The Pantry Still Growing by Leaps and Bounds

The Pantry (Nasdaq: PTRY  ) is taking over America's Southeast. The convenience store chain reported earnings Thursday and indicated that while store expansion drove revenue growth, costs related to that growth and to rising gasoline prices hurt EPS.

The Pantry's 1,642 stores, located in 11 states, offer gasoline and convenience products like cigarettes, beverages, fast food, and snacks. You may know Pantry by its Kangaroo Express-branded stores located near highways, coastal resorts, and in suburbs. The company is in the process of converting its entire store base to the Kangaroo Express brand, with about 80% of its stores converted to date.

A 24.8% rise in revenue highlighted The Pantry's third quarter. The company breaks up its revenue into two segments: merchandise sales and gasoline sales. This allows it to better isolate fluctuations in volatile gasoline prices. Gas prices were 4% higher during this year's quarter, and with a 19.9% increase in gallons sold, retail gasoline revenue climbed 24.5%. 

"Inside the house," the company sells stuff, like tobacco and snacks. Merchandise revenue increased 15.8% in Q3, driven by added stores and 1.9% growth in same-store sales.

While revenue was up at the Kangaroo retailer, margins didn't fare so well. The Pantry's slim operating margin narrowed 80 basis points, to 2.1%. You see, the company is still in its high growth stage and bears the cost of that effort. Merchandise margins narrowed 80 basis points, as newly acquired stores typically hurt The Pantry's profit comparisons until they are converted into the company's richer format. During the quarter, the company bought 11 "Fast Phil's" stores from Willard Oil, 66 Petro Express stores, and a couple others here and there. Acquisitions totaled 152 stores so far this fiscal year. 

Retail gasoline margins did not hold up much better than merchandise, because it's not easy for the company to shift rising gas prices to consumers. Retail gross margin per gallon at The Pantry's pit stops was 12.8 cents, compared with 14.1 cents a gallon in the quarter a year ago.

In the end, The Pantry reported EPS of $0.55, beating the analysts' consensus expectation, even after a charge of $0.06 on debt refinancing costs. Still, the result was well short of last year's Q3 EPS of $0.86.

This Fool expects The Pantry's store conversion and brand-building to add value, because consumers often take to a store they recognize, especially when traveling. There was even some evidence of added brand value in the third-quarter results. Gasoline sales volume rose 1.0% on a same-store basis, and we think brand and operations improvement probably drove that.

The company carries a hefty debt load, at some 59% of capital, and its interest coverage ratio (EBITDA divided by interest expense) was just 3.3. However, I am not overly concerned, because The Pantry sells a somewhat non-discretionary offering in gasoline. I have to admit that I'm not sure how high gasoline prices have to get before people seriously shift to carpooling and mass transit.

In terms of valuation, the company, trading at roughly 12.9 times trailing-12-months EPS, compares well with peers Casey General Stores (Nasdaq: CASY  ) at 20.9 and Weis Markets (NYSE: WMK  ) at 18.4. The problem is, lately The Pantry's earnings estimates have taken a negative turn. According to Thomson Financial, the consensus figure for the fiscal year ending in September has fallen 38% in the last 90 days, to $1.67 a share. That kind of momentum has a way of affecting the valuation.

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Fool contributor Markos Kaminis has no ownership interest in any of the companies discussed here, but he thinks he could outbox a kangaroo. The Fool has a disclosure policy.


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