Pantry Inc fka PTRY

[makesumgravy]

STOCK ANALYSIS
The Pantry Is Bare (PTRY)
November 25, 2008 | By Eugene BukoveczkyNews that gasoline prices have now fallen below $2 a gallon to a national average of $1.97 according to the Lundberg survey has to be one of the few bits of good news amongst the daily deluge of gloom about the economy and the markets hitting the headlines lately.



However, lower gas prices are not welcome news for everyone, especially when they're a result of lower demand. Consider the case of gas station and convenience store operator The Pantry (Nasdaq:PTRY) whose shares fell by more than 30% in just two trading days at the end of last week following the release of the company's latest results and guidance for next year.

With over 1,600 outlets spread mostly across the Southern states, a good portion of Pantry's earnings are derived from gas sales, which typically earns the company a margin of between 10-13 cents a gallon, but have averaged at the lower end of that range over the last few quarters. It's a volume business that also drives the sales of snack and fast foods through the company's outlets, which include franchises such as Dairy Queen, a wholly owned subsidiary of Berkshire Hathaway (NYSE:BRK.A) and Hardee's, a unit of CKE Restaurants (NYSE:CKR), both of whom compete directly against industry giant McDonald's (NYSE:MCD). (Don't miss The Bottom Line On Margins.)

Lower Gas Volumes And Merchandise Sales Now Expected For 2009
Lately, however, gasoline volumes sold through the company's outlets have been shrinking, and could fall further in the coming year. While the company's recently released year-end result of $1.43 per share beat consensus expectations of $1.23 per share, investors may choose to look past the earnings numbers to focus on the fact that same-store sales of gasoline declined by 6.8% during the quarter and that food and merchandise sales also declined by 2.5%.

Company guidance now calls for gasoline volumes next year to be in the range of 2.0-2.1 billion gallons compared to this year's total of 2.1 billion, and merchandise revenue to be flat to down as well, coming in at $1.6-1.66 billion versus $1.64 for the year just ended.

Growth Doubts Prompt Lower Earnings Estimates
This lackluster outlook now appears to placed in doubt the thesis that the company is a consumer market growth story. While The Pantry still has room to expand its operations in a highly fragmented southern U.S. market dominated by single station "mom & pop" operators, it's going to be tougher to justify such expansion given the evidence of a significant deceleration in gasoline sales. The longer term implications of this on earnings were reflected in the 17% drop in analysts' earnings estimates for fiscal 2010; which fell to $1.56 from $1.88 following last week's earnings release. (Be sure to check out Analyst Forecasts Spell Disaster For Some Stocks.)

The Bottom Line
Slumping demand for a basic commodity like gasoline is as clear sign just how serious the current slump in consumer demand is. If this turns into more than just a temporary phenomenon, companies like Pantry, which have made gasoline sales the keystone of their business models, may have to look for another source to fuel their future growth.



By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint. At the time of writing Eugene Bukoveczky did not own shares in any of the companies mentioned in this article.