peter J. Sodini

We’ve given visibility to our year-end number which is about two-thirds of our [inaudible], and I think we would not be in court, but I think we reserve judgment on the balance of [inaudible] we don’t have clear vision to some of the dates in early ’09. So, I think we’d be better able to answer that part of the question when we get to October.

Anthony Lebiedzinski – Sidoti & Company

Okay, thank you.

Operator

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

Karen Holland – Lehman Brothers

Good morning, was wondering if there were any costs associated with slowing down your capital spending for new store development, if there is any money in Escrow associated with that?

Peter J. Sodini

No, if there is Karen at this point in time it is the minimal amount. We have some places where we’ve been investigating things, we’ve got some land where we’ve purchased the land already but we’re kind of reevaluating some of those.

Karen Holland – Lehman Brothers

The 3 cent impact that you’re going to have from the elimination of the hedge, is that going to actually impact the gas margin or would that just be below the line cost?

Peter J. Sodini

No, that will impact the gas margin as well – just roll that for cost of sales just like we did the previous year.

Karen Holland – Lehman Brothers

Okay, perfect. Thanks. And then, looking at the promotions that you were talking about during the summer working with your vendors, so essentially you’ll be more promotional, you’re not going to have to take a hit on margin, how does that work? Are your vendors just willing to give that much more additional funding for it to try to drive traffic?

Peter J. Sodini

Well we touched briefly on the fact earlier in the presentation that the same pain that we’re dealing in terms of the consumer impact being felt by all the major packaged food vendors that we handle though we have a mutual interest in getting promotional activity to drive sales, and I don’t know major vendors who are doing that.

Karen Holland – Lehman Brothers

It sounds like they would be actually taking all of the impact rather than you.

Frank G. Paci

I think there’s a shared impact in terms of percentage margin – obviously, if they take some and we take some, we kind of end up about the same place. What I’m saying is its not going to be major impact. So, it’s not as if we are just discounting it on our own if you are getting what I’m talking.

Karen Holland – Lehman Brothers

Right, and then, if I think about the competitive environment that you’re in, do you have any thoughts as far as what percentage of your competitors are in fact kind of single store or handful of store operators versus some of the larger competitors that you go against – I asked because it seems to me that the smaller competitors eventually are going to have to kind of throw their arms up given the low margins that they are running in on the merchandize side, that their cash flows are not going to be able to sustain their costs associated with this business.

Peter J. Sodini

I think there are a lot of people out there who are interested in getting out of the business and selling their assets, but they’re mullables. We don’t think – at least what we’re seeing have been adjusted to reflect the kind of market we’re in right now. So, to the extent a lot of those smaller operators, particularly are relatively un-leveraged, mean to say, typically a high percentage of them own the building, own the land. Effectively what they’re doing is maybe buying time and prepare to take less of an imputed rent on that facility because they essentially own everything – can they write this thing out yet, are they interested in selling – clearly, but mainly we would think and that’s why we’re comfortable in getting out of the acquisition business, so to speak, between now and calendar year end – we were seeing kind of a mullables with where this world is today at $120 barrel of crude.

Karen Holland – Lehman Brothers

I guess the gas margin has continued to trend in the normal level and the environment has been weak for gas margins and you don’t see that changing despite the fact that these smaller players are struggling if they are? Do you think it eventually gets to a point where they are like – alright forget it, I have to get a 12 cent gas margin.

Frank G. Paci

Well it is interesting, I think Pete was talking earlier about the fact that we continue to try to lead the market up in this conversation, and we’ve been getting some pretty good followup or so to your point Karen – people who before may have dragged their feet in terms of moving those numbers are moving up pretty quickly now because they don’t have a choice.

Karen Holland – Lehman Brothers

Great, thanks very much.

Operator

Your next question comes from the line of Karen Short with Friedman, Billings, Ramsey & Co. Please proceed.

Karen Short – Friedman, Billings, Ramsey & Co.

Hi everyone. A couple of questions. I guess on the new store openings that you said had been pushed into ’09, I guess the first question is can you actually cancel those or are you ultimately committed and can really only delay?

Peter J. Sodini

Well Karen, they weren’t pushed in ’09, they were originally scheduled in ’09 – as you can imagine, if we’re going to open something in ’09, you got to begin working on it way in advance of that because of all the permitting and all the other kinds of things. As I said before, there are facilities where we’ve purchased the land, obviously we could resell the land if we decided if we want to on that. So, except for some architectural costs that we’ve got again which are minor expenditures and which we have not yet canceled, all we’re really doing at this point in time is talking about delaying these things.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay, and I guess you talked about some of the things that you’re working on to generate some slightly improved general merchandize sales, have you seen any improvements in trends into the third quarter – it doesn’t sound like you have given the weather, but just wondering if you could give us some comments there.

Peter J. Sodini

I think the comments were made about getting more promotional really a time order of Memorial Day launch which is the beginning of the driving season – the program has really kicked in May 1st, so we’re really only looking at the first week of data on some of that stuff.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay, and then I guess you guys are probably tracked with frustration that OPUS data is painting a pretty ugly picture of gas margins recently, I don’t know if you can maybe just comment a bit on whether or not we should be using the data at all or if the disparity is to why at this stage – because if you look at what it’s showing right now, it would tell me that as you lose the third quarter high gas margin and so in third quarter of ’07, if you don’t improve on your trends versus what is OPUS is saying, you do potentially have covenant issues, and I don’t really know how to think about that.

Peter J. Sodini

I think the OPUS margins to us have always been if anything else to offer some visibility into what the margin structure is, but we would obtain that 100% and I think you would agree with that. The problem is when you get into an ethanol environment which might be changing in terms of source of ethanol, might be phasing in in terms of we’ve got locations as we pointed out in the presentation that are going to be opening this quarter and more had opened up in the fourth quarter – we just think there’s no way to look at OPUS margins and then intuition what ethanol might be if you knew when it was growing in. So, I think it’s a very challenging environment to try to forecast weekly margins because you’ve got an incomplete deck of information – you don’t have the ethanol input and then you’ve got to assume – from that you’ve got to make a basic assumption as to some of that ethanol gets competed away; in some markets, a portion of it may in other markets, maybe it’s not because it’s less competitive, and I just think the permutations are off the chart. So, I think the short answer is very difficult but much reliability in the OPUS margins when you’ve got ethanol at the startup mode in the southeast.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay, and then I’m curious on given that you’ve terminated the hedge, can we now take the negative impact off the hedge in the second quarter out of your gas margins or out of the reported results from a covenant perspective – I mean I know we would have included if it was part of like your business model but seeing that it was kind of more one time, could it now get pulled out?

Peter J. Sodini

Obviously we have no mark-to-market left. We’ve gone to market as of finishing up last night, so it’s all going to pull through cost of sales.

Frank G. Paci

Yeah, an answered question is it will be because it is now a realized loss and we recognize that cost of sales will be included in our capital calculation.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay.

Frank G. Paci

And on your question before we wrote our own comment on the trends, the only thing I would tell you is that based on trends to date in the quarter we wouldn’t have an issue with trends.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay, and I guess this is the last question, any thoughts on using your cash to buy back your bonds.

Peter J. Sodini

Yeah, we continue to look at all of our options especially those could improve our coverage ratios – we want to make sure we’re maximizing the return on available cash, so we continue to look at those things.

Karen Short – Friedman, Billings, Ramsey & Co.

Okay, great. Thanks a lot.

Operator

Your next question is a followup question from the line of Bryan Hunt with Wachovia. Please proceed.

Bryan Hunt – Wachovia

Yeah, Pete you kind of touched on this, I was wondering if you could talk about how your – may be the difference in behavior between your chain competitors and the single store operators – is either group acting more aggressively than the other trying to raise prices or sustain prices in the current environment? And that’s my first question.

Peter J. Sodini

I think that there’s slight variation in how people behave and what is the definition of a chain? – I’m not being coy, but we don’t consider 20 or 25 stores a chain. We do have, and always have had, significant competitors in this market, some of whom are integrated, Amerada Hess, like Murphy which is the gasoline surrogate for Walmart. The day to day [inaudible] with them has been more compatible over the past couple of months than they traditionally have been; however, behavior in the future is anyone’s guess.

Bryan Hunt – Wachovia

Okay, and then if I were to look at your promotions and what you’re talking about being I guess the dollars aided from your vendors, is there any particular merchandize segment or is this pretty much across the board type of promotional activity?

Peter J. Sodini

I think it is across the board and because all vendors are getting hurt by the weakened consumer, and beyond that, I don’t think we’d like to get into specifics of what we’re going to promote and what kind of money is it talking about.

Bryan Hunt – Wachovia

Alright, and then lastly, it looks like South Carolina is going to get a cigarette tax increase, could you talk about – are your margins better on a single pack versus a carton and do you expect that type of behavior if this cigarette tax increase goes through?

Peter J. Sodini

Yeah, that may have margins but it has always been better on loose packs than cartons. You can appreciate what the tax has done to a lot of market, the carton buyers is becoming a bit of a loss so to say, and and we’ve said that it has been a positive to our business because as they convert from buying cartons which maybe they go to a mass merchandizing the cartons, they certainly are not going to go to Walmart and buy loose packs because I’m not sure they can get them there. We are convenient, we have a distinctive advantage when the customers switch to loose pack, and I think that’s reflected by the fact that the unit decline in this channel of distribution has been lesser than you’ve seen in supermarkets and other drugs over the past 3 to 4 years – It’s a declining category. I think we get less of an impact than others.

Bryan Hunt – Wachovia

Alright, and that’s it. Thank you.

Operator

I’d like to the turn the call back over to Pete Sodini for closing remarks.

Peter J. Sodini

Excellent, we appreciate everyone getting on the call this morning. We realize there’s a [inaudible] out there. We are doing everything reasonable to deal with the kind of environment we find ourselves in and you can rest assured we’ll do that continuing on to the balance of the quarter. So, we’ll see everyone in August. I appreciate your participation. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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