The Pantry, Inc. (PTRY)

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The Pantry, Inc. (PTRY)

F2Q09 (Qtr End 03/26/09) Earnings Call

May 5, 2009 10:00 am ET

Executives

Berry Epley - VP and Corporate Controller

Pete Sodini - Chairman and CEO

Frank Paci - EVP of Business Operations, CFO and Secretary

Brad Williams - SVP of Field Operations

Analysts

John Heinbockel - Goldman Sachs

Simeon Gutman - Canaccord Adams

Mark Miller - William Blair

Karen Howland - Barclays Capital

Ben Brownlow - Morgan Keegan

Anthony Lebiedzinski - Sidoti & Company

Karen Short - FBR Capital Markets

Presentation

Operator

Welcome to The Pantry Incorporated Second Quarter 2009 Earnings Conference Call. (Operator Instructions).

Now, I would like to turn the presentation over to your host for today's call, Mr. Berry Epley, Vice President, Corporate Controller. Please proceed.

Berry Epley

As you know, earlier today we announced financial results for the second quarter of our 2009 fiscal year. If anyone does not have a copy of the release and would like one faxed or email to them, please contact Selby Kewin in our office at 919-774-6700, extension 7002 and she will see that you get what you need.

Before I begin today, I would like to point out that certain comments made during this call may be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. 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 thepantry.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. Certain of these non-GAAP financial measures were also included in the press release we issued this morning. We, therefore, refer you to our press release posted on our website, which includes a presentation and reconciliation of each non-GAAP financial measure to the most directly comparable financial measure included in the press release 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; Tom Murnane, Lead Independent Director; and Frank Paci, our CFO.

I'll now turn the call over to Pete.

Pete Sodini

We're pleased to report second quarter EPS of $0.28 compared with a loss of $0.23 per share in last year's second quarter. As detailed in the press release, the results this year include $0.18 per share in gains from repurchase of outstanding debt at a discount, while the results a year ago included $0.23 per share in losses on gasoline hedging transactions.

Backing those items out, our earnings were $0.10 per share this year compared with essentially a breakeven a year ago. As many of you are aware, the second quarter is typically the seasonally low point of our fiscal year.

We were able to achieve these results despite a worsening economic environment. In our market, we saw our state weighted average unemployment rate increased to 9.6% during our second fiscal quarter, up from 7.3% in the first fiscal quarter, and 5.4% during the second fiscal quarter last year. While these factors have weighed on consumers, we started to see some improvement in our merchandise business this past quarter.

For the quarter, comparable store merchandise revenues were up 1.3% versus a 3% decline in the first quarter. Our merchandise gross margin was 37.2%, up 170 basis points from our first quarter margin of 35.5%, but down 30 basis points from a year ago. Both merchandise sales and margin results were positively impacted by cigarette cost increases and corresponding retail price increases taken in anticipation of the Federal Excise Tax to support the State Children's Health Insurance, commonly known as SCHIP. Frank will provide more detail later.

In the gasoline business, our volumes remain relatively soft with a 6.4% decline in comp for retail gas gallons. Again this quarter, a significant portion of the drop is attributable to diesel sales, which were down 22% in comparable store versus a year ago. Excluding diesel, our comp store gasoline gallons were down a more manageable 4.4%.

While miles driven in our markets in Jan and Feb improved to be down only 2.4% versus a Q4 decline of 6.3%, our region still trailed the national average, which showed miles driven down 1.9%. Our gasoline gross margin was relatively strong for the second quarter at $0.112 per gallon, which is up $0.022 from the $0.09 a year ago. Our gas margin last year, as I alluded to earlier, was reduced by $0.016 by losses on gasoline hedging transactions. Even excluding that, our gas margin was still up six-tenth of a cent.

During last quarter's conference call, we said we expect to see improved performance in gasoline comp sales as we move through the fiscal 2009. We've started to see signs of that this quarter.

In the past five weeks of Q3, both gasoline gallons and merchandise comp sales have been positive. However, gas margins continuing to-date have been challenging due to the rising energy costs. In Q3 last year, we saw retail gas prices spike toward more than $4 per gallon and the gas price peaked last July, which clearly impacted both our merchandise and gasoline volumes a year ago.

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