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The Pantry Finds Itself Less Filling

Last month, convenience-store operator The Pantry (Nasdaq: PTRY  ) hit investors over the head with an explanation for an unexpected second-quarter loss. The previous warning was confirmed today, as the company announced its $0.23 loss.

Beating analysts' forecasts, total sales were a hair over $2 billion, representing a 39.9% increase from last year. The surge was helped by new-store development and acquisition activities, along with higher gasoline prices.

Despite the top-line growth, same-store sales fell in both the retail gasoline and merchandise segments. This comes as no surprise, since inflationary pressures have been eating away at everyone's discretionary income. Consumers may be more likely to bulk up on soft drinks and snacks at Wal-Mart (NYSE: WMT  ) or Target (NYSE: TGT  ) , rather than splurge on the convenient marked-up items after shelling out $3.60 a gallon for fuel.

And speaking of rapidly rising oil prices, The Pantry's gross gasoline margins were squeezed this quarter to $0.09. While competitors like Casey's General Stores (Nasdaq: CASY  ) are feeling the same pressure, not all of the blame stemmed from higher oil costs. The doozy for the quarter was a $0.23 loss due to an ill-advised attempt to hedge higher fuel costs.

Management issued a mea culpa and won't be burned on hedging again, as it closed out all of its positions and doesn't plan any related activities anytime soon. But even without the hedging snafu, The Pantry operated at close to breakeven for the quarter. The company is clearly feeling the effects of higher fuel and food costs and the subsequent crunch this is having on consumer pocketbooks.

As a result, The Pantry has ramped down its capital expenditure plans and is "suspending any additional acquisition activity" for the rest of the year. It expects this to boost free cash flow generation by the end of the year, but it clearly puts a damper on its business, as the company depends on a healthy dose of acquisitions to keep growing at a rapid clip. The company also shored up liquidity by tapping a credit facility, which is a bit concerning now that total debt to capital has risen to a lofty 77.8%. Still, it posted positive operating cash flow for the quarter and should be able to weather the current weakness in its two key business categories.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. Wal-Mart has been recommended by Inside Value. The Fool has an ironclad disclosure policy.

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Related Tickers

12/31/1969 7:00 PM
PTRY.DL $0.00 Down +0.00 +0.00%
The Pantry CAPS Rating: No stars
CASY $114.65 Down -0.43 -0.37%
Casey's General St… CAPS Rating: *****
TGT $68.23 Up +0.52 +0.77%
Target CAPS Rating: ***
WMT $68.34 Down -0.39 -0.57%
Wal-Mart Stores CAPS Rating: ***