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  • 1. The Pantry, Inc. 2007 annual report

2. Strength in Numbers The PanTry, Inc. meeTs The souTheasTs daIly shoPPIng needs as The regIons leadIng oPeraTor of convenIence sTores, wITh 1,644 locaTIons In eleven sTaTes. over The lasT few years, weve converTed more Than 90 PercenT of our sTores To The Kangaroo exPress brand, gIvIng us a consIsTenT regIonal IdenTITy. our sTores offer a broad selecTIon of hoT and cold beverages, snacKs, fasT food, Tobacco ProducTs, gasolIne, and oTher merchandIse and servIces.1,6441,4931,400 1,361 1,25820032004 20052006 2007 Total Store Locations 3. 9 Indiana50 Virginia 30 Kentucky387North Carolina 104 Tennessee277South Carolina 136 83 82 Georgia Alabama Mississippi25 Louisiana 461Florida 1,644 Stores 4. LET TER TO OUR ShAREhOLDERS Although fiscal 2007 was a challenging year for The Pantry, we in Charlotte, N.C. and the 24 store Sun Stop acquisition opening again made excellent progress toward our long-term strategic the Tallahassee and Southwest Georgia markets. The largest objectives. We continued to successfully execute our regional transaction was our purchase of Petro Express, with stores that consolidator business model by acquiring and integrating 152average approximately 3,000 square feet of floor space and convenience stores. We drove additional organic growth in thegenerate both merchandise and gasoline volumes well in excess of existing store base through our merchandising initiatives despiteour portfolio average. With its leading market position in the greater a difficult retail environment, and we renegotiated our debt onCharlotte area, Petro Express gives us a strong presence in one favorable terms, leaving us well-positioned to continue growingof the most attractive regional markets in the United States. our leading market share in the southeastern United States overMost of the remaining acquisitions were of the tuck in variety, the years to the 16 store Anglers Mini-Mart acquisition in Charleston, S.C. Ultimately, our bottom-line results were disappointing, primarilyOverall, we were very pleased with the quality of the locations of due to an unfavorable gasoline market. During fiscal 2007, the stores acquired during the year and their strong merchandise price of crude oil increased by approximately 32%, our retailand gasoline volumes. gasoline margin for the year was down five cents per gallon toOur core merchandise operations also delivered solid results 10.9 cents, and total retail gasoline gross profits declinedagain in fiscal 2007. Comparable store merchandise sales approximately 20%. In some respects, it was a reverse image ofincreased 2.3%following comparable store increases of fiscal 2006, when we enjoyed unusually strong gasoline margins inapproximately 5% in each of the previous two years. We consider our first and fourth fiscal quarters; in fiscal 2007, gasoline marginsthis a very respectable performance in light of the soft retailing were unusually weak in the same two quarters. The impact onenvironment in Florida where we have our greatest concentration our earnings was substantial: net income for fiscal 2007 wasof stores. Our merchandise gross margin of 37.2% was again $26.7 million, or $1.17 per share, compared to $89.2 million, orwell above the industry average, though down slightly from 37.4% $3.88 per share, in fiscal fiscal 2006, primarily due to the impact of adding the lower We believe that other key metrics tell a different storyone ofmargin Petro Express stores to our portfolio mix. continued growth in The Pantrys store base, which we believeWe continued to execute our various merchandising initiatives, will drive long-term earnings potential. We achieved solid double-especially in the food service arena. At year-end, we had quick digit percentage increases in fiscal 2007 in total revenues,service restaurant (QSR) franchises at 234 locations, up from 197 merchandise sales and gross profits, and gasoline gallons sold.a year ago, and we plan on adding approximately 25 new QSRs Revenues for the year were approximately $6.9 billion, up 16%per year. QSRs can be highly profitable and generate store traffic from the prior year. Merchandise sales and merchandise grossthat helps boost sales in other categories. During the year, we also profit increased 14% and 13%, respectively. Retail gasoline gallonscontinued rolling out our proprietary Bean Street Coffee Company sold increased approximately 16%, to 2.0 billion gallons. We fullyand The Chill Zone (fountain and frozen drink) stations, adding expect to leverage the increased scale of our retail operationsor upgrading them at approximately 300 locations. when conditions in the gasoline market improve.We successfully opened 15 new large-format stores in fiscal The strong revenue growth primarily reflects the continued success2007, up significantly from five greenfield openings in fiscal of our strategic acquisition program. During fiscal 2007, we2006. In most cases, these are state-of-the-art facilities with acquired a total of 152 stores compared to 113 in fiscal 2006.features such as car washes and QSRs. While they typically do We made some major strategic acquisitions that allowed us tonot offer the immediate high returns of acquired stores, they can enter new markets, like the 66 store Petro Express acquisition 2The Pantry, Inc. 5. ultimately generate nearly twice as much profit as our current In view of our substantial earnings declineeven though we believe average store. Building stores ourselves enables us to fill in it was primarily due to market forces beyond our controlwe market gaps, increasing our market presence and helping us launched a comprehensive review of various options for improving keep pace with the growth of expanding suburban markets. New our efficiency. At year-end, we announced a restructuring program stores also help to leverage our expense infrastructure andthat essentially eliminated a layer of field management. This clearly add another dimension to our growththough they areprogram will generate significant cost savings and enhance our not a substitute for acquisitions. In fiscal 2008, we expect toability to leverage our cost structure in fiscal 2008 and beyond. open approximately 15 new stores, incorporating full-size Krystal In addition to the cost savings, quite a few of the managers in and Bojangles franchises in at least two of these locations.positions that were eliminated chose to stay with us, filling otheropen positions in store management. To finance our fiscal 2007 acquisitions and maintain our financial flexibility going forward, we were able to renegotiate our creditAt this writing, the gasoline market environment remains challenging agreement before the financing environment deteriorated late in thefor fiscal 2008; however, we are proactively taking steps to year. We were able to significantly expand the size and extend improve our performance. Early in the new fiscal year we began the maturities of our facilities with pricing comparable to ourtesting an ethanol blend in several locations and have begun previous agreement. In addition, the new terms and covenants rolling it out across the store base. While this may give us some are less restrictive, enhancing our overall financial flexibility. The initial cost advantage, we expect it to be temporary due to new facilities include a $350 million term loan, increased fromcurrent price differentials between ethanol and gasoline in the the $204 million that remained outstanding under our previousmarketplace, and the fact that our competitors are likely exploring credit agreement as of the end of fiscal 2006, and a $225 millionethanol blending as well. On another front, we continue to explore revolving credit facility, up from $150 million. Final maturities forvarious alternatives to hedge our energy costs in this uncertain the facilities were extended to 2014 for the term loan and 2013environment. for the revolver.In conclusion, we continue to believe that The Pantrys fundamental At year-end, our liquidity position remained excellent, with cashstrengths have not changed. As the leading independent and cash equivalents of $71.5 million. We also had approximately convenience store chain in the Southeast, we remain in a strong $168 million available under our revolving credit facility after position to drive future growth, both organically and through adjusting for outstanding letters of credit. In addition, we have aacquisitions, and we also have the financial strength and flexibility delayed-draw option in our new loan agreement that gives us theto continue executing our strategy. right to add up to $100 million to our term loan with the same attractive pricing and other terms on a fully committed basisSincerely, through May 2008.Although we clearly have the resources to continue growing through acquisitions, we have made a conscious decision to slow our pace temporarily following the Petro Express deal, as we digest our fiscal 2007 acquisitions. We have not stopped look- ing at potential transactions as many acquisition opportunitiesPeter J. Sodini remain in our regional markets.President and Chief Executive Officer32007 Annual Report 6. MERChANDISE Merchandise revenue increased 13.7% AVERAGE MERC HANDI SE SALES/ STO RE (dollars in thousands)999 954 8981000857792800600400200020032004 20052006 2007 Improving Our Merchandise Business Weve maintained our focus on expanding our food service offerings such as our Bean Street Coffee Company and The Chill Zone beverage stations, while expanding our private label merchandise offerings under our Celeste brand. We continued to grow our merchandise revenues in fiscal 2007 by steadily upgrading our store portfolio through acquisitions and comparable store sales increases. Comparable store growth in fiscal 2007 was 2.3%following two consecutive years of approximately 5% increases. 4 The Pantry, Inc. 7. Q U I C K S E R v I C E