The Pantry, the leading convenience store operator in the southeastern US and the second largest independently operated convenience store chain in the country, has announced its financial results for the Q2 and H1 ended 28 March 2002.

The Sanford, North Carolina-based company posted a net loss of US$4.1m for the Q2 net, compared to a net loss US$4.9m in the Q2 2001. EBITDA was US$18.1m, compared to US$25m year on year. On a pro forma basis, the Q2 2002 loss per share was US$0.26, compared to a loss per share of US$0.06 in the Q2 2001.

During the Q2, the company reported a gasoline margin of 9.0 cents per gallon, compared to 11.4 cents per gallon in the Q2 2001. The 2.4-cent decline in gasoline margin per gallon was principally responsible for the decline in gasoline gross profit of US$6.4m, which translated into earnings, represents a decline of 21.0 cents per share.

President and CEO Pete Sodini said: "Our Q2 performance reflects an extremely volatile gasoline market, heightened by current events in the Middle East and Venezuela.

"On the positive side, we are very encouraged by several underlying trends and are particularly pleased with recent comparable store volume. Intelligently growing merchandise revenue and gasoline volume remains a focus of our management team and, as a result, we achieved our third consecutive quarter of positive comparable store merchandise sales and gasoline gallon volume growth."

Total revenues in the Q2 reached US$560.8m, compared to US$635.7m year on year. This revenue decline was attributable to a 19.6% decline in gasoline retail prices, offset partially by increases in other revenue segments. Merchandise revenues increased 1.2% to US$232.5m as comparable store merchandise sales increased 1.9%, compared to a decrease of 1.6% in the corresponding period of 2001.

The company attributes improved comparable store merchandise sales principally to merchandise program enhancements, competitive pricing and increased promotional activity in key categories.

Merchandise gross profit for the Q2 was US$76.4m, compared to US$78.9m year on year. The gross profit decline was primarily the result of a 150 basis point decline in gross margin from 34.3% in the Q2 2001 to 32.8% in the Q2 2002, partially offset by increased merchandise revenue. The company's Q2 2002 merchandise margin was in line with previously announced expectations and an improvement from the Q1 2002 margin of 32.6%.

Regarding the company's merchandise enhancements, Pete Sodini added: "In FY 2002, we are repositioning our merchandising program to communicate value to our customers and to aggressively promote key demand categories. Early results from these activities have strengthened our view that these initiatives will better meet our customers' needs and enhance our ability to achieve long-term comparable store sales growth, sustainable margin levels and overall gross profit dollar growth."

In the Q2 2002, operating, general and administrative expense (OG&A) declined US$1.3m to US$90m despite increases in lease and insurance expenses totalling US$1m. Adjusting for the inflationary impact of gasoline, OG&A as a percent of total revenues declined from 16.4% in the Q2 2001 to 16% in the Q2 2002. In FY 2001, the company restructured and centralised its corporate administrative functions resulting in pre-tax one-time charges of US$4.8m last fiscal year.

Sodini added: "The actions and process improvements initiated in FY 2001 resulted in Q2 2002 savings of about US$2.3m, excluding insurance cost increases and the lease expense associated with store additions. As a result, we are well on our way to meet and possibly exceed our targeted pre-tax annual savings of US$5m."

For the H1, total revenues were US$1.1bn, compared to US$1.3bn in the corresponding period of fiscal 2001. Consistent with the Q2 performance, the decline in total revenue is primarily attributable to a significant decrease in gasoline retail price per gallon. Merchandise revenues and gasoline gallon volume increased 2.5% and 3.2% respectively, over the comparable period last year. Year-to-date comparable store merchandise sales increased 1.8% and comparable store gasoline gallon volume improved 0.4%. For the H1, the company reported a net loss of US$3.7m, compared to a net loss of US$3m in the comparable period of FY 2001. EBITDA was US$44.6m, compared to US$56.8m recorded in the comparable period of fiscal 2001. The earnings and EBITDA declines are primarily attributable to significantly lower gasoline margins in FY 2002 compared to FY 2001.

"Our management team continues to execute programs designed to reduce our cost structure and streamline operations while strengthening our retail network through investments in technology and training," added Sodini. "We continue to divest or close our unprofitable and non-strategic locations and are actively managing discretionary spending.
"In fiscal year 2002, we anticipate closing about 35 and opening or acquiring about five stores. Net capital expenditures for the year are expected to be about US$25m and, through scheduled principal payments, we plan to reduce debt by US$40m. We continue to enhance our gasoline pricing and inventory management systems and are in the early phases of a scanning project. Anticipated benefits of these investments include incremental merchandise gross margin enhancement, better consumer targeting for product assortment, improved internal controls and reduced inventory costs."

Sodini concluded: "As we look to the balance of FY 2002, we certainly believe gasoline margins will improve over the level reported for the H1. In the current environment, we will continue to aggressively pursue cost control and capital restraint in an effort to streamline our operational structure, drive free cash flow and increase asset efficiency. We believe these initiatives, along with a series of revenue generation plans, will enhance our long-term prospects as the economic climate improves and the geopolitical landscape stabilises."