Slurping Up the Earnings

7-Eleven (NYSE: SE  ) recently reported strong earnings, and it has SpongeBob SquarePants to thank for it. The popularity of SpongeBob Slurpees and a surge in gasoline sales have helped the convenience-store chain post its best first quarter in years. David Gardner recently had an opportunity to ask 7-Eleven CEO Jim Keyes about the company's current success, its goals for the future, and a fellow named Moneypenny.

David Gardner: Jim, you have said the most recent quarter for 7-Eleven was the best in a decade. Total revenues up, same-store sales up, fuel sales . up. What is the single biggest difference between 7-Eleven today and 7-Eleven 10 years ago?

Jim Keyes: Well, it was the best first quarter in over a decade, and I think the single biggest difference is the technology that we have today, vs. a few years ago, that allows us to understand better than ever before what the customer wants. And we are able to respond to it in new and very different ways.

DG: Something else that is clearly helping 7-Eleven -- gasoline sales. I have read that more than a third of 7-Eleven revenues come from gasoline. Because of the growth of your gasoline sales, Jim Keyes, some people have even suggested that, hey, 7-Eleven is now more of an energy business than a retail business. To what extent has 7-Eleven benefited from higher gas prices?

JK: We really have not benefited very much. You see, we are a net buyer of gasoline, so by the time we buy the product, we move our inventory so quickly that we are even more vulnerable than the consumer to rising prices. Now, we have been fortunate. We have been able to pass those prices along, and our margins have been very solid.. Yes, we are an energy business, but it is just like anything else we sell: Our primary purpose in gasoline is convenience.

DG: If you are a net buyer, does that mean if you could wave your magic wand as CEO and make anything about gasoline happen, would you make the price of gasoline zero or, I don't know, $10 a gallon? Which benefits 7-Eleven more?

JK: (Laughs.) We are with the customers. We want lower prices. It is better for the overall economy, and it is certainly better for our customers, so we like it when the prices go down. That is when our margins expand, and that is when our customers are most happy.

DG: Something that caught our attention in your recent earnings is your decision to credit a rather unlikely source, SpongeBob SquarePants. For those of us who don't know about 7-Eleven's product line, Jim, tell us about the role that SpongeBob played in your recent success.

JK: SpongeBob has been very good to 7-Eleven. Of course, the Slurpee business has always been a favorite among our customers, and the kids just love SpongeBob these days. So when we were able to put out a special SpongeBob SquarePants mug with "Under the Sea Pineapple" flavor for the month of March, our customers really responded. It helped us drive the Slurpee business. But that is just the beginning. We have got more things lined up for the summer that will make it very exciting for the Slurpee business.

DG: Jim, I read where the average 7-Eleven store sells 2,800 items in a day. Is that accurate?

JK: We have about 2,800 items in each store. Per day, we probably sell a few less items. Our average sales might be a little over $3,000 per day in any given store.

DG: And is that number -- 2,800 items in the store [in the] average 7-Eleven each day -- is that higher or lower than it was 10 years ago?

JK: It is a little lower. Ten years ago, we had the notion that we had to fill the stores up with stuff. Again, with the benefit of technology today, we are much better at understanding what sells and what doesn't sell, so we have probably reduced the number of items by over a thousand in any given store. Today, many more of those items sell, which is a much better thing for the investor.

DG: Jim, what is the most heavily trafficked 7-Eleven location?

JK: The most heavily trafficked 7-Eleven location is probably a store in Long Island, right on the railway on the way to New York City. We sell over a thousand cups of coffee a day there.

DG: I know that you don't want to give away your R&D secrets at 7-Eleven, but presumably you have thought about what the world looks and feels like three to five years from now. Can you give us a sense of the way that my local 7-Eleven might be different five years from today [from] where it is today, from your viewpoint as CEO?

JK: We think your local 7-Eleven in the future will look and feel much more like a fresh-food environment -- perhaps a Starbucks (Nasdaq: SBUX  ) or your local deli. It will be brighter; it will be cleaner. It will be merchandised more for portable, high-quality fresh foods. Now, we are still going to have the basics of convenience. We will never lose our heritage, but we think that the consumer, going forward, is going to want much more portability and a better place to pick up . healthier alternatives for lunch or for breakfast, or even dinner.

DG: Jim, which one would 7-Eleven benefit most from its disappearance? Here they are: Starbucks, Krispy Kreme (NYSE: KKD  ) , McDonald's (NYSE: MCD  ) , or my local mom-and-pop convenience store?

JK: That is a tough call. We actually like the work that the Starbucks and even the McDonald's and the Krispy Kremes have done in elevating the perception of portable fast food and drink for the consumer, so they are actually good guys from our environment. We are actually pleased with McDonald's foray into deli-style sandwiches. We think that is good for us because they are helping to make the consumer more aware.

The local mom-and-pop . if they become consolidated and are able to uplift the image of convenience -- perhaps by having a transition from local mom-and-pops to more established competition out there -- we think that would be good for the industry. In many ways, we are kind of like the Kleenex of the convenience-store industry. People know 7-Eleven, and we become generic for convenience stores, and sometimes they walk into a mom-and-pop and they think they are in a 7-Eleven, but they are really not. So, yeah, if I had to pick any of those three, I would say mom-and-pops.

DG: Last one for you, Jim. As you know from our previous conversations, we are big fans of your company's CFO. Not because we know anything about him. We don't, but because your chief financial officer at 7-Eleven is named Edward Moneypenny. Jim Keyes, how is Moneypenny's job performance as of late? And please refer to him by name in your answer!

JK: (Laughs.) Well, Mr. Moneypenny has been doing a terrific job of keeping us with a disciplined approach to our overall . balance sheet and income statement. I think one of the most impressive things that Mr. Moneypenny has helped us to accomplish in the last year was to help us reduce debt by almost $450 million.

DG: Jim Keyes is the CEO of 7-Eleven. Jim Keyes, continued success, and thanks for joining us.

JK: Thank you. It is great to be here, and we are always pleased to talk about 7-Eleven's new and exciting stuff.

Motley Fool co-founderDavid Gardneris the chief analyst for theMotley Fool Rule Breakersnewsletter service and hostsThe Motley Fool Radio Show, which airs nationally on more than 100 NPR member stations every week.


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