Convenience-store operator The Pantry (NASDAQ:PTRY) eked out a penny of profit when it released first-quarter earnings yesterday, hurt by low gasoline gross margins and tough comps versus a year ago. Fortunately, the long-term picture remains intact.
Our recent Fool by Numbers will walk you through the aisles of the quarterly details, but in a nutshell, The Pantry posted 5% sales growth, while operating income evaporated. Same-store merchandise sales advanced an anemic 1.9%, and gasoline comps were little better at 2%. Gasoline margins fell more than 60% from last year's first quarter, even though total gallons sold grew 14%.
Merchandise revenue was strong during the quarter, rising 10.3%, while related merchandise costs grew slightly less, allowing for increased profitability. Convenience stores work hard to motivate gas-purchasing consumers to step inside and buy snacks, beverages, and other general merchandise. Why? Merchandise sales carry high margins -- around 37% in The Pantry's case -- especially compared with gasoline margins, which average closer to 6%.
Management also guided down total 2007 earnings to $2.75 to $2.90 per share, from the previous $2.80 to $3.00. It expects gasoline margins to return more to normal historical trends, which have ranged between $0.104 to $0.158 for The Pantry over the past five years.
I prefer competitor Casey's General Stores (NASDAQ:CASY) for its more conservative acquisition strategy and subsequent lower debt. To illustrate, The Pantry has a current debt-to-capital ratio greater than 70%, while Casey's is just less than 30%. That higher debt helps The Pantry make more acquisitions, but higher subsequent interest expense can magnify any operating difficulties. This quarter is a case in point, as The Pantry's $15.5 million in interest expense exceeded its $14.3 million in operating income.
Overall, both The Pantry and Casey's should be able to grow steadily, both through internal means and the acquisition of mom-and-pop operators in the highly fragmented convenience-store industry. Other large competitors include 7-Eleven, and Kroger (NYSE:KR) has a sizeable convenience store business, but The Pantry and Casey's represent the only way to gain pure equity exposure to the space, since most peers remain privately held.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.
