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Susser Holdings Corporation (NYSE:SUSS)

Q2 2008 Earnings Call Transcript

August 7, 2008 11:00 am ET

Executives

Chip Bonner – EVP and General Counsel

Sam Susser – President and CEO

Mary Sullivan – EVP, CFO & Treasurer

Analysts

John Lawrence – Morgan Keegan

Bryan Hunt – Wachovia Securities

Radina Russell – JPMorgan

Mike Smith – Kansas City Capital

Andrew Berg – Post Advisory Group

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Susser Holdings Corporation second quarter earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. If you do have a question, please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, please press the star followed by the two. If you are using a speakerphone today, please lift the handset before making your selection. The conference is being recorded Thursday, August 7, 2008. I'd like to turn the conference over to Chip Bonner, Executive Vice President. Please go ahead, sir.

Chip Bonner

Good morning, everyone. Thanks for joining us. Yesterday afternoon, Susser released its earnings and news release was broadcast to our company's e-mail list. If you'd like to be added to our list please contact our IR firm, DRG&E at 713-529-6600, or send your requests via the company's Investor Relation page on our Web site, and we will be glad to add you. A replay will be available both on the web and via telephone replay. To access a replay on the web, go to our IR page on the Susser's Web site at www.susser.com. You'll find a number and an access code in the Earnings Release.

Today's call contains various forward-looking statements and includes information as based on management's beliefs and assumptions. It includes Susser's objectives, targets, plans, strategies, costs and anticipated capital expenditures. These statements involve risk and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our 2007 10-K and our 10-Q for the first quarter of 2008. We will discuss certain non-GAAP financial measures that we believe are helpful to a full understanding of our financial condition. Please refer to our news release posted on our Web site which includes a presentation and reconciliation of each financial measure. Information reported on this call speaks only to the company’s view as of today, August 7, 2008, so time-sensitive information may no longer be accurate at the time of any replay.

Now, I'll turn the call over to Sam Susser, our CEO.

Sam Susser

Thanks Chip and good morning to everyone. Yesterday we reported very strong numbers from our merchandise segment as well as improved retail fuel margins. We are very pleased with our team's execution, their operating results and growth in market share and key merchandise categories. Our merchandise margin was 34.3% which is our highest quarterly merchandise margin since 2001. We also saw above average same-store sales growth of 6.6% on top of 6.4% in the second quarter of 2007. On a pro forma basis, had Town & Country been in our store base last year, same-store sales for the quarter would have shown an increase of 8.4%. Consumer demand in our region continues to hold up well despite ongoing concerns about the national economy. We believe this is due in part to the strong oil and gas informing activity that is driving the West Texas and Eastern New Mexico economy, and our South Texas markets have underlying demographics and growth patterns that are continuing to benefit our region.

In retail fuel, our per gallon margin was $0.194, up $0.075 from last quarter Q1, and up $0.022 from a year ago. This improvement was partly offset by higher credit card expense and also by a slight reduction in pro forma volumes due to reductions in consumer driving and substantially lower prices for gasoline and diesel fuel available in Mexico. Before I get into the rest of the numbers, I'd like to point out that we raised our estimate of synergies we now expect from the integration of Town & Country. We expect synergies to exceed $10 million, up from our previous estimate of $5 million and we expect to achieve the full run rate in 2009. Our estimate of G&A synergies is unchanged at $2 million annually, but we now expect over $8 million of procurement and merchandising related synergies. Most of the additional $5 million will come from inside the store, but we now also expect some savings on fuel procurement. In the second quarter, we completed the integration process when we combined our store accounting systems and fuel procurement processes and also completed the related staffing changes. This allows us to realize the full G&A savings of about $0.5 million per quarter starting with the third quarter.

One other thing I'd like to touch on is the impact that Hurricane Dolly had on us a couple of weeks ago in South Texas. At the peak of the storm, about 112 stores were closed, but we began reopening as the storm passed and 90 units reopened within about 72 hours. The others reopened within a week as flooding subsided and electricity was restored. Property damage was generally limited food spoilage, roof, sign, and fuel canopy damage. We're still assessing the cost of the damage but it looks like it's going to be between about $2 million and $3 million most of which we expect will be capital expenditures. We carry insurance to cover significant losses and we are working closely with our carriers to see if part of the losses here will exceed our deductibles and self-insured retentions. Fortunately, the damage was relatively minor and none of our employees were hurt.

Now, turning to the second quarter, as you know the second and third quarters are usually the most profitable for us due to seasonal factors, and this year's second quarter was one of our best ever. Merchandise margins increased 170 basis points on a pro forma basis, which reflects our strong merchandising efforts and some of the initial synergies we've achieved at Town & Country as well as benefits to all of our stores from our increased scale. Given the rapid increases in the cost of fuel, we were also pleased with the very strong retail fuel margins we saw in the quarter. I have to give credit to our operators and fuel pricing team for making the most out of very challenging market conditions. Gasoline prices were almost $1 higher than a year ago and these high prices have curbed some discretionary car trips. And in South Texas, sizeable price differentials have impacted purchasing patterns for folks who live in the border communities. In recent weeks, fuel prices in Mexican border towns were approximately $2 a gallon less than on the US side. This price gap is large enough to entice some customers including diesel truck drivers to fill up in Mexico. The gap for unleaded gasoline prices recently declined to $0.80 or $.90 delta although diesel remained significantly less expensive across the border.

Our wholesale fuel business continues to perform very well. Wholesale margins were $0.058 a gallon versus $0.053 a year ago. Wholesale volumes were up nearly 5%, and reported gross profit was up 14.8% to more than $7 million. Rising prices have certainly inhibited volume growth, and some of our customers are also challenged by our credit requirements. That said, our team's year-to-date performance has been very solid.

Looking at store expansions, we opened three new convenience stores and closed one lower volume store in the second quarter which put our total store count at the end of the quarter at 509 and we've opened one more store so far in the third quarter.

We have also fine-tuned our annual guidance for operating metrics slightly. In merchandise, we increased our estimate of same-store sales for the year by 50 basis points to a range of 5% to 6.5%. This is based on the very strong first half performance and a strong outlook for the rest of the year. That said, please note that we are going to be comping up against 7.9% increases and 11.7% same-store merchandise sales increases in the third and fourth quarters here at the balance of the year. Based on fuel volume trends that began to show up during the second quarter, we've lowered our retail fuel estimates. We now expect full year fuel volumes to be anywhere from a minus 3% to a positive 3%. At the same time, we've raised our estimate for retail fuel margins to a range of $0.135 to $0.165 a gallon. We've also raised our estimate for wholesale fuel margins by $0.005. We've reduced the upper end of our estimated new store construction count to 14 stores for the year and we've reduced the upper end of our wholesale dealer sites we expect to add with the current range of 25 to 30. As a result, we've slightly lowered the upper end of our capital spending forecast. Although we've lowered our upper end guidance for new stores, we have been aggressively focused on developing the land bank for new store development for next year. You can find additional details on our new guidance metrics in yesterday's press release.

With that I'll turn it over to Mary Sullivan, our Chief Financial Officer.

Mary Sullivan

Thanks Sam, good morning everyone. Merchandise sales increased more than 77% to $188 million, are up almost 13% on a pro forma basis. This was driven by an 8.4% pro forma increase in same-store sales and the fact that we opened 17 new big box stores during the last 12 months. These factors along with improved margins from our wholesale fuel business increased overall gross profit to $112.3 million, which is up 74% on a reported basis and 12.6% pro forma.

Looking at our retail fuel business, gallons sold increased to about 55% on a reported basis, and 1% pro forma to 165 million gallons. Our retail fuel margin was $0.194 per gallon which is up $0.022 from a year ago reported and up about $0.005 on a pro forma basis. Credit card expense increased by $1.7 million on a pro forma basis from last year. Credit card fees cost us $0.043 per gallon in the second quarter versus $0.033 per gallon pro forma a year ago. Please keep in mind we report credit card expense as part of our other operating expenses.

Looking at the bottom line, net income was $6.7 million or $0.39 per diluted share, and that compares with $6.3 million or $0.37 per diluted share a year ago on a reported basis, and $5.1 million or $0.31 per share pro forma for the Town & Country acquisition and its impact on our Federal income tax position. Adjusted EBITDA increased about 90% to $31.7 million and adjusted EBITDAR increased 77% to $40.3 million. On a pro forma basis, adjusted EBITDA increased 7.5% from a year ago and adjusted EBITDAR was up about 9%.

Looking at a few of the key expense items for the second quarter, overall costs were of course higher on a reported basis due to the acquisition of the 168 Town & Country stores and the opening of an additional 17 stores since last year. Our average store is larger than it was a year ago and with Town & Country we have higher restaurant penetration which requires more labor. Personnel expense was $34.5 million which is up about 76% from a year ago on a reported basis and about 20% pro forma. Personnel expenses will vary seasonally, so for modeling purposes, I would suggest using a ratio to merchandise sales. Year to date, our personnel expenses are running about 18.2% of merchandise sales. Other operating expenses increased to $30.4 million, which is up 81% on a reported basis and about 13% pro forma. This reflects the higher store count, higher credit card expense, and also higher utility costs. However, in spite of the increased energy-related costs, other operating expenses for the quarter were 16.2% of merchandise sales, about the same ratio as pro forma last year and a slightly better ratio than the 16.6% we saw in the first quarter. Approximately $7 million of our other operating costs were spent on utilities. Power costs were up almost 40% versus a year ago as the cost of electricity followed the sharp upward increase in crude and natural gas costs. Some of that increase is to power the new stores we opened over the last four quarters, but most of it is due to higher fuel prices. We did have some forward purchases in place to partly mitigate the cost spikes during May and June. We've recently taken some additional positions to cover us for a portion of our utility expense for the rest of the year, and we'll continue to look for additional opportunities. Based on current market conditions and seasonality, I would expect third quarter costs to be about the same as second quarter, but to see some softening by fourth quarter. Rent expense was $8.7 million which is up 42% from a year ago and 15% pro forma, and this reflects the sale leasebacks we've done in the last 12 months of 43 stores which gave us total proceeds of almost $120 million. This includes the sale leasebacks on seven stores totaling about $20 million we did in the second quarter. As the result, our current annualized rent expense is close to $40 million and we expect to do more sale leasebacks in the fourth quarter to fund our new store growth.

As you can see from our revised net CapEx guidance, we're currently anticipating doing another $15 million to $25 million of lease financing this year. As of the end of the quarter we owned 241 of our 509 retail sites, and 44 of our wholesale sites and the book value is just over $400 million. DD&A was $10.3 million, which is up 52% mostly due to the Town & Country acquisition and basically flat on a pro forma basis. Since we're using sale leaseback financing on most of our new stores, we don't expect to see big increases in DD&A in the balance of the year but most likely some small increases related to other fixed asset additions. G&A increased to $8 million which is up 33.6% on a reported basis and just 1% pro forma. Now that the integration of Town & Country is complete, we'll start to realize the full synergy savings of about $0.5 million a quarter beginning in Q3.

Interest expense increased to $9.5 million from $3.1 million a year ago reflecting the $255 million of debt we incurred with Town & Country; however this is down slightly from pro forma Q2 last year and from the first quarter this year as a portion of our debt is variable and we benefited from lower interest rates. We increased our revolver in the second quarter from $90 million to $120 million. We also issued another $30 million in senior unsecured notes in June and used the proceeds to pay down the revolver. At the end of the quarter, we had $15 million outstanding under the revolver, $30 million in standby letters of credit , and a sufficient borrowing base to support the use of the full $120 million revolver which leaves us about $75 million available on the credit line as of the end of the quarter. Now since the end of the quarter, however, we've paid down all of the outstanding amount on the revolver and in fact last night we had over 18 million of excess cash invested. We took these steps to provide additional liquidity and flexibility in the face of rising working capital requirements due to higher motor fuel prices. We remain in full compliance of all of our debt covenants and we're very comfortable with our liquidity position.

Now I'll turn it back to Sam.

Sam Susser

Thank you Mary. Operator, we're ready for any questions there might be.

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions) Our first question is from John Lawrence with Morgan Keegan. Please go ahead.

John Lawrence – Morgan Keegan

Good morning.

Sam Susser

Hi John.

John Lawrence – Morgan Keegan

Sam, would you start off a little bit with I guess on the merchandise side, it was strong, just talk about some of the categories if you could give us a little bit more break out of Laredo a little bit, what's happening in those markets with new stores etc on the food side and we'll start there.

Sam Susser

Sure. There was a pretty even distribution of growth in terms of which categories were the big drivers. The top drivers were packaged drinks, food service, cigarettes, snacks and beer. We saw healthy growth in Laredo Taco and in the Country Cookin’ concept out in West Texas, that's one area where we're very pleased that since the acquisition we've been able to create some positive sales momentum in the food service business out West. A lot of that is coming from improved staffing. We’ve really focused on the people’s side, we've been able to increase the hours of operation and I think the biggest change has been we've enhanced in-stock conditions. We've got more food, made fresh, available, ready to go. We also have begun recently to test our Laredo Tacos out West and I'm certainly not ready to declare victory. I think this is a long term project for the business, but we're pleased with the initial results and we expect to keep learning and responding to what the consumer tells us. Our new stores continue to open very well on the food side, and we really are excited about Laredo Tacos still. We think there's a lot of upside left in the business. It's still a fairly new concept for our Company and we continue to fine-tune it. Some of the properties that we've been working on especially out of the Town & Country land bank have a lot of platting and zoning, curb cut kind of issues that have delayed our plans to start construction a little bit, but we're very, very bullish on how our new stores are performing , mainly focused on the integration, and making sure that our balance sheet is in solid shape and at this point, I can definitely say we are in very solid shape and we're making plans for growth for next year. Across the board all our core categories are performing really strong. The increased scale that we got out of Town & Country has put us in a position to negotiate for stronger deals, more promotional support, more service from our DSD vendors and that's impacting not just Town & Country but also Stripes.

John Lawrence – Morgan Keegan

So just to follow-up and I guess that's where you're headed is the difference in the synergies that we're seeing this time around with one more step in the integration process is just the ability to get those deals with scale. Would that be the synopsis?

Sam Susser

That is the synopsis, John. That's 90% of it right there.

John Lawrence – Morgan Keegan

Great. Thanks, congratulations.

Sam Susser

Thanks a lot John.

Operator

Our next question comes from Bryan Hunt with Wachovia Securities. Please go ahead.

Bryan Hunt – Wachovia Securities

Hang on one second, Sam.

Sam Susser

No problem, Brian.

Bryan Hunt – Wachovia Securities

I have unfortunately pulled my headset out of my phone. Good morning first of all and second, I want to follow-up on what John was asking on merchandise. When we had the analyst tour out in West Texas, it seemed like there was a lot of merchandise that was being added to the stores. Could you talk about what's happened with your SKU count and then a second, along the promotional dollars line, how much of that promotional support you're getting from the vendors is temporary versus permanent?

Sam Susser

Brian let me take the second part of that. The dollars that we're talking about in synergies are procurement savings that are long-term sustained contractual savings that we expect to be repeatable, not only for the next 12 months but for the years ahead. We feel real comfortable with that position. From a merchandising standpoint, we've done a lot with single beer with a snack categories. We've added a lot of SKUs and exposure in the snack category. We're focused on ice, which is a very high profit category in the summertime. We also are focused on pricing and promotional activity relating to fountain and frozen drinks, and getting the maintenance function as strong as possible to manage the up time. We have reset all of the vaults and we will do that at least twice a year going forward. We continue to work closely with our vendors to optimize those sets and take advantage of the new products that are coming in and out, so for a convenience store, I would say there's been quite a bit of change in SKUs, there's both SKUs going out and SKUs going in and much, much more promotional activity that our consumers or customers are responding to.

Bryan Hunt – Wachovia Securities

And when I look at your gasoline side of the business, I mean you mentioned procurement savings there. I know your key supplier for T&C had an issue earlier in the year, have you all changed your gasoline procurement contract to a different vendor or have you established better purchasing because of your scale there as well?

Sam Susser

Elan [ph] was one of the leading suppliers to Town & Country and we have a very strong relationship with Elan. We take the word of those folks, because of the refinery fire at Big Springs, they're no longer providing the same disproportionate share, if you will, of fuel and we have been able to negotiate some favorable arrangements with other suppliers that we value also but we are hearing that the Elan plant will be coming up in the not-too-distant future and we hope to be able to reenergize our relationship with Elan as their production comes back up, but we have as a result of that fire broadened and deepened our supply relationships and it's worked out well.

Bryan Hunt – Wachovia Securities

Then a last question and I'll get back in the queue, in terms of the timing of all of the remerchandising and the achievement of the integration, when was it achieved during a quarter, was it late in the quarter or early in the quarter? Do you still have a little bit of runway with regards to the sales momentum you're experiencing?

Sam Susser

I think that we have got the 80% of the stuff that's going to move the needle in the core categories done during the course of the second quarter. The food side, we still have runway left and I will have to describe it as a long slow runway, Brian. It is years of work and opportunity and remodeling of stores and working on the menu. It's not – we went after the stuff that we could impact quickly, fast, and we have got it implemented and we are realizing great sales growth and great margin growth as a result, you see that in the numbers, but I think on the food side, we've got opportunity that we need to be working towards for the next two or three years before it will flatten out.

Bryan Hunt – Wachovia Securities

Great. I'll get back in the queue. Thank you.

Sam Susser

Thank you, Brian.

Operator

Our next question comes from Radina Russell with JPMorgan.

Radina Russell – JPMorgan

Hi, good morning guys, great quarter. Quick question on the synergies, the new $8 million synergy estimate, where are we in that process, initially with the $2 million on the last quarter you mentioned that you're about halfway through there, where are you now?

Sam Susser

Our guidance is for $10 million of synergies arising from the Town & Country acquisition, $2 million of which are G&A savings, we expect to fully realize that beginning now here in the third quarter of this year. And on the merchandise side, merchandise and fuel, we expect to realize the full $8 million in 2009 but the vast majority of it, we expect to be realizing here in Q3 and Q4. There are still a few more pieces that need to fall into place before we're 100% on that and that will happen by year end.

Radina Russell – JPMorgan

Then wanted to switch to the merchandise sales a quick minute, how do the same-store sales trend during the quarter?

Sam Susser

It's pretty consistent on the merchandise side, very strong, very consistent. We continue to enjoy great momentum on the merchandise side. Price has moved up on fuel dramatically during the quarter and we saw softness in fuel demand develop during the quarter, in other words, softer at the end of the second quarter than at the start, but on the merchandise side, very positive and very consistent.

Radina Russell – JPMorgan

Any insight into the third quarter?

Sam Susser

We really avoid being in the quarterly business. There isn't anything materially different in our competitive environment in the third quarter than what we've experienced in the past couple of years. The company is executing well. We have strong fundamentals. We think the outlook is really good for the business. I would highlight we're going up against phenomenal comps in Q3 and Q4 and I don't know, I don't think it's realistic to think we're going to comp 11.7% on top of 11.7%, but I don't want that to take away from the strength that we feel about the business, and we just feel strength both in merchandise sales and in GP dollars, and between the two, I would probably say there's more momentum on the merchandise GP dollar side because of the synergies that we're getting. We are watching for consumer weakness like crazy. We read the papers every day like everyone else, and we are really vigilant for signs of a slowdown in this merchandise side, but we're not seeing it. We're looking but we don't see it.

Radina Russell – JPMorgan

All right, thanks guys.

Sam Susser

Thank you.

Operator

Our next question comes from Mike Smith with Kansas City Capital. Please go ahead.

Mike Smith – Kansas City Capital

Good morning, congratulations.

Sam Susser

Thank you very much, Mike.

Mike Smith – Kansas City Capital

A couple of questions. The gas margin that you reported actually surprised me considering that price of what happened to the price of gasoline during the quarter. Now that we have seemed to have crested the hill, would you anticipate the gas margin widening in the third quarter because the price is going to be a little sticky coming down?

Sam Susser

Mike, we have been pretty dogmatic about not giving quarterly forecasts but there's no doubt that when prices are going up, that creates a tougher margin environment and when they're falling that's when we tend to get healthier, and so I'm going to let you draw your own conclusion from that.

Mike Smith – Kansas City Capital

Fair enough. Another question, of the 510 stores, where at the end of the quarter, where do you stand in terms of having the food service and how many of those stores do you ultimately think you can put food service in, and how fast will you pace yourself?

Sam Susser

We have food service in about 287 of the 510 or so stores that we're operating today. We plan to add kitchens at about three more stores of existing stores this year and we're continuing to build new stores. I think if you look out three, four, five years from now, and in a no acquisition scenario, which is very unlikely for this company, that's not our D&A, but in a no acquisition scenario, I would hope that we have restaurants in 75% or so of the stores. We have certainly a 100, 150 stores that are very, very good keeper stores that just aren't ever going to be big enough to have Laredo Taco concept, either there's not enough parking spaces or enough room in the building and no room to expand out, so we never see getting to 100% but we do see the proportion continuing to inch up as we build new stores and add kitchens to existing stores at a measured clip.

Mike Smith – Kansas City Capital

Thank you.

Sam Susser

Thank you.

Operator

Our next question comes from Andrew Berg with Post Advisory Group. Please go ahead.

Andrew Berg – Post Advisory Group

Sam, on the increased cost savings that you're seeing now from the integration, is that predicated upon where the business is running at existing levels or is it predicated upon where you see things being in the next couple of quarters? Is it pretty much in the bag now or is it based on projections and some assumptions?

Sam Susser

No, the numbers that we are discussing today are done.

Andrew Berg – Post Advisory Group

Okay.

Sam Susser

That is negotiations that had been concluded, not forward. We hope to get there kind of stuff. This is stuff that's done.

Andrew Berg – Post Advisory Group

Fantastic. You guys continue to perform well so keep it up.

Sam Susser

Well, we appreciate it. The team is working really hard and I am really proud of our guys.

Andrew Berg – Post Advisory Group

Thank you.

Sam Susser

Thank you.

Operator

Our next question is a follow-up from Bryan Hunt. Please go ahead.

Bryan Hunt – Wachovia Securities

I try to hold it to the rule, Sam, ask two and go away.

Sam Susser

No problem.

Bryan Hunt – Wachovia Securities

Mary, I was wondering if you could talk about your cap rates and whether they've changed on the sale leasebacks you're doing today versus maybe a year ago in light of the strange capital markets that exist today.

Mary Sullivan

Sure, Bryan. The last sale leasebacks that we did which were in May, we have seen some higher cap rates than certainly what we saw a year or two ago, and up a little bit, and we're seeing additional pressure a little bit in those markets. We still have access to the sale leaseback markets. We've got very good relations with our sale leaseback partners and I think as we talked about last quarter, we've got commitments from them for up to another $45 million of sale leaseback financing this year.

Sam Susser

Brian, I want to build on that. We see the real estate market as tightening the sale leaseback market, and it's slightly more expensive but the market is now differentiating between issuers and a year or two ago, money was available for just about anybody, and I don't think that's the case and I think that's going to end up being advantageous for Susser Holdings. We're able to continue to access that market at competitive rates that are attractive and I'm not sure that everybody in the world is going to have the same access.

Bryan Hunt – Wachovia Securities

All right, good companies always have access to capital Sam, so I don't think you'll have a problem. The second question is how are you promoting differently in light of, and I know Texas economy is radically different from other parts of the country like Florida and California, but if your consumers are reacting so positively to your promotions, what's your formula and again, maybe what categories are you promoting differently this year than a year ago?

Sam Susser

We are focused on the packaged beverage area. That is an area that's experiencing a lot of change. There are a lot of hot beverages this year, a lot of things that were hot last year that you can't give away today. We focus very, very hard on in-stock conditions in execution within our stores, and our store image, and we recognize that we've got a lot of opportunity to improve where we are in that regard, and the company is really working hard along those lines. We have incentive programs in place that get down to the individual stores and to our multi-unit supervisors and they touch our suppliers all around targeted promotions moving key packages and key merchandising initiatives in staying in stock, and the convenience store industry is notorious for having 10% and 20% of its items out of stock at a given time, and we are really trying to distinguish ourselves in that regard, and with the cleanliness of our stores and a lot of the energy that we have is going into the overall customer experience. I don't think in no way are we radically redesigning the merchandise set inside the stores. We're just focusing on the basics in trying to get a little bit better every quarter.

Bryan Hunt – Wachovia Securities

Then lastly on your promotions, how are you communicating differently at T&C to those customers? Is it mostly just store signage or are you doing flyers or local paper or local radio?

Sam Susser

We are using local radio and some other forms of media but I think the in-store merchandising with different displays, different signage and a reset of the entire store is probably having more impact than the advertising that we're running. We, as you know, have not rebranded the stores to Stripes yet and that's coming next year. We're real excited about the positive impact that's going to be and we're going to really lean into the advertising side when we make that conversion. We did that when we went from Circle K to Stripes and we were rewarded handsomely and we're excited to hopeful repeat that experiment next year with the Town & Country stores. So our advertising, we are using radio and newspaper and other things in certain markets. We've done a lot of community sponsorship work to continue to promote our name and the goodwill but we've got more investment in the year ahead and we're excited about what the impact of that will be.

Bryan Hunt – Wachovia Securities

Last question Mary, how many locations do you have in your land bank and have you been spending, what level of dollars are you spending for the average dirt that you're buying?

Chip Bonner

Bryan, this is Chip Bonner. We have about 20 stores in our land bank that are in line for future store growth, and the values of those property range anywhere from $2 a foot up to $10 a foot, so it just depends what market is and what we're able to accomplish there.

Sam Susser

I think there have been a few sites not the majority that are substantially more per foot than that, but we have been able to secure some attractive deals in certain markets this year that we have put in the pipeline for next year. In terms of the spend rates, Mary do you want to provide that comment, on capital spending?

Mary Sullivan

Sure. Capital spending just in total, we did put up some new guidance this year in line with our store estimates, gross between $65 million and $85 million this year, after sale leasebacks we're expecting to spend net between $25 million and $35 million in CapEx this year.

Sam Susser

So when it's all said and done, we expect to lease finance the vast majority of the new stores that we're going to build this year.

Bryan Hunt – Wachovia Securities

Sam, Mary, Chip thank you so much and have a good day.

Sam Susser

Thanks a lot.

Operator

Our next question is a follow-up from John Lawrence. Please go ahead.

John Lawrence – Morgan Keegan

Sam, can you go through merchandise one more time just a couple of more questions?

Sam Susser

You keep coming, John.

John Lawrence – Morgan Keegan

Can you help me on the pro forma, if I remember correctly, the in-stock issue and etc that's helping the T&C stores, some of that was related to some product related to route structure. Can you talk about the in stock? Is that correct for a lot of this product?

Sam Susser

We have made some significant distribution changes for us in those stores and the relationships that we have with the suppliers in that community I feel are at a much stronger place and we're getting better coverage and more consistent coverage from key supply partners, and there's more dialogue between our operators and the suppliers than there was a year ago, and that really makes a big difference in the convenience store business. It may not be real exciting but it's very impactful for us. So we're continuing to make changes. We've got some more changes coming this quarter out west in our supply chain that we think are going to be very, very big positives for our store managers and ultimately for our customers but the food side and the grocery side and the packaged beverage side, the changes have already been implemented. These are smaller areas of the business that's coming up ahead of us.

John Lawrence – Morgan Keegan

While I've got you, I know it's early with the test out West with the tacos, what are you seeing with the change in the basket or the ticket with the test at this point in the Country Cookin’ stores?

Sam Susser

John, because we didn't have the stores on our systems prior to this conversion, which we accomplished and finalized in the second quarter, I can't compare it to a per basket transaction last year.

John Lawrence – Morgan Keegan

Okay.

Sam Susser

I can’t tell you that we've seen sales momentum of kind of between 5% and 10% within the category.

John Lawrence – Morgan Keegan

Okay.

Sam Susser

The sales are building but until we have 13 months of data on our systems I can't accurately tell you what the exact basket difference is and customer transaction change, but within the category, our sales growth is definitely there. Our margin performance is strong in the category and we're bullish.

John Lawrence – Morgan Keegan

Great. Have a good day. Thanks.

Sam Susser

Thank you.

Operator

(Operator instructions) our next question comes as a follow-up from Mike Smith. Please go ahead.

Mike Smith – Kansas City Capital

Yes, just really quick Mary, what kind of tax rate should we apply for the full year?

Mary Sullivan

Sure. Federal tax rate if you'll use 36% would cover the Federal and the state tax in New Mexico and Oklahoma. On top of that, remember the State of Texas has a margin tax, which is one half of 1% of gross profit. So if you model that separately on top of the 36% of pre-tax , that should get you there.

Mike Smith – Kansas City Capital

Thank you.

Operator

At this time as there are no additional questions in the queue, I'd like to turn the call back over to management for any concluding remarks they may have.

Sam Susser

We appreciate your time. I want to compliment our team for the strong operational results and the action steps that we've taken to strengthen our liquidity and make sure that our company is stronger as a result of the Town & Country acquisition, and we're about eight months into it and we're definitely feeling that we're on our way. So really appreciate your time and support and hope you guys will come down and see us and try some tacos. Take care.

Operator

Ladies and gentlemen, this does conclude the Susser Holdings Corporation second quarter earnings conference call. You may now disconnect and we thank you for using ACT Teleconferencing.

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Source: Susser Holdings Corporation Q2 2008 Earnings Call Transcript
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