Description
Filed with the SEC from June 28 to July 4:
Pantry (PTRY)
Hawkeye Capital Management disclosed that it owns 371,105 shares (4.3%), following its purchase of 907,243 shares in the period from June 6 through June 27 at prices ranging from $13.40 to $14.19 per share.
BUSINESS OVERVIEW
General
We are the leading independently operated convenience store chain in the southeastern United States and the third largest independently operated convenience store chain in the country based on store count. As of September 29, 2011, we operated 1,649 stores in 13 states under a number of selected banners including Kangaroo Express ® , our primary operating banner. Our stores offer a broad selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers. Our strategy is to continue to improve upon our position as the leading independently operated convenience store chain in the southeastern United States by generating profitable growth through merchandising and marketing initiatives, sophisticated management of our fuel business, leveraging our geographic economies of scale, generating strong cash flows to reinvest in our business and reduce debt levels.
Our principal executive offices are located at 305 Gregson Drive, Cary, North Carolina 27511. Our telephone number is 919-774-6700. We were originally incorporated under the laws of Delaware on July 13, 1987.
Our Internet address is www.thepantry.com. We make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”).
References in this annual report to “The Pantry,” “Pantry,” “we,” “us,” “our” and “our company” refer to The Pantry, Inc. and its subsidiaries, and references to “fiscal 2012” refer to our fiscal year which ends on September 27, 2012, references to “fiscal 2011” refer to our fiscal year which ended on September 29, 2011, references to “fiscal 2010” refer to our fiscal year which ended September 30, 2010, references to “fiscal 2009” refer to our fiscal year which ended September 24, 2009, references to “fiscal 2008” refer to our fiscal year which ended September 25, 2008, references to “fiscal 2007” refer to our fiscal year which ended September 27, 2007, and references to “fiscal 2005” refer to our fiscal year which ended September 29, 2005. All fiscal years presented included 52 weeks, except fiscal 2010, which included 53 weeks.
Competition
The convenience store and retail fuel industries are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering the products and services found in our stores. We compete with numerous other convenience store chains, independent convenience stores, supermarkets, drugstores, discount clubs, fuel service stations, mass merchants, fast food operations and other similar retail outlets.
The performance of individual stores can be affected by changes in traffic patterns and the type, number and location of competing stores. Principal competitive factors include, among others, location, ease of access, fuel brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. We believe our store base, strategic mix of locations, fuel offerings and use of competitive market data, combined with our management’s expertise, allow us to be an effective and significant competitor in our markets.
Technology and Store Automation
Collaboration between our information technology team and internal and external business partners allows us to continue to successfully advance our systems portfolio and technology infrastructure through the implementation of key operational, financial and merchandising initiatives.
Fiscal 2011 saw the rollout of the initial phases of both the fuel pricing and workforce management systems. Both provide our store and fuel operations teams with improved efficiencies, greater business control, and improved decision making opportunities. The fuel pricing system has provided new insights resulting in improved retail pricing decisions. The next phase of this project to be implemented during fiscal 2012 brings improvements in store level execution by pushing retail fuel price changes to our point of sale systems, fuel dispensers and electronic price signs. With the implementation of the task execution management and labor scheduling modules at store level we’ve been able to reduce non value-added activities and allow our store-level associates to focus on delivering a fast, friendly and clean shopping experience for our customers. Our next phase of workforce management, time and attendance, will get underway in fiscal 2012.
Trade Names, Service Marks and Trademarks
We have registered, acquired the registration of, applied for the registration of and claim ownership of a variety of trade names, service marks and trademarks for use in our business, including The Pantry ® , Worth ® , Golden Gallon ® , Bean Street Coffee Company ® , Big Chill ® , Celeste ® , The Chill Zone ® , Lil’ Champ Food Store ® , Kangaroo ® , Kangaroo Express ® , Cowboys ® , Aunt M’s ® , Quickstop SM , Petro Express ® and Presto. In the highly competitive business in which we operate, our trade names, service marks and trademarks are critical to distinguish our products and services from those of our competitors. We are not aware of any facts which would negatively impact our continuing use of any of the above trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal, state and local laws and regulations. A violation or change of these laws or regulations could have a material adverse effect on our business, financial condition and results of operations. We describe below the most significant of the regulations that impact all aspects of our operations.
Storage and Sale of Fuel. We are subject to various federal, state and local environmental laws and regulations. We make financial expenditures in order to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In particular, at the federal level, the Resource Conservation and Recovery Act of 1976, as amended, requires the U.S. Environmental Protection Agency (“EPA”) to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks (e.g. overfills, spills and underground storage tank releases). At the state level, we are periodically required to upgrade or replace underground storage tank systems.
The Florida trust fund will not cover releases first reported after December 31, 1998. We obtained private insurance coverage related to certain remediation costs and third-party claims arising out of releases that occurred in Florida and were reported after December 31, 1998. We believe that this coverage complies with federal and Florida financial responsibility regulations. In Georgia, we opted not to participate in the state trust fund effective December 30, 1999, except for certain sites, including sites where our lease requires us to participate in the Georgia trust fund. For all such sites where we have opted not to participate in the Georgia trust fund, we have obtained private insurance coverage related to certain remediation costs and third-party claims. We believe that this coverage complies with federal and Georgia financial responsibility regulations.
As of September 29, 2011, environmental reserves of approximately $5.9 million and $12.0 million are included in other accrued liabilities and other noncurrent liabilities, respectively. As of September 30, 2010, environmental reserves of approximately $5.4 million and $18.0 million are included in other accrued liabilities and other noncurrent liabilities, respectively. These environmental reserves represent our estimates for future expenditures for remediation and related litigation associated with 187 and 277 known contaminated sites as of September 29, 2011 and September 30, 2010, respectively, as a result of releases (e.g., overfills, spills and underground storage tank releases) and are based on current regulations, historical results and certain other factors. We estimate that approximately $9.6 million of our environmental obligations will be funded by state trust funds and third-party insurance; as a result we estimate we will spend up to approximately $8.3 million for remediation and related litigation. The increase in our estimated expenditures for remediation and related litigation is primarily due to lower than expected coverage for certain known remediation costs. Also, as of September 29, 2011 and September 30, 2010, there were an additional 589 and 510 sites, respectively, that are known to be contaminated sites that are being remediated by third parties for which we have no obligations, and therefore, the costs to remediate such sites are not included in our environmental reserve. Remediation costs for known sites are expected to be incurred over the next one to ten years. Environmental reserves have been established with remediation costs based on internal and external estimates for each site. Future remediation for which the timing of payments can be reasonably estimated is discounted at 8.0% to determine the reserve.
Although we anticipate that we will be reimbursed for certain expenditures from state trust funds and private insurance, until such time as a claim for reimbursement has been formally accepted for coverage and payment, there is a risk of our reimbursement claims being rejected by a state trust fund or insurer. As of September 29, 2011, anticipated reimbursements of $11.0 million are recorded as other noncurrent assets and $7.4 million are recorded as current receivables related to all sites. In Florida, remediation of such contamination reported before January 1, 1999 will be performed by the state (or state approved independent contractors) and substantially all of the remediation costs, less any applicable deductibles, will be paid by the state trust fund. We will perform remediation in other states through independent contractor firms engaged by us. For certain sites, the trust fund does not cover a deductible or has a co-pay which may be less than the cost of such remediation. Although we are not aware of releases or contamination at other locations where we currently operate or have operated stores, any such releases or contamination could require substantial remediation expenditures, some or all of which may not be eligible for reimbursement from state trust funds or private insurance.
Several of the locations identified as contaminated are being remediated by third parties who have indemnified us as to responsibility for cleanup matters. Additionally, we are awaiting closure notices on several other locations that will release us from responsibility related to known contamination at those sites. These sites continue to be included in our environmental reserve until a final closure notice is received.
Sale of Alcoholic Beverages. In certain areas where stores are located, state or local laws limit the hours of operation for the sale of alcoholic beverages. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of alcoholic beverages. These agencies may also impose various restrictions and sanctions. In many states, retailers of alcoholic beverages have been held responsible for damages caused by intoxicated individuals who purchased alcoholic beverages from them. While the potential exposure for damage claims as a seller of alcoholic beverages is substantial, we have adopted procedures intended to minimize such exposure. In addition, we maintain general liability insurance that may mitigate the effect of any liability.
Store Operations. Our stores are subject to regulation by federal agencies and to licensing and regulations by state and local health, sanitation, safety, fire and other departments relating to the development and operation of convenience stores, including regulations relating to zoning and building requirements and the preparation and sale of food. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new store in a particular area.
Our operations are also subject to federal and state laws governing matters such as wage rates, overtime, working conditions and citizenship requirements. At the federal level, there are proposals under consideration from time to time to increase minimum wage rates and to introduce a system of mandated health insurance, each of which could adversely affect our results of operations.
Financial Information
For information with respect to revenue and operating profitability, see the items referenced in Item 6. Selected Financial Data: Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations; and the Consolidated Statements of Operations.
CEO BACKGROUND
Edwin J. Holman was named Chairman of our Board on September 17, 2009 and as Interim Chief Executive Officer on October 5, 2011. He has served on our Board since October 2005 and, prior to becoming Interim Chief Executive Officer in October 2011, served a member of our CO Committee and our Corporate Governance and Nominating Committee. Previously, he had served as Chairman of our CO Committee and as a member of our Executive Committee, the duties and responsibilities of which are now encompassed by our Finance Committee. Mr. Holman is a 2011 National Association of Corporate Directors (NACD) Governance Fellow and has been named as a Director honoree. He has demonstrated his commitment to boardroom excellence by completing NACD’s comprehensive program of study for corporate directors. He supplements his skill sets through ongoing engagement with the director community and access to leading practices. We believe Mr. Holman is especially qualified for our Board, and particularly as its Chair, because of his extensive executive experience in the retail industry. From March 2010 to the present, Mr. Holman also has served as the non-executive Chairman of RGIS International, which provides retail inventory solutions. Previously, Mr. Holman served as Chairman and CEO (2004-August 31, 2009) of Macy’s Central, a division of Macy’s Inc. that operates 217 department stores in the Midwest and Southern United States. He also served as President and CEO of Galyan’s Trading Company, a public company (2003-2004). Previously, Mr. Holman was the President and COO of Bloomingdale’s (2000-2003), a division of Federated Department Stores Inc.; President and COO of Rich’s/Lazarus/Goldsmiths divisions, a division of Federated Department Stores, Inc. (1999-2000); Chairman and CEO of Petrie Retail, Inc. (1996-1999); President and COO of Woodward & Lothrop (1994-1996); Vice Chairman and COO of The Carter Hawley Hale Stores; and a senior operating executive of The Neiman Marcus Group. Mr. Holman is well-versed in the various aspects of retail operations, and he also has high-level experience with a wide range of diverse companies, which we believe gives him very relevant skills in working with boards, overseeing management, assessing risk, and exercising diligence. Additionally, Mr. Holman’s substantive experience gives him a solid foundation from which to advise our company with respect to its numerous and diverse retail vendors, and his experience overseeing multiple retail stores under the same brand meshes with our business model organizational structure, vendor relations, and multiple retail store operations, making him an excellent fit for our Board and a prime choice as its Chair. Further, his diverse executive experience has prepared him to respond to complex financial and operational challenges, which we believe adds significant value to the critical skill sets needed by our Board, to help our company succeed in such a highly competitive marketplace. Finally, in addition to serving in several principal roles as employee, Mr. Holman has also served as an independent director on the boards of Office Max (2003) and Circle International (1994-2000), both public companies. During his tenure as director at Circle International, he served as Chairman of the Audit Committee for three years and also as Chairman of the Compensation Committee for two years. As of January 18, 2010, Mr. Holman also began serving on the Board of Directors of La-Z-Boy, a public company. We believe Mr. Holman’s commitment to boardroom excellence and his substantial retail, executive, and operational experience, particularly at large, multi-store companies, and his prior board experience make him valuable as Chairman of our Board.
Robert F. Bernstock has served on our Board since October 2005, and is currently a member of our Finance and Investment Committee, our Corporate Governance and Nominating Committee and is Chairman of our CO Committee. Mr. Bernstock is currently self-employed as an independent consultant. Mr. Bernstock was president of the U.S. Postal Service Mailing and Shipping Services division from June 2008 until June 2010, which has produced in excess of $70 billion in annual revenues. As president, he was responsible for product management, development, and retail and commercial sales and services, which required his participation in pricing, operational support, service enhancements, partnerships, and investment activities. Mr. Bernstock’s other high level executive and director experience includes positions at SecureSheet Technologies (Chairman and CEO, 2006-2008); Scotts Miracle-Gro Company (COO and President of North America, 2003-2006); The Dial Corporation (Senior Vice President and General Manager); Campbell Soup Company (President of the U.S. Division, President of the International Division, and Executive Vice President); Vlasic Foods International (President, CEO, and Director, 1998-2001; Atlas Commerce, Inc. (President, CEO, and Director); and NutriSystem, Inc. (Director). We believe this broad executive experience not only equips Mr. Bernstock well to advise our Board generally, but it also provides him (and our company) with particular advantages. Specifically, the diversity of his corporate experience—from Scotts Miracle-Gro to Campbell Soup Company and Atlas Commerce—give him extensive experience working with diverse boards of directors and overseeing management. This background also provides him with a collection of best practices and strategies to help inform our Board’s general corporate decision-making, our CO Committee’s specific analyses regarding executive pay and benefits, and our Finance and Investment Committee’s oversight and review of our company’s financial plans and policies and our acquisition and divestiture strategies. We believe Mr. Bernstock’s significant experience as a director of Vlasic Foods, Atlas Commerce, Inc., and NutriSystem, Inc, as well as his high-level executive experience, qualifies him for service as a member of our Board of Directors, Chairman of our CO Committee, and member of our Corporate Governance and Nominating Committee and Finance and Investment Committees.
Paul L. Brunswick has been a director since July 2003, and is currently a member of the Finance and Investment Committee and Chairman of our Audit Committee. He previously served on our Corporate Governance and Nominating Committee. Mr. Brunswick is currently on the Board of Directors of VTFLEX, Inc., and The WakeMed Foundation. He served on the Board of Directors of Beroe, Inc. from 2005 until 2011 and as a director of Lonesource, Inc. from 2003 until March 2010. Service on those boards has provided him with the background and experience of board processes, function, exercise of diligence, and oversight of management. Since 1999, Mr. Brunswick has provided financial and business consulting services through his own company, General Management Advisory, and brings that expertise to our Board as well. Further, we find Mr. Brunswick’s financial background to provide additional value to our Board and our Audit and Finance and Investment Committees. From 1992 to 1999, Mr. Brunswick was Vice President and Chief Financial Officer of Good Mark Foods, Inc., a publicly-held meat snack manufacturer and marketer whose primary retail channel of distribution was via convenience stores, and in that role dealt with that company’s public accountants, regulatory agencies, and the Audit Committee of its Board of Directors. Prior to 1992, he served as Chief Financial Officer of Compuchem Corporation and Photographic Sciences Corporation, and as Corporate Controller of Voplex Corporation, all publicly-held companies. In addition, he served as director, Chair of the Audit Committee, and Chair of the Compensation Committee of Waste Industries, another public company, from 1999 to 2005. Mr. Brunswick brings to us previous experience as Corporate Controller, Chief Financial Officer, and Audit Committee Chair, uniquely qualifying him to serve as our Audit Committee Chair and as a member of our Finance and Investment Committee.
Wilfred A. Finnegan was elected to our Board in July 2006, and currently serves as our Interim Lead Independent Director and as a member of our Audit Committee and Chairman of our Finance and Investment Committee. We believe Mr. Finnegan’s experience in the financial sector and his demonstrated past board performance make him a good fit for our Board and, in particular, our Audit and Finance and Investment Committees. Mr. Finnegan co-founded the high yield securities business at JPMorgan Chase (then Chemical Bank, and later Chase Manhattan) in 1993 and subsequently was promoted to the head of Global Leveraged Finance, where he accumulated substantial leadership and financial experience. His later positions as Senior Advisor to The Carlyle Group, a global private equity firm (2003-2005), more recently as Managing Director (2007-2008) of GoldenTree Asset Management, LP, and as an independent consultant since 2003 further enhance his executive experience and fiscal know-how. His committee experience at JPMorgan – as a member of the Management, Global Markets, and Market Risk committees there – provides additional experience in analyzing risk and performing financial strategic planning that we believe adds value to his participation on our Audit and Finance and Investment Committees. Finally, Mr. Finnegan attained a B.A. and M.B.A. from Dartmouth College, one of the nation’s top undergraduate and business institutions. We believe Mr. Finnegan’s significant executive, financial, and educational background qualifies him for service as a member of our Board, Chairman of our Finance and Investment Committee, and member of our Audit Committee, and also makes him a valuable addition to our team.
Terry L. McElroy was named director in March 2006 and currently serves on both the CO Committee and the Audit Committee of our Board. He has also served on our Executive Committee, the duties and responsibilities of which are now encompassed by our new Finance and Investment Committee. Since his 2006 retirement, Mr. McElroy has been self-employed as an independent consultant. Before his 2006 retirement, Mr. McElroy spent more than twenty-five years in multiple executive roles with McLane Company, Inc., a $34 billion supply chain services company that provides grocery and food service supply chain solutions for thousands of convenience stores, including for our company. For the last five years of his executive experience at McLane, he was President of McLane Grocery Distribution, which has provided him the background and experience of working with a board of directors and overseeing management in addition to his substantively valuable experience in a closely-related industry. We believe Mr. McElroy is well qualified to serve on our Board’s CO Committee and the Audit Committee. As a former President and Vice President of Distribution at McLane, Mr. McElroy was responsible for developing and implementing corporate strategy, including how it related to compensation and benefits. Specifically, he served on the committee that developed the first formalized position description and salary framework for the company as a whole, and he later helped develop a formal succession planning process for senior positions that contributed to successful internal promotions for almost all open positions. During his tenure at McLane, Mr. McElroy also served on the committee that formalized the company’s beliefs and values and developed its first long-term strategic plan, and as President, he was responsible for developing and updating the strategic plan for that unit. Further, Mr. McElroy’s extensive high-level executive experience has routinely exposed him to financial analysis and oversight, preparing him for service on our Audit Committee, which monitors regulatory financial compliance and the independence and performance of internal and external auditors. We believe that Mr. McElroy’s broad executive experience, particularly as President and Vice President of a food service supply chain servicing convenience stores, qualifies him well to serve on our Board and on our CO and Audit Committees.
Mark D. Miles first joined our Board in January 2006 and currently serves on our CO Committee and our Corporate Governance and Nominating Committee. Mr. Miles’ wide array of experience, both in terms of industry and position, give him a valuable perspective from which to contribute to our Board as it oversees our company’s dealings with multiple-industry vendors and the public. For instance, since January 2006, Mr. Miles has been the President and Chief Executive Officer of Central Indiana Corporate Partnership, Inc., a not-for-profit organization of central Indiana CEOs and university presidents that seeks to foster growth and opportunity throughout the region. Additionally, Mr. Miles is currently a director for City Financial Corporation, a holding company for City Securities, in Indianapolis, Indiana and serves on its Compensation and Audit Committees. City Securities Corporation is Indiana’s oldest and largest, independent, full service investment firm active in investment services, money management, insurance, public finance, corporate finance, taxable fixed income, institutional sales and syndication of tax credits. Also, Mr. Miles is currently the Chairman of the Board of “Our 2012 Super Bowl,” the host committee of Super Bowl 2012 in Indianapolis, Indiana. He has held numerous other executive positions in the sports industry, including fifteen years as CEO of the ATP, the official international circuit of men’s professional tennis tournaments (1990 to 2005); President of the Organizing Committee of the 1987 Pan American Games in Indianapolis; and President of the RCA Championships (formerly Indianapolis ATP tournament). We find that this exposure to major event planning has prepared Mr. Miles to offer substantive advice in the areas of marketing and negotiating with vendors, and it also provides experience in strategically responding to complex operational and financial challenges and overseeing an array of personnel, both of which are important Board and Committee functions. Mr. Miles was also Executive Director of Corporate Relations for Eli Lilly & Co., an international agricultural, medical instrument, and pharmaceutical company. Mr. Miles’ responsibilities at Eli Lilly included oversight of the company’s Washington, D.C. office and all of its federal and state governmental affairs, including all lobbying activities. Additionally, Mr. Miles has had experience managing political campaigns, including a mayoral campaign for the city of Indianapolis and several congressional candidate campaigns for both the Indiana and U.S. legislatures. Not only do these positions further underscore Mr. Miles’ diversity of experience in high level executive positions, but we believe that they, and particularly the not-for-profit position, highlight his experience helping businesses plan and strive for growth and show him to be well-situated to strengthen and expand his (and therefore our) business network. We believe Mr. Miles’ diverse and long-ranging executive and operational experience well prepares and qualifies him to serve on our Board and its CO and Corporate Governance and Nominating Committees.
Bryan E. Monkhouse has served on our Board since December 2004 and is currently a member of our Corporate Governance and Nominating Committee and our Audit Committee. Since 2003, Mr. Monkhouse has served as chairman of Blue Water Safaris, Ltd. and as managing director of Liamuiga Marine Limited, both privately-held companies offering tourism services in the Caribbean. Additionally, since his retirement from Irving Oil Limited in 2003, Mr. Monkhouse has been self-employed as a consultant and has provided consulting services to Irving Oil in 2004 and 2008. Mr. Monkhouse has broad high level executive experience in both the oil and convenience store industries, which we believe makes him an ideal fit for our Board. Early in Mr. Monkhouse’s career, he held senior positions in supply, corporate development, logistics, and marketing with Suncor, Inc., an integrated Calgary oil company. As VP of Marketing at Suncor, he was responsible for the operation of the company’s convenience store chain. He then moved to Irving Oil Limited, a petroleum refiner and marketer serving New England and eastern Canada, where he was responsible for approximately 800 convenience stores in Canada and the United States as Vice President of Marketing. Mr. Monkhouse was named COO of the four-billion dollar enterprise in 2001, and he was then charged with overseeing its operations, interacting with inside and outside public accountants and auditors and exercising diligence, all of which are relevant and valuable to our Board and particularly our Audit Committee. Further, at both oil companies, Mr. Monkhouse served as a supply executive, which we believe gives him unique and valuable insight into the goals and constraints of oil companies in their dealings with companies like ours. We believe that Mr. Monkhouse’s work in oil and convenience operations, his continuing executive experience, and his proven financial acumen make him a very valuable member of our Board and its Audit and Corporate Governance and Nominating Committees.
Thomas M. Murnane has been a member of our Board since October 2002 and currently chairs our Corporate Governance and Nominating Committee and serves as a member of our Audit and CO Committees. Mr. Murnane is a 2011 National Association of Corporate Directors (NACD) Governance Fellow. He has demonstrated his commitment to boardroom excellence by completing NACD’s comprehensive program of study for corporate directors. He supplements his skill sets through ongoing engagement with the director community and access to leading practices. Since 2005, Mr. Murnane has been a Principal and co-owner of ARC Business Advisors, a boutique consultancy that provides strategic and operational advice to retailers and their suppliers, as well as M&A due diligence support to both strategic and financial investors on transactions in the retail sector. In light of our company’s history and strategy of growth through acquisitions, Mr. Murnane’s experience is relevant and useful to our company on a substantive level. In addition, advising on significant transactions also highlights Mr. Murnane’s skills in assessing risk and exercising diligence, which are functions relevant to his Committee positions. Mr. Murnane also has extensive experience in the financial sector and its retail applications, an attribute that adds value to his posts on our Board generally and on the Audit Committee in particular. Until his retirement in 2002, Mr. Murnane was a partner at PricewaterhouseCoopers, LLP. He began his career at PwC in 1980, and during his tenure there, he directed first the firm’s Retail Strategy Consulting Practice, later its Overall Strategy Consulting Practice for the East Region of the United States, and most recently served as Global Director of Marketing and Brand Management for PwC Consulting. From 2003-2008, Mr. Murnane also served on the board of Captaris, Inc., a company that developed software to automate paper and other document-centric processes. He chaired the Governance, Nominating, and Strategy Committee, and for various periods served on both the Audit and Compensation Committees there. Captaris was sold to Open Text, a Canadian Company, in 2008. From 2003 to the present, Mr. Murnane has served on the board of Pacific Sunwear of California, Inc., a national chain of specialty stores that retail apparel, accessories, and footwear to teenage consumers. He also serves on the Audit Committee at Pacific Sunwear. From 2002 to 2010, Mr. Murnane served on the board of Finlay Enterprises, Inc., a retailer of fine jewelry. Mr. Murnane was also recently elected to the Board of Directors of Goodwill Southern California, a non-profit organization, where he also serves on the Retail and Strategic Plan Oversight Committees. We believe Mr. Murnane’s diverse executive and board experience provides him key skills in working with directors, understanding board processes and functions, responding to complex financial and operational challenges, and overseeing management. Further, we believe that Mr. Murnane’s demonstrated commitment to boardroom excellence, his experience at a national accounting/consulting firm, his demonstrated understanding of business combinations, his retail prowess, and his prior and current experience on a variety of boards of directors make him a valuable addition to our Board and its Audit, CO and Corporate Governance and Nominating Committees.
Maria C. Richter has served on our Board since July 2006 and currently serves on both our Corporate Governance and Nominating Committee and our Finance and Investment Committee. Since 2003, Ms. Richter has exclusively served on boards of directors, including the Board of Directors of National Grid plc, an international electricity and gas utility company (2003-present), Vitec Group plc, an international provider of broadcast, entertainment, and photographic products and services (2007-present) and Bessemer Trust, an asset management company for high net worth individuals and families (2008-present). Ms. Richter, until 2002, was a Managing Director of Morgan Stanley’s Corporate Finance Retail Group. We believe Ms. Richter is particularly well-suited for our Board based on her broad board experience and financial expertise. Ms. Richter’s extensive service on boards of directors has provided her the background and experience of board processes, function, exercise of diligence, and oversight of management. Ms. Richter also has financial experience, working at Prudential Insurance and Salomon Brothers before rising to Managing Director at Morgan Stanley where she held numerous senior roles, including Managing Director in the Corporate Finance Retail Group responsible for large retail clients of the firm. We believe Ms. Richter is well-qualified to serve our Board’s Corporate Governance and Nominating Committee and Finance and Investment Committee. With her broad experience on multiple boards of directors, she is well suited to the Corporate Governance and Nominating Committee functions of identifying and evaluating individuals qualified to become board members and evaluating our corporate governance policies. She is also well prepared to review transactions and agreements on the Finance and Investment Committee by her experience in finance and her legal education (she earned a law degree from Georgetown University). With her prior board experience, financial expertise, and legal background, we find Ms. Richter to be a valuable member of our Board and its Corporate Governance and Nominating and Finance and Investment Committees.
MANAGEMENT DISCUSSION FROM LATEST 10K
Our Business
We are the leading independently operated convenience store chain in the southeastern United States with 1,649 stores in 13 states as of September 29, 2011. Our stores operate under a number of select banners, with 1,562 of our stores operating under either the Kangaroo Express ® or Kangaroo ® banners, which are our primary operating banners. We derive our revenue from the sale of merchandise, fuel and other ancillary products and services designed to appeal to the convenience needs of our customers. Our strategy is to continue to improve upon our position as the leading independently operated convenience store chain in the southeastern United States in the following ways:
•
Strengthening our merchandising and marketing initiatives to improve sales;
•
sophisticated management of our fuel business;
•
leveraging our geographic economies of scale;
•
strong cash flow generation to reinvest in our business and reduce debt levels;
•
divesting of under-performing store assets and non-productive surplus properties.
Executive Summary
Our net income for fiscal 2011 was $9.8 million, or $0.44 per diluted share, and adjusted EBITDA for fiscal 2011 $231.7 million. Our total revenue for the year increased 12.0% to $8.1 billion primarily driven by higher retail fuel prices which rose from an average of $2.64 a gallon in fiscal 2010 to an average of $3.33 a gallon in fiscal 2011. We believe that the significant increase in our average fuel retail price per gallon negatively impacted our retail fuel gallon volume during fiscal 2011.
During fiscal 2011, we completed the rollout of our Fresh initiative to the Charlotte, NC, Birmingham, AL and Gulf Coast Mississippi markets. This initiative is focused on each of our core food and beverage offerings including coffee, hot dogs, fountain and frozen beverages, sandwiches and bakery. As of September 29, 2011 we have converted approximately 250 stores. We anticipate having approximately 340 stores converted by the end of our first quarter of fiscal 2012. We will continue to study the results generated by the Fresh initiative and potential areas for improvement in the program before deciding on future rollout plans.
During fiscal 2011, we reduced our long-term debt, net of cash and increased liquidity. Our outstanding long-term debt, net of cash decreased $25.3 million from fiscal 2010 to $533.4 million. Our liquidity, including cash on hand and borrowing availability under our revolving credit facility increased $28.2 million from fiscal 2010 to $334.6 million at the end of fiscal 2011. We were able to achieve these improvements by generating cash flow from operations of $178.9 million in fiscal 2011 compared to $154.8 million in fiscal 2010.
Our plans for fiscal 2012 will focus on:
•
Achieving a better balance between sales levels and margin contribution in order to enhance our competitiveness in the marketplace.
•
Product assortment and other marketing and merchandising initiatives to improve the productivity of our stores.
•
Investing capital as needed in stores that we have identified as core operating properties to provide a platform for future growth through our merchandising and marketing initiatives.
•
Reducing our corporate general and administrative expenses and our store operating expenses and improving our working capital position. We have launched initiatives to drive down these expenses which include renegotiating lease payments and bank fees as well as engaging a third party to supplement our non-merchandise procurement team for renegotiations and renewals.
•
Continuing to reduce leverage through payments on the senior credit facility and purchasing notes on the open market. Our excess cash flow, as defined in the senior credit facility, will require us to make a mandatory prepayment of approximately $27.6 million in the first quarter of fiscal 2012. Additionally, our current plan is to retire our outstanding convertible notes at or before maturity in November, 2012 using available cash on hand.
Market and Industry Outlook
There is currently a trend in the convenience store industry of companies concentrating on increasing and improving in-store food service offerings, including fresh foods, quick service restaurants or proprietary food offerings. Should this trend continue, we believe consumers may become more likely to patronize convenience stores that include such offerings, which may also lead to increased inside merchandise sales or gasoline sales for such stores. We are attempting to capitalize on this trend by improving our in-store food offerings. Currently, 233 of our convenience stores offer quick service restaurants, and we have launched a company-wide Fresh initiative to improve breakfast, lunch and snack experiences in our stores. We launched the program in fiscal 2010 and approximately 250 of our stores had the program implemented at the end of fiscal year 2011.
Fiscal 2011 Compared to Fiscal 2010
Merchandise Revenue and Gross Profit. Merchandise revenue for fiscal 2011 increased $14.4 million, or 0.8%, from fiscal 2010, excluding the estimated impact of the 53 rd week. The increase is primarily attributable to revenue from acquired stores and comparable store sales growth, partially offset by lost revenue from closed stores. The increase in merchandise revenue of $31.1 million from stores acquired since the beginning of fiscal 2010 outpaced lost revenue of $22.7 from stores closed since the beginning of fiscal 2010. The increase in merchandise revenue of $2.9 million from comparable store sales growth was primarily attributable to growth in our service revenue.
Merchandise gross profit for fiscal 2011 increased $4.3 million, or 1.2%, from fiscal 2010, excluding the estimated impact of the 53 rd week. This increase is primarily attributable to the $14.4 million increase in merchandise revenue discussed above and the 10 basis point increase in merchandise margin from 33.8% for fiscal 2010 to 33.9% for fiscal 2011. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.
Fuel Revenue, Gallons, and Gross Profit. Fuel revenue for fiscal 2011 increased $991.5 million, or 18.5%, from fiscal 2010, excluding the estimated impact of the 53 rd week. This increase is primarily attributable to a 26.1% increase in the average retail fuel price per gallon from $2.64 for fiscal 2010 to $3.33 for fiscal 2011, partially offset by a decrease in retail fuel gallons sold of 120.6 million gallons, or 6.0%. The increase in our average retail price per gallon was primarily due to rising domestic crude oil prices, which resulted in higher wholesale and retail fuel costs. In fiscal 2010, domestic crude oil prices began at approximately $66 per barrel, reaching a high of approximately $87 per barrel in the third quarter, and ended the year at $80 per barrel. In fiscal 2011, domestic crude oil prices began at approximately $80 per barrel, reaching a high of approximately $114 per barrel in the third quarter, and ended the year at approximately $82 per barrel. The decrease in retail fuel gallons sold for fiscal 2011 is primarily attributable to a decrease in comparable store gallons sold and lost gallons sold from closed stores, partially offset by gallons sold from acquired stores. The decrease in comparable store retail fuel gallons sold of 147.2 million gallons, or 7.4%, is primarily due to the significant year-over-year increase in retail prices, which negatively impacted miles driven in our markets. Our efforts to focus on fuel margin dollars also negatively impacted our retail fuel volumes. The increase in retail fuel volume of 45.7 million gallons sold from stores acquired since the beginning of fiscal 2010 outpaced lost retail fuel volume of 16.2 million gallons sold from stores closed since the beginning of fiscal 2010.
Fuel gross profit for fiscal 2011 decreased $3.7 million, or 1.4%, from fiscal 2010, excluding the estimated impact of the 53 rd week. This decrease was primarily due to the decline in gallon volume discussed above, partially offset by a 0.6 cent increase in retail margin per gallon from 12.9 cents in fiscal 2010 to 13.5 cents for fiscal 2011. The increase in retail margin per gallon is partially attributable to our efforts to maximize gross profit contribution which did result in some added pressure to our retail fuel volume. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present fuel margin per gallon inclusive of credit card processing fees and repairs and maintenance on fuel equipment. These fees and costs totaled $0.066 per gallon and $0.055 per gallon for fiscal 2011 and fiscal 2010, respectively. The increase in these fees was primarily due to higher average retail fuel prices.
Store Operating. Store operating expenses for fiscal 2011 decreased $4.2 million or 0.8% from fiscal 2010, excluding the estimated impact of the 53 rd week. The improvement is primarily due to lower labor costs driven by our continued efforts to better match employee staffing with expected customer traffic, favorable trends in medical costs and our efforts to reduce facility related costs. These reductions were partially offset by increased advertising associated with our promotional activity.
General and Administrative. General and administrative expenses for fiscal 2011 increased $10.7 million, or 11.4%, from fiscal 2010, excluding the estimated impact of the 53 rd week. The increase is primarily due to additional personnel investments in marketing and information technology, increased advertising expenses and expenses associated with the acquisition of 47 stores from Presto in the first quarter of fiscal 2011, plus the impact of real estate gains recognized in fiscal 2010. We continue to launch initiatives to drive down our general and administrative costs which include renegotiating lease payments, renegotiating bank fees and engaging a third party to supplement our non-merchandise procurement team for renegotiations and renewals.
Depreciation and Amortization. Depreciation and amortization expenses for fiscal 2011 decreased $1.5 million, or 1.2%, from fiscal 2010, excluding the estimated impact of the 53 rd week. The decrease is primarily due to accelerating depreciable lives of certain assets in fiscal 2010 related to re-imaging of several of our Chevron ® branded locations and assets that were part of our new in-store initiative projects.
Impairment Charges. During our fiscal 2011 annual impairment testing of goodwill we determined in step one of the test that fair value exceeded book value by a significant amount. Subsequent to the date of our annual impairment test, we experienced a decline in our market capitalization to less than our book value for a short period of time. However, we are unaware of any specific events or changes in circumstances precipitating the decline in market capitalization that would represent an indicator of impairment. As a result, no impairment charges related to goodwill were recognized for fiscal 2011. During our fiscal 2010 impairment testing of goodwill we concluded that the carrying value of our goodwill exceeded its implied fair value. As a result we recorded a non-cash pre-tax impairment charge of $230.8 million. See Note 5—Goodwill and Other Intangible Assets and Note 6—Asset Impairments in “Part II Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
There were no intangible asset impairments for fiscal year 2011. During fiscal 2010, we performed interim impairment testing of our Petro Express® trade name due to events and changes in circumstances that resulted in a change to the estimate of the remaining useful life from indefinite to finite-lived. As a result of the impairment test, we recorded an impairment charge to write-off the carrying value of the trade name of approximately $21.3 million. See Note 6—Asset Impairments and Note 19—Fair Value Measurements in “Part II.—Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
In April 2011, management made a strategic decision to market certain surplus properties and operating stores for sale. As a result, we recorded impairment charges related to surplus properties of approximately $7.3 million and operating stores of $5.2 million during fiscal year 2011. In December 2009, management made a decision not to develop stores on certain surplus properties. As a result, we recorded impairment charges related to surplus properties of approximately $7.8 million and operating stores of $7.2 million during fiscal 2010. See Note 6—Asset Impairments and Note 19—Fair Value Measurements in “Part II.—Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
We test our operating stores for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Cash flows vary for each store year to year and as a result, we have identified and recorded impairment charges of approximately $5.2 million and $7.2 million during the fiscal year ended September 29, 2011 and September 30, 2010, respectively primarily due to changes in market demographics, traffic patterns, competition and other factors have impacted the overall operations of certain of our individual store locations. See Note 6—Asset Impairments and Note 19—Fair Value Measurements in “Part II.—Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
Gain(Loss) on Extinguishment of Debt. The loss on extinguishment of debt of $15 thousand during fiscal 2011 relates to the repurchase of $10 million in principal amount of our subordinated notes, partially offset by the write-off of $65 thousand of unamortized deferred financing costs. The loss on extinguishment of debt of $791 thousand during fiscal 2010 relates to the repurchase of approximately $16.2 million in principal amount of our convertible notes.
Interest Expense, Net. Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of an insignificant amount of interest income. Interest expense, net for fiscal 2011 was consistent with fiscal 2010, excluding the impact of the 53 rd week.
Income Tax Expense (Benefit) . Our effective tax rate for fiscal 2011 was 33.0% compared to 30.1% for fiscal 2010. The increase in our effective rate is primarily the result of the impact of the goodwill impairment charge in fiscal 2010.
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, net, gain/loss on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA for fiscal 2011 was $231.7 million, which was a decrease of $8.1 million, or 3.4%, from fiscal 2010. This decrease is primarily attributable to the variances discussed above.
Adjusted EBITDA is not a measure of operating performance or liquidity under GAAP and should not be considered as a substitute for net income, cash flows from operating activities or other income or cash flow statement data. Historically, we have included lease payments the Company makes under lease finance obligations as a reductions to EBITDA. We are no longer adjusting EBITDA for payments made for lease finance obligations in order to provide a measure that management believes is more comparable to similarly titled measures used by other companies. We have included information concerning Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting and field operations compensation targets.
Any measure that excludes interest expense, loss on extinguishment of debt, depreciation and amortization, impairment charges or income taxes has material limitations because we use debt and lease financing in order to finance our operations and acquisitions, we use capital and intangible assets in our business and the payment of income taxes is a necessary element of our operations. Due to these limitations, we use Adjusted EBITDA only in addition to and in conjunction with results and cash flows presented in accordance with GAAP. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure. Adjusted EBITDA does not include impairment of long-lived assets and other charges. We excluded the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets.
Fiscal 2010 Compared to Fiscal 2009
Merchandise Revenue and Gross Profit. Merchandise revenue for fiscal 2010 increased $105.5 million or 6.4%, from fiscal 2009, excluding the estimated impact of the 53 rd week. The increase is primarily attributable to comparable store sales growth and revenue from acquired stores, partially offset by lost revenue from closed stores. Comparable store sales growth of 5.6% accounted for a $91.8 million increase in merchandise revenue. Although the sluggish economy has decreased merchandise unit sales, the increase in comparable store merchandise revenue was primarily attributed to increased retail prices resulting from the recent increases in federal and state excise cigarette taxes. The increase in merchandise revenue of $33.8 million from stores acquired and constructed since the beginning of fiscal 2009 outpaced lost revenue of $17.8 million from stores closed since the beginning of fiscal 2009.
Merchandise gross profit for fiscal 2010 increased $9.1 million, or 1.5%, from fiscal 2009, excluding the estimated impact of the 53 rd week. This increase is primarily attributable to the $105.5 million increase in merchandise revenue discussed above, partially offset by the 160 basis point decrease in merchandise gross margin to 33.8% for fiscal 2010 from 35.4% for fiscal 2009. The decrease in merchandise gross margin is primarily due to the continued impact of increased state and federal excise taxes in the cigarette category. We saw large increases in federal excise taxes during fiscal year 2009, including an increase of $0.62 per pack on April 1, 2009. Additionally, Florida increased state excise taxes $1.00 per pack effective July 1, 2009, which impacted approximately 26% of our stores. While we attempted to pass on the increased cost to our customers, the tax increase resulted in lower unit volumes and reduced merchandise margins. Our increased promotional activity to support our Fresh program also contributed to the decrease in our merchandise gross margin in the form of increased markdowns. Our Fresh program is designed to improve comparable store sales and merchandise gross margin with focus on coffee, meals and snacks. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.
Fuel Revenue, Gallons, and Gross Profit . Fuel revenue for fiscal 2010 increased $637.0 million, or 13.5%, from fiscal 2009, excluding the estimated impact of the 53 rd week. This increase is primarily attributable to a 17.9% increase in the average retail fuel price per gallon from $2.24 for fiscal 2009 to $2.64 for fiscal 2010, partially offset by a decrease in retail fuel gallons sold of 67.9 million gallons, or 3.3%, excluding the estimated impact of the 53 rd week. The increase in our average retail price per gallon was primarily due to rising domestic crude oil prices, which resulted in higher wholesale and retail fuel costs. In fiscal 2010, domestic crude oil prices began at approximately $66 per barrel, reaching a high of approximately $87 per barrel in the third quarter, and ended the year at $80 per barrel. The decrease in retail fuel gallons sold for fiscal 2010 is primarily attributable a decrease in comparable store gallons sold and lost gallons sold from closed stores, partially offset by gallons sold from acquired stores. The decrease in comparable store retail fuel gallons sold of 102.6 million gallons, or 4.9%, is primarily due to the significant year-over-year increase in retail prices, which negatively impacted miles driven in our markets. Our efforts to focus on fuel margin dollars also added pressure to our retail fuel volumes. The increase in retail fuel volume of 44.2 million gallons sold from stores acquired since the beginning of fiscal 2009 outpaced lost retail fuel volume of 11.7 million gallons sold from stores closed since the beginning of fiscal 2009.
Fuel gross profit for fiscal 2010 decreased $50.5 million, or 16.2%, from fiscal 2009, excluding the estimated impact of the 53rd week. This decrease was primarily due to our retail gross profit per gallon declining from $0.149 in fiscal 2009 to $0.129 for fiscal 2010 and by the decline in gallon volume discussed above. The decrease in retail gross profit per gallon is partially attributable to an unusually high fuel margin of $0.26 cents per gallon in the first quarter of fiscal 2009. As a result of a continued global economic recession which impacted oil demand, we experienced a sharp decline in oil and fuel prices in our first quarter of fiscal 2009, which favorably impacted our fuel margins. Our margin per gallon of $0.129 for fiscal 2010 was consistent with our historical averages. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present fuel margin per gallon inclusive of credit card processing fees and repairs and maintenance on fuel equipment. These fees and costs totaled $0.055 per gallon and $0.047 per gallon for fiscal 2010 and fiscal 2009, respectively. The increase in these fees was primarily due to higher average retail fuel prices.
Store Operating . Store operating expenses for fiscal 2010 increased $12.9 million or 2.5% from fiscal 2009, excluding the estimated impact of the 53rd week. The increase in store operating expenses is primarily due to costs associated with the remodeling and re-imaging of many of our stores, an expanded store employee training program, increased store advertising and other costs associated with the promotion of our Fresh program.
General and Administrative. General and administrative expenses for fiscal 2010 decreased $5.7 million, or 5.8%, from fiscal 2009, excluding the estimated impact of the 53 rd week. The decrease in general and administrative expenses is primarily due to significant costs for accelerated vesting of stock-based compensation and CEO transition costs that were incurred in fiscal 2009 but not in fiscal 2010.
Depreciation and Amortization. Depreciation and amortization expenses for fiscal 2010 increased $9.8 million, or 9.0%, from fiscal 2009, excluding the estimated impact of the 53 rd week. The increase is primarily due to accelerating depreciable lives of certain assets in fiscal 2010 related to re-imaging of several of our Chevron ® branded locations and assets that were part of our new in-store initiative projects.
Impairment Charges. During our fiscal 2010 impairment testing of goodwill we concluded that the carrying value of our goodwill exceeded its implied fair value. As a result we recorded a non-cash pre-tax impairment charge of $230.8 million. There were no goodwill impairment charges for fiscal 2009. See Note 5—Goodwill and Other Intangible Assets and Note 6—Asset Impairments in “Part II Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
During fiscal 2010, we performed interim impairment testing of our Petro Express ® trade name due to events and changes in circumstances that resulted in a change to the estimate of the remaining useful life from indefinite to finite-lived. As a result of the impairment test, we recorded an impairment charge to write-off the carrying value of the trade name of approximately $21.3 million. During fiscal 2009, we recorded an impairment charge to write down the carrying value of the Golden Gallon ® trade name of $900 thousand. See Note 6—Asset Impairments and Note 19—Fair Value Measurements in “Part II.—Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
In December 2009, management made a decision not to develop stores on certain surplus properties. As a result, we recorded impairment charges related to surplus properties of approximately $7.8 million during fiscal 2010. There were no surplus properties impaired during fiscal 2009. See Note 6—Asset Impairments and Note 19—Fair Value Measurements in “Part II.—Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
We test our operating stores for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Cash flows vary for each store year to year and as a result, we have identified and recorded impairment charges of approximately $7.2 million and $1.2 million during the fiscal year ended September 30, 2010 and September 24, 2009, respectively primarily due to changes in market demographics, traffic patterns, competition and other factors have impacted the overall operations of certain of our individual store locations. See Note 6—Asset Impairments and Note 19—Fair Value Measurements in “Part II.—Item 8. Financial Statements—Notes to Consolidated Financial Statements”.
Gain(Loss) on Extinguishment of Debt. The loss on extinguishment of debt of $791 thousand during fiscal 2010 represents a loss on the repurchase of approximately $16.2 million in principal amount of our convertible notes. The loss is due to the write-off of the unamortized debt discount and unamortized deferred financing costs. The gain on extinguishment of debt of $4.0 million during fiscal 2009 represents a gain on the buyback of approximately $24.0 million of our convertible notes and $3.0 million of our subordinated notes. We recognized a gain of $3.7 million and $705 thousand related to the repurchase of our convertible notes and our subordinated notes, respectively, partially offset by the write-off of $438 thousand of unamortized deferred financing costs.
Interest Expense, Net. Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for fiscal 2010 decreased $4.0 million, or 4.4%, from fiscal 2009, excluding the impact of the 53 rd week. The decrease is primarily a result of declining interest rates and lower average outstanding borrowings.
Income Tax Expense (Benefit) . Our effective tax rate for fiscal 2010 was 30.1% compared to 36.6% for fiscal 2009. The decrease in our effective rate is primarily the result of the impact of the goodwill impairment charge in fiscal 2010.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Executive Overview
Our net loss for the second quarter of fiscal 2012 was $9.7 million, or $0.43 per share, compared to a net loss of $269 thousand, or $0.01 per share, in the second quarter of fiscal 2011. Adjusted EBITDA for the second quarter was $38.9 million, a decrease of $11.7 million, or 23.1% from the second quarter of fiscal 2011.
Our comparable store fuel gallons increased 1.1% compared to the second quarter of fiscal 2011. Our retail fuel margin per gallon was 9.6 cents in the second quarter of fiscal 2012 compared to 13.7 cents in the second quarter of fiscal 2011.
Our merchandise comparable store sales increased 4.8% from the second quarter of fiscal 2011. We have continued to grow our proprietary food service consisting of coffee, fountain and frozen beverages, hot dogs, sandwiches and bakery. Our merchandise margin for the second quarter declined to 33.4% in fiscal 2012 from 34.3% in fiscal 2011 primarily due to margin pressure in the cigarette category as a result of competitive pricing. Although we are experiencing downward margin pressure in the cigarette category, this is being partially offset by higher margins in our proprietary food services during the quarter.
During the first six months of fiscal 2012, we have retired $93.9 million of debt obligations as part of our continuing initiative to reduce debt levels. During the second quarter of fiscal 2012, we purchased $48.5 million in outstanding principal of our 3.0% convertible notes in open market transactions resulting in a loss on the extinguishment of debt of $2.5 million. The loss is primarily due to the non-cash write-off of deferred financing costs of $131 thousand and the unamortized debt discount of $1.9 million. We plan to retire the remaining 3.0% convertible notes at or before maturity in November, 2012 using available cash on hand. Our liquidity, including cash on hand and borrowing availability under our revolving credit facility was $236.8 million as of March 29, 2012.
Our initiative to divest our under-performing store assets and non-productive surplus properties continued during the second quarter of fiscal 2012 as we converted five operating stores to dealer locations with fuel supply agreements and closed or sold eight under-performing stores. For the six months ended March 29, 2012, we have converted 27 operating stores to dealer locations and closed or sold 11 stores. Corporate general and administrative expenses for the second quarter of 2012 decreased 22.4% or $6.5 million compared to the second quarter of 2011 as we continue to benefit from our strategic initiatives. Our store operating expenses remained relatively flat when comparing the second quarters of fiscal 2012 to 2011 as increased labor and training expenses offset our cost reduction initiatives.
For the remainder of fiscal 2012 we intend to remain focused on the following key initiatives:
•
achieving a better balance between sales levels and margin contribution in order to enhance our competitiveness;
•
strong cash flow generation to reinvest in our business and reduce debt levels;
•
investing capital as needed in stores that we have identified as core operating properties to provide a platform for future growth through our merchandising and marketing initiatives;
•
divesting of under-performing store assets and non-productive surplus properties; and
•
reducing our corporate general and administrative expenses and our store operating expenses and improving our working capital position.
Market and Industry Trends
We tend to experience lower fuel margins in periods of rising wholesale costs and higher margins in periods of declining wholesale costs as the timing of any related increase or decrease in retail prices is affected by competitive conditions. During the second quarter of fiscal 2012, we experienced a continual climb in wholesale gasoline costs as measured by the Gulf Spot price which increased $0.62, or 23.8%, from the beginning of the quarter. This increase was primarily responsible for our second quarter fiscal 2012 retail margin per gallon of 9.6 cents which is below historical averages.
Three Months Ended March 29, 2012 Compared to the Three Months Ended March 31, 2011
Merchandise Revenue and Gross Profit. The increase in merchandise revenue of $12.4 million is primarily attributable to an increase in comparable store merchandise revenue of 4.8%, or $19.6 million, partially offset by lost merchandise revenue from stores closed or converted to dealer operations since the beginning of the second quarter of fiscal 2011 of $7.2 million. The increase in merchandise gross profit is primarily attributable to the increased volume partially offset by a 90 basis point decline in gross margin. The merchandise gross margin decline in the second quarter of fiscal 2012 compared to 2011 was primarily due to margin pressure in the cigarette category.
Fuel Revenue, Gallons and Gross Profit. The increase in fuel revenue of $154.0 million is attributable to the 10.1% increase in the average retail price per gallon to $3.57 partially offset by a decline in fuel gallons sold. Retail fuel gallons sold for the second quarter of fiscal 2012 decreased 1.1 million gallons, or 0.2%, from the second quarter of fiscal 2011. The decrease is primarily attributable to 6.0 million gallons lost from stores closed or converted to dealer operations since the beginning of the second quarter of fiscal 2011 which was partially offset by an increase in comparable store fuel gallons sold of 1.1%, or 4.9 million gallons. The increase in comparable store fuel gallons sold was primarily due to more favorable year over year weather trends and our efforts to improve market share through more consistent and competitive pricing compared to the second quarter of fiscal 2011.
The decrease in fuel gross profit is primarily attributable to a 4.1 cent decrease in retail gross profit per gallon to 9.6 cents for the second quarter of fiscal 2012 from 13.7 cents in the second quarter of fiscal 2011. The decline in our retail fuel margin per gallon is due to an unfavorable wholesale fuel environment and our efforts to improve market share compared to the prior period. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses and inclusive of credit card processing fees and cost of repairs and maintenance on fuel equipment. These fees totaled 6.8 cents per retail gallon and 6.4 cents per retail gallon for the three months ended March 29, 2012 and March 31, 2011, respectively.
Store Operating. Store operating expenses for the second quarter of fiscal 2012 increased $101 thousand, or 0.1%, from the second quarter of fiscal 2011. The increase resulted from higher salaries and training expenses at our stores as we are working to retain and train store personnel. This increase was partially offset by property rent which decreased $2.5 million through active lease negotiations and the impact of closed and converted stores. Other reductions related to utilities, advertising and store postage are as a result of our efforts to better manage store expenses.
General and Administrative . General and administrative expenses for the second quarter of fiscal 2012 decreased $6.5 million, or 22.4%, from the second quarter of fiscal 2011. The decrease is primarily due to a $2.9 million reduction in corporate personnel expenses and $2.6 million in various property transactions recognized in the second quarter of fiscal 2012.
Asset Impairment. We recorded impairment charges related to operating stores and surplus properties of approximately $2.4 million and $797 thousand for the quarter ended March 29, 2012 and March 31, 2011, respectively, as a result of changes in expected cash flows at certain operating stores and management determining that certain other operating stores and surplus properties should be classified as held for sale. See Note 3—Asset Impairments and Note11—Fair Value Measurements in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements” above.
Interest Expense, Net. Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for the second quarter of fiscal 2012 was $20.2 million compared to $21.8 million for the second quarter of fiscal 2011. The decrease was primarily due to the maturity of higher fixed rate swap agreements and lower average outstanding borrowings.
Income Tax Benefit. Our effective tax rate for the second quarter of fiscal 2012 was 37.5% compared to 80.9% in the second quarter of fiscal 2011. The decrease in our effective tax rate is primarily the effect of the level of net loss before tax for the second quarter of fiscal 2012 compared to second quarter 2011. We anticipate our effective tax rate will be approximately 32.8% for fiscal 2012 compared to 33.0% for fiscal 2011.
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, net, gain/loss on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA for the second quarter of fiscal 2012 decreased $11.7 million, or 23.1%, from the second quarter of fiscal 2011. This decrease is primarily attributable to the decline in fuel gross profit offset by lower general and administrative expenses.
Adjusted EBITDA is not a measure of operating performance or liquidity under generally accepted accounting principles (“GAAP”) and should not be considered as a substitute for net income, cash flows from operating activities or other income or cash flow statement data. We have included information concerning Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting compensation targets. Adjusted EBITDA does not include impairment of long-lived assets and other charges. We excluded the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets.
Any measure that excludes interest expense, loss on extinguishment of debt, depreciation and amortization, impairment charges or income taxes has material limitations because we use debt and lease financing in order to finance our operations and acquisitions, we use capital and intangible assets in our business and the payment of income taxes is a necessary element of our operations. Due to these limitations, we use Adjusted EBITDA only in addition to and in conjunction with results and cash flows presented in accordance with GAAP.
We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
Cash Flows provided by Operations. Due to the nature of our business, substantially all sales are for cash and cash provided by operations is our primary source of liquidity. We rely primarily on cash provided by operating activities, supplemented as necessary from time to time by borrowings under our revolving credit facility and lease finance transactions to finance our operations, pay principal and interest on our debt and fund capital expenditures. We had no borrowings under our revolving credit facility during the first six months of fiscal 2012 and we had approximately $101.4 million of standby letters of credit issued under the facility as of March 29, 2012. Our working capital as of March 29, 2012 was $62.3 million. Changes in working capital represented a use of cash of approximately $5.3 million in the first six months of fiscal 2012 compared to $56.8 million in the first six months of fiscal 2011. Due to the seasonality of certain payments, changes in working capital typically represent a use of cash in the first six months of our fiscal year. In addition, periods of rising fuel costs typically create an investment in working capital. During the first six months of fiscal 2012, we migrated the impact through better management of receivables and fuel inventory gallons on hand. The increase in working capital during the first six months of fiscal 2012 was primarily due to increases in receivables and inventories as a result of rising fuel prices, which were not offset by a corresponding increase in fuel payables due to a decline in our days payable outstanding as a result of a shift in supplies. Cash provided by operating activities increased to $35.3 million for the first six months of fiscal 2012 compared to $10.5 million for the first six months of fiscal 2011. The increase in cash flow from operations is primarily due to changes in working capital previously discussed. We had $113.2 million of cash and cash equivalents on hand at March 29, 2012.
Cash Flows used in Investing Activities. Capital expenditures (excluding accrued purchases and acquisitions) for the first six months of fiscal 2012 were $44.1 million which was offset by proceeds from the sale of property and equipment totaling $6.2 million. Our capital expenditures are primarily expenditures relating to store improvements, store equipment, new store development, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. We finance substantially all capital expenditures and new store development through cash flows from operations, proceeds from lease financing transactions, asset dispositions and vendor reimbursements. We anticipate that capital expenditures for fiscal 2012 will be approximately $90.0 million assuming no material cost for fuel rebranding.
Cash Flows used in Financing Activities. For the first six months of fiscal 2012, net cash used in financing activities was $99.7 million. During the first six months of fiscal 2012, we paid $94.4 million to reduce our debt obligations of which $63.9 million was purchased in the open market. Additionally, we paid $30.5 million to reduce the principal amount of our senior credit facility. As of March 29, 2012, our debt consisted primarily of $376.5 million in loans under our senior credit facility, $221.6 million of outstanding senior subordinated notes and $61.3 million of outstanding convertible notes. As of March 29, 2012, we also had outstanding $453.2 million of lease finance obligations.
Senior Credit Facility. We are party to a Third Amended and Restated Credit Agreement (“credit agreement”), which defines the terms of our senior credit facility, which includes (i) a $225.0 million revolving credit facility, (ii) a $350.0 million initial term loan facility and (iii) a $100.0 million delayed draw term loan facility. In addition, we may at any time incur up to $200.0 million in incremental facilities in the form of additional revolving or term loans so long as (i) such incremental facilities would not result in a default as defined in our credit agreement and (ii) we would be able to satisfy certain other conditions set forth in our credit agreement. The revolving credit facility has been, and will continue to be, used for our working capital and general corporate requirements and is also available for refinancing or repurchasing certain of our existing indebtedness and issuing commercial and standby letters of credit. A maximum of $160.0 million of the revolving credit facility is available as a letter of credit sub-facility.
During the first six months, we had no borrowings under our revolving credit facility and as of March 29, 2012, $101.4 million of standby letters of credit had been issued. As of March 29, 2012, we had $123.6 million in available borrowing capacity under the revolving credit facility ($58.6 million of which was available for issuances of letters of credit). During the first six months of fiscal 2012, we paid $30.5 million in principal amount on our senior credit facility, which included a mandatory prepayment of $27.9 million as a result of our excess cash flow. As of March 29, 2012, we were in compliance with all covenants and restrictions under the senior credit facility.
Senior Subordinated Notes. As of March 29, 2012, we had outstanding $221.6 million of our senior subordinated notes due February 15, 2014. The senior subordinated notes bear interest at an annual rate of 7.75%, payable semi-annually on February 15th and August 15th of each year. During the first six month of fiscal 2012, we paid $15.4 million in principal amount on our senior subordinated notes on the open market which resulted in a loss on debt extinguishment of approximately $82 thousand.
Senior Subordinated Convertible Notes. As of March 29, 2012, we had outstanding $61.3 million of our convertible notes which bear interest at an annual rate of 3.0%, payable semi-annually on May 15th and November 15th of each year. During the second quarter of fiscal 2012, we purchased $48.5 million in principal amount of the convertible notes on the open market which resulted in a loss on debt extinguishment of approximately $2.5 million. The loss is primarily due to the non-cash write-off of deferred financing costs of $131 thousand and the unamortized debt discount of $1.9 million.
CONF CALL
Berry Epley
As you know, earlier today we announced financial results for the third quarter of our 2009 fiscal year. If anyone does not have a copy of the release and would like one faxed or emailed to them, please contact Beverly Gainey in our office at 919-774-6700 extension 5217 and she will see that you get what you need.
Before we begin today, I would like to point out that certain comments made during this call may be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, comments regarding the company are management's beliefs, expectations, targets, goals, plans, outlook or predictions of the future are forward-looking statements.
These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by these forward-looking statements. These risks and uncertainties are detailed in The Pantry's filings with the SEC and in our earnings release issued this morning. We refer you to the SEC's Web site or our site at thepantry.com for these and other documents.
We also will discuss certain non-GAAP financial measures today that we believe are helpful to a full understanding of our financial condition. Certain of these non-GAAP financial measures were also included in the press release we issued this morning. We therefore refer you to our press release posted on our Web site, which includes a presentation and reconciliation of each non-GAAP financial measure most directly comparable financial measuring put in the press release and an explanation of why we believe these measures provide useful information to our investors and how they are used by management.
With us today are The Pantry's Chairman and CEO Pete Sodini, Frank Paci our CFO, and Tom Murnane our Lead Director. I will now turn the call over to Pete.
Pete Sodini
As you all know, we reported a net income for the third quarter of $43,000 or approximately breakeven on a per share basis compared to $10.7 million or $0.48 per share a year ago. Our results were impacted by weak retail gas margin, adverse economic conditions, and increased tobacco excise taxes.
On the gasoline side, our results are not surprising in light of our exceptionally strong performance earlier this year. You may remember that we reported an all-time record gasoline gross margin in the first quarter due to unprecedented declines in oil and gasoline prices.
We fully expected that sometime during the year there would be naturally some bounce-back and we would see oil prices retrace at least a portion of their huge decline earlier. And that's exactly what happened in the third quarter as oil moved from a low of approximately $46 a barrel to as high as $73 per barrel before easing slightly at the end of the quarter.
As you all know, when oil and gasoline prices are rising, our margins tend to get squeezed and we wound up with a $0.093 per gallon margin for the third quarter. Putting this in perspective, we still have a $0.153 per gallon margin for the first nine months of fiscal 2009.
In addition, market conditions were much more favorable for the first few weeks of the fourth quarter before tightening recently. So overall, even with a soft third quarter, we still expected the year with the gasoline margins at well above our long-term average.
Our gas gallon comps improved slightly during the quarter. Retail gallons sold in comparable stores were down 0.5% in the third quarter, much better than 6.4% decline in the second quarter. And our performance again was significantly impacted by diesel. Comparable diesel sales were down 15.1%.
Excluding diesel, our comp gallons sold were up 1.4%, much stronger than our 4.4% decline in the second quarter. We saw some improvement in the year-on-year weighted average miles driven in our market from a negative 2.6% in the second quarter to only a negative point three-tenths of a percent in the April/May period. However, our markets are continuing to trail the national average. Comps for our merchandise sales were up two-tenths of a percent for the quarter and were clearly dampened by the overall recessionary economy, particularly in the southeast.
As we've noted on previous calls, unemployment is significantly higher in our markets on average than in the U.S. as a whole. The weighted average unemployment rate in the U.S. in the states where we operated increased to 10.4% in the third fiscal quarter, up from 9.6% in the previous quarter and 5.9% in the third quarter a year ago.
Our merchandise results were also significantly affected by the increase in fed cigarette taxes under the SCHIP legislation that took effect April 1. This increase in taxes adversely impacted our cigarette unit volume and we believe this is having a spillover effect on the volume in other merchandise categories.
Even though we've taken a substantial price increase on tobacco products on a percentage basis, our tobacco margin is down from a year ago and our merchandise margin has fallen as we expected and discussed on our call three months ago. Frank will go into more detail on the whole tobacco category.
On a positive note, we're pleased to complete our previously announced acquisition of 38 stores from Herndon Oil on the final day of the third quarter. Located primarily in the Mobile, Alabama market, these stores nicely complement our existing store base by filling in a gap in our regional market presence. The acquisition included the real estate underlying 32 of the 38 properties. The store characteristics are similar to those of our average store in size and in volume.
The acquisition also includes six stores with operating Subway units. As we implemented many of our merchandise programs, especially on the food service side, we think there may be a significant potential upside in the performance of these stores and continue to believe this acquisition will make a positive net contribution to company earnings in 2010.
And now, I'd like to turn the meeting over to Frank to review our numbers in greater detail.
Frank Paci
Total revenues for the quarter were approximately $1.6 billion, down 34% from last year's third quarter primarily due to the huge year-over-year decline in gasoline prices. Our total gross profit of $201.1 million was down 6.1% from a year ago. Merchandise gross profit declined 3.5% while gasoline gross profit was off 13%.
On the merchandise side, total revenues increased 0.5% with comparable store merchandise sales up 0.2%. Our overall merchandise margin for the third quarter was 35%, down 150 basis points from a year ago. Approximately 90 basis points of the decline resulted from the impact of the tax changes on cigarettes, and approximately 40 basis points was from our grocery category which includes other tobacco products also impacted by tax changes. Despite the margin decline driven by lower cigarette gross margin, cigarette gross profit dollars were relatively flat compared to last year's third quarter.
As Pete mentioned, our merchandise results were significantly impacted by the $0.62 per pack increase in federal cigarette taxes. For the quarter, our cigarette unit sales were down in the low double digits as we expected, and this was offset by an increase in average revenue per unit of more than 25%. We are continuing to fine tune our strategy in cigarettes to determine the right competitive positioning in this key category.
In addition to the federal tobacco tax increase, our results were slightly affected during the quarter and will be to a much greater extent going forward by increases in state tobacco taxes. Kentucky increased its cigarette tax by $0.30 per pack in April, Mississippi by $0.50 in May, and Florida, which has 26% of our stores, raised the cigarette tax by $1 per pack on July 1.
Based on our revised guidance, you can see we expect further decline in merchandise margin from changes in the cigarette taxes and pricing in Q4. We believe the impact could be as much as 50 to 80 basis points sequentially from Q3, including approximately 30 basis points from incremental LIFO costs.
In addition, gross profit has been negatively impacted by sales declines in our packaged beverage business, primarily in take-home carbonated soft drinks but also in immediate consumption. The softness we are experiencing in this category is reflective of general trends in the packaged beverage industry. We've been working with our suppliers and recently increased our promotional activity in an attempt to improve our volume in this category.
In the gasoline business, retail gallons sold for the quarter increased 0.3% overall but were down 0.5% in comparable stores. As we note our gas gallon counts, excluding diesel, were up 1.4%. Total gasoline revenues for the quarter declined 41.2% primarily due to a 40.4% year-on-year decrease in the average retail price per gallon from $3.72 a year ago to $2.21 in this year's third quarter.
Our retail gross margin per gallon was $0.093 compared with $0.107 a year ago. The gross margin a year ago was reduced by three-tenths of a cent per gallon by losses incurred in our gasoline hedging program.
As you know, we report our gas margin net of credit card fees and equipment maintenance costs, which were 4.4% per gallon in this year's third quarter compared $0.062 cents a year ago but up from $0.04 in the second quarter. Credit card utilization was at 60% down from 61.9% in the prior year but up sequentially from 57.5% in the second quarter.
Store operating expenses for the quarter were $125.4 million down 0.6% from a year ago despite increases in facilities and insurance. We continue to achieve significant savings in labor costs, which were down approximately 5% on a per store basis in the third quarter, as a result of our ongoing initiative to better align staffing with store sales volumes.
General and administrative expenses were $27.8 million up $5.6 million or 25% versus the prior year, $4.6 million of the increase is attributable to three categories of expenses. The first includes about $2 million in one-time expenses primarily related to Pete's retirement and improvement costs for a new CEO.
In addition, it was a negative year-on-year swing of just over $2 million in real estate gains and losses, which are included in our G&A expense. A year ago we had miscellaneous gain in the third quarter of about $1.6 million while this year we incurred a miscellaneous loss of $500,000. Finally we have $500,000 in additional expense this year due to some accelerated investing of stock-based compensation.
Appreciation and amortization expense was $27.4 million up 0.4% from a year ago. Net interest expense for the quarter was $20.9 million down 4% from last year's third quarter. We had a pre-tax loss for the question of $330,000 compared with pre-tax income of $17.1 million in last year's third quarter.
Net income was $43,000 or $0.00 per share compared with $107 million or $0.48 last year. EBITDA for the quarter was $48 million compared with $66.1 million a year ago, and operating cash flow was $41 million.
Earnings for the first nine months for fiscal 2009 are up significantly from a year ago. Earnings per share for the nine month period were $2.06 compared with $0.40 per share in the first nine months a year ago. EBITDA for the nine month period was $209.6 million, an increase of 31.2% from a $159.8 million in the corresponding period last year.
Our financial results have enabled us to generate a $148 million in operating cash flow for the nine month period. As part of our ongoing strategy in balancing growth with deleveraging the business, we've used this cash flow to acquire 41 stores and reduce our debt in lease financing obligations by $52 million.
Despite these uses of cash, our cash balance has only declined $1.8 million from the start of the fiscal year, and we believe our liquidity position remains excellent with $215.4 million in cash on hand. In addition, we have approximately $143 million in availability under our revolving credit facilities after considering outstanding letters of credit. Capital expenditures for the first nine months of 2009 were $58 million and we now estimate that our CapEx for the full year will be between $90 million and $100 million.
As Pete noted during the quarter, we completed the Herndon Oil acquisition adding 38 stores to our portfolio. For the year-to-date, we've now acquired 41 stores, opened three new stores, and closed 18 stores. You'll see in our Form 10-Q filed later today, we've included pro forma financial results for the year-to-date acquisitions which show $0.15 per share in accretion from these transactions. However, we remind you the pro forma disclosures in the 10-Q were designed to show the affect the acquisitions would have had on results reported, not the affect it will have going forward.
The 10-Q also disclosures that subsequent to the end of the third quarter we're able to settle a dispute with one of our gasoline providers that will allow us to recognize a pre-tax gain of approximately$5 million in our fourth quarter of fiscal 2009. This benefit is included in our gas margin guidance range for the year.
In this morning's press release we updated our guidance ranges for fiscal 2009. The most substantial changes relate primarily to the acquired stores and the higher state tobacco taxes in Florida and Mississippi, which were not incorporated in our previous guidance. As a result of these changes, we've increased our target range for merchandise sales to between $1.65 billion and $1.66 billion and have reduced our expectation for merchandise gross margin to between 35.4% and 35.7%.
We now expect the retail gas margin to range between $0.144 cents and $0.154 cents per gallon for the full year. We anticipate retail gasoline sales to be slightly higher than our previous forecast between 2.06 billion and 2.07 billion gallons.
Total store operating and general and administrative operating expenses for fiscal 2009 are expected to be between $617 million and $621 million down slightly from our previous range despite the additional costs from the acquired stores and the inclusion of the one-time CEO transition expenses.
Appreciation and amortization expected to be between $106 and $108 million with net interest between $84 million and $85 million, excluding the one-time gains earlier in the year from the extinguishment of debt. None of these estimates include any future acquisitions.
With that, we'll turn it over to the operator and take any questions you may have.
|
|
Fund Letters
