After a loss, The Pantry sees better times ahead

The Pantry reported a second-quarter loss Tuesday, but executives said the company's outlook for the rest of the year is positive.

Wall Street agreed, pushing the company's stock up $2.16, more than 13 percent, to close at $18.21 Tuesday.

It was a tumultuous quarter for the Cary-based convenience store chain of more than 1,600 stores throughout the Southeast.

Rising oil prices drove the cost of gas way up, and consumers responded by spending less on other things. The company also had to deal with the effects of the violent tornadoes that swept the Southeast, and it continued to expand its new fresh food initiative.

Overall for the quarter ended March 31, The Pantry reported a net loss of $269,000, or 1 cent per share. In the second quarter of 2010, the company reported a much more substantial net loss of $166.1 million, or $7.44 per share.

Focus on efficiency

Despite the loss, The Pantry beat analysts' estimates by a long shot, something Wells Fargo Securities analyst Bryan Hunt attributed to better-than-expected fuel profit margins and good cost management by The Pantry. Analysts surveyed by Reuters were expecting a loss of 54 cents per share.

"The company is showing that it has the fortitude to continue to cut costs and continue through several different initiatives," he said.

CEO Terrance Marks said on a conference call with investors and media Tuesday morning that the company has been focusing on increasing efficiency, productivity and expanding its fresh food strategy to its third market, Birmingham, Ala. All of those things, he said, should help the company's bottom line in the coming months.

"By focusing on what we can control, we can deliver our near-term objectives while simultaneously investing in our stores, growing our food service capabilities and deleveraging our food costs at the same time," he said.

In the second quarter, The Pantry saw merchandise sales at stores open at least a year rise by 2 percent. And, while the number of gallons of gasoline that the company sold decreased as people stopped driving as much, the company's profit on gas rose to $61.8 million, up from $65.4 million a year ago.

And there may be more opportunity for increased profit with shoppers visiting stores more often because they are not buying a full tank of gas during each visit anymore, Hunt said.

"It could end up playing out in the form of more items sold," he said. "The average convenience store makes 70 percent of its profit on merchandise."

Fresh options' success

Among the other highlights of the quarterly earnings release and conference call Tuesday:

The fresh foods campaign that was piloted first in the Triangle and then in Charlotte is producing results. Marks said that traffic in the revamped stores is up and the number of visits from female shoppers is up and that growth in those two markets has been double the company's overall growth.

The Pantry plans to have 400 renovated stores by the end of the year. But officials would not say which markets will follow Birmingham.

Commodity prices are becoming a factor, and The Pantry has worked to reduce waste and negotiate with suppliers, especially on coffee, which is the cornerstone of its new fresh store model.

There are small indications that consumers continue to be careful about expenditures. For example, Marks said, smokers are switching from carton purchases to buying individual packs.

The Pantry lost two stores in the Ringgold, Ga., market to the tornadoes that swept through the area. The company plans to rebuild.

Thanking the workers

And Marks began the conference call Tuesday in an unusual way - by thanking employees in the tornado-affected areas.

"I know that many of our employees listen to our quarterly calls," he began. "I'd like to take a moment to recognize the hardships. Despite dealing with their own personal losses, Pantry employees often went above and beyond to ensure that our customers' needs were met. Let me say on behalf of the executive leadership team that we are truly grateful for your unwavering commitment to serving our guests."