10-K 1 ptry-20120927x10k.htm 10-K 68b474c810114cc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 27, 2012

 

Commission File Number: 000-25813

 

 

THE PANTRY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

56-1574463

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

P.O. Box 8019

305 Gregson Drive

Cary, North Carolina

27511

(Address of principal executive offices and zip code)

 

 

Registrant’s telephone number, including area code: (919) 774-6700

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 par value

 

The NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

 

NONE

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer and large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer    ¨

 

Accelerated filer   x

Non-accelerated filer   ¨(Do not check if a smaller reporting company)

 

Smaller reporting company   ¨

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).  Yes ¨  No x

 

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 29, 2012 was $295,162,929.

As of December 5, 2012, there were issued and outstanding 23,257,223 shares of the registrant’s common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Pantry’s Proxy Statement for the Annual Meeting of Stockholders to be held March 14,  2013 are incorporated by reference in Part III of this Form 10-K. 

 

 

 


 

 

THE PANTRY, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

PART I

 

Item 1.

Business

1

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

20

Item 3.

Legal Proceedings

20

Item 4.

Mine Safety Disclosures

22

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6.

Selected Financial Data

24

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

25

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 8.

Consolidated Financial Statements and Supplementary Data

44

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

76

Item 9A.

Controls and Procedures

76

Item 9B.

Other Information

79

 

 

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

80

Item 11.

Executive Compensation

80

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

80

Item 13.

Certain Relationships and Related Transactions, and Director Independence

80

Item 14.

Principal Accounting Fees and Services

80

 

 

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

81

 

Signatures

90

 

 

 


 

 

 

PART I

 

Item 1.   Business.

 

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 United States based on store count. As of September 27, 2012, we operated 1,578 stores in 13 states primarily under the Kangaroo Express® operating banner.  All but our very smallest stores offer a wide selection of merchandise which includes foodservice, fuel and ancillary products and services designed to appeal to the convenience needs of our customers. A limited number of stores do not offer fuel. Our strategy is to continue to improve upon our position as a leading independently operated convenience store chain in the southeastern U.S. by generating profitable growth through sophisticated management of our fuel business, implementing merchandising and marketing initiatives, and leveraging our economies of scale.  This will generate strong cash flows to which we will 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.

 

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 ended 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 on September 30, 2010. All fiscal years presented included 52 weeks, except fiscal 2010, which included 53 weeks.

 

Operations

 

Our convenience stores offer a broad selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers.

 

Each convenience store is generally staffed with a manager, an assistant manager and sales associates who work various shifts to enable most stores to remain open 24 hours a day, seven days a week. We operate 218 proprietary foodservice and quick service restaurants at 215 of our locations. Our field operations organization is comprised of a network of divisional vice presidents, regional directors and district managers who, with our corporate management, evaluate store operations. Each district manager typically oversees an average of 11 stores. We also monitor store conditions, maintenance and customer service through a regular store visitation program by district and region management as well as periodic visits by our executives and corporate management.

 

Merchandise Operations.  Our convenience stores offer a wide assortment of food, beverages, non-food merchandise and various services. The following table details our category sales, as a percentage of total merchandise sales, for the last five fiscal years:

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

Cigarettes

31.5% 

 

33.2% 

 

33.6% 

 

30.0% 

 

27.7% 

Grocery and other tobacco products

23.6 

 

23.6 

 

24.6 

 

29.5 

 

30.7 

Packaged beverages

16.1 

 

15.7 

 

18.8 

 

16.3 

 

17.4 

Beer and wine

14.8 

 

14.8 

 

15.1 

 

16.1 

 

16.3 

Foodservice

10.6 

 

9.4 

 

4.8 

 

4.7 

 

4.4 

Services

3.4 

 

3.3 

 

3.1 

 

3.4 

 

3.5 

  Total

100.0% 

 

100.0% 

 

100.0% 

 

100.0% 

 

100.0% 

 

 

1

 


 

 

Our foodservice category includes both proprietary foodservice and quick service restaurants consisting of major national quick service restaurants and a proprietary brand, Aunt M’s®. Our foodservice includes the following: 

 

 

 

 

 

 

 

2012

 

2011

Subway® 

147

 

145

Aunt M® (1)

37

 

40

Dairy Queen® 

12

 

11

Hardee's® 

7

 

7

Krystal®

5

 

5

Baskin Robbins®

5

 

5

Other®(2)

5

 

20

 

218

 

233

 

(1)

Proprietary foodservice program featuring breakfast biscuits, fried chicken, deli and other hot food offerings.

 

(2)

Other includes Quiznos®, Bojangles® and Church’s®.

 

 

Our services revenue is derived from sales of lottery tickets, prepaid products, money orders, ATMs and other ancillary product and service offerings. We also generate car wash revenue at approximately 257 of our locations.

 

Fuel Operations.    We offer a mix of branded and private branded fuel at our locations based on an evaluation of local market conditions and other factors.  The following table illustrates the number of locations selling branded and private branded retail fuel at the end of each of the last five fiscal years:

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

Branded

1,026 

 

1,107 

 

1,088 

 

1,141 

 

1,119 

Private branded

540 

 

526 

 

532 

 

514 

 

516 

  Total

1,566 

 

1,633 

 

1,620 

 

1,655 

 

1,635 

 

 

We purchase fuel from major oil companies and independent refiners. We purchase our branded fuel from major oil companies under supply agreements. Our branded fuel is sold under the Marathon®, BP®, CITGO® , Chevron® , Shell® , Texaco®, ExxonMobil® and ConocoPhillips®  brand names.

 

We purchase the majority of our private branded fuel from Marathon Petroleum Company, LLC (“Marathon”) and CITGO Petroleum Corporation (“CITGO”).  The majority of our private branded fuel is sold under our Kangaroo Express® banner. Our fuel supply agreements typically contain provisions relating to, among other things, minimum volumes, payment terms, use of the supplier’s brand names, compliance with the supplier’s requirements, acceptance of the supplier’s credit cards, insurance coverage and compliance with legal and environmental requirements. Our inventories of fuel turn approximately every five days.

 

The following table highlights certain information regarding our fuel supply during fiscal 2012:

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

 

 

 

 

Expiration

Fuel Supply

 

2012

 

Calendar Year

Marathon(1)

 

44.4 

%

 

2017

BP®(2)

 

22.8 

 

 

2012

Citgo(3)

 

14.4 

 

 

2013

Other (4)

 

18.4 

 

 

 

 

 

100.0 

%

 

 

 

(1)

The branded product supply agreement expires in June 2013, subject to the Company’s right to renew for periods which extend to December 2017. The unbranded product supply agreement expires in December 2017.

 

(2)

We are currently in negotiations with BP® to continue our fuel relationship.

 

(3)

The product supply agreement expires in August 2013, subject to automatic three-year renewal periods if not validly terminated by either party.

 

(4)

We purchase fuel from various other suppliers including major oil companies and regional suppliers.

 

2

 


 

 

Distribution

 

Merchandise.    In fiscal 2012, we purchased over 57.8% of our merchandise, including most tobacco and grocery products,  through a single wholesale grocer, McLane Company, Inc. (“McLane”), a wholly owned subsidiary of Berkshire Hathaway, Inc. We have a distribution services agreement with McLane pursuant to which McLane is the primary distributor of traditional grocery products to our stores. We purchase the balance of our merchandise from approximately 630 distributors. All merchandise is delivered directly to our stores by McLane or other vendors. We do not maintain additional product inventories other than what is in our stores.

 

Fuel.    Our fuel is distributed from fuel terminals to our stores through third parties. There are approximately 60 fuel terminals in our operating areas, allowing us to choose from more than one distribution point for most of our stores.

 

Employees

 

As of September 27, 2012, we had 13,709 total employees (5,955 full-time and 7,754 part-time), with 12,907 employed in our stores and 802 in corporate and field management positions. Fewer part-time employees are employed during the winter months than during the peak spring and summer seasons. None of our employees are subject to collective bargaining agreements and we consider our employee relations to be in good standing.

 

Operating Market

 

We operate convenience stores primarily in the southeastern United States. Approximately 32.0% of our stores are strategically located in coastal/resort areas such as:

 

·

Jacksonville, Orlando/Disney World® and St. Augustine, Florida;

·

Charleston, Hilton Head and Myrtle Beach, South Carolina; and

·

Gulfport/Biloxi, Mississippi.

 

These areas attract a large number of tourists who we believe value convenience shopping. Additionally, approximately 23.0% of our total stores are situated along major interstates and highways, which benefit from high traffic counts and customers seeking convenient fueling locations, including some stores in coastal/resort areas. Almost all of our stores are freestanding structures averaging approximately 2,900 square feet and provide ample customer parking.

 

Geographic Information

 

All of our revenues are generated within the United States and all of our long-lived assets are located within the United States. The following table shows the geographic distribution by state of our stores at the end of each of the last five fiscal years:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

 

 

 

 

 

Total Stores

 

 

 

 

 

 

 

 

 

 

 

 

September 27,

 

Number of Stores as of Fiscal Year End

State

 

2012

 

2012

 

2011

 

2010

 

2009

 

2008

Florida

 

     24.0

%

 

378 

 

399 

 

415 

 

440 

 

453 

North Carolina

 

     22.8

 

 

360 

 

378 

 

382 

 

384 

 

385 

South Carolina

 

     17.1

 

 

270 

 

276 

 

279 

 

284 

 

283 

Georgia

 

     7.2

 

 

114 

 

128 

 

131 

 

132 

 

133 

Alabama

 

     7.0

 

 

110 

 

112 

 

113 

 

114 

 

81 

Tennessee

 

     6.2

 

 

98 

 

100 

 

104 

 

104 

 

104 

Mississippi

 

     6.0

 

 

95 

 

97 

 

99 

 

100 

 

99 

Virginia

 

     3.0

 

 

48 

 

50 

 

50 

 

50 

 

50 

Kansas

 

     2.7

 

 

42 

 

43 

 

 -

 

 -

 

 -

Kentucky

 

     1.5

 

 

24 

 

27 

 

29 

 

29 

 

30 

Louisiana

 

     1.7

 

 

27 

 

27 

 

27 

 

27 

 

26 

Indiana

 

     0.6

 

 

 

 

 

 

Missouri

 

     0.2

 

 

 

 

 -

 

 -

 

 -

  Total

 

 100.0

%

 

1,578 

 

1,649 

 

1,638 

 

1,673 

 

1,653 

 

 

3

 


 

 

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, allows us to compete effectively in our markets.

 

Seasonality

 

Due to the nature of our business and our reliance, in part, on consumer spending patterns in coastal, resort and tourist markets, we typically generate higher revenues during warm weather months in the southeastern United States, which fall within our third and fourth fiscal quarters. Accordingly, our working capital requirements are greater in the months leading up to our peak sales period.

 

Acquisitions and Divestitures

 

Acquisitions.    On October 28, 2010, we purchased one store in North Carolina and on December 2, 2010, we purchased 47 stores from Presto Convenience Stores, LLC (“Presto”) in Kansas (44) and Missouri (3). The 47 stores purchased separately from Presto operate under the Presto trade name. The Presto acquisition included the real estate underlying 36 of the stores. These acquisitions were funded using available cash on hand. We did not acquire any stores in fiscal 2012 or 2010.

 

Divestitures.  We continually evaluate the performance of each of our stores to determine whether any particular store should be closed, sold or converted to dealer operations based on profitability trends, store conditions and our market presence in the surrounding area. Although closing, selling or converting underperforming stores reduces revenues, our operating results typically improve as these stores are generally unprofitable.

 

The following table summarizes our activities related to acquisitions, store openings, store closures and  sales and store conversions for each of the last five fiscal years:

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

2012

 

2011

 

2010

 

2009

 

2008

Number of stores at the beginning of period

1,649 

 

1,638 

 

1,673 

 

1,653 

 

1,644 

  Acquired or opened

 -

 

48 

 

 -

 

44 

 

32 

  Closed or sold

(42)

 

(19)

 

(34)

 

(24)

 

(23)

  Converted

(29)

 

(18)

 

(1)

 

 -

 

 -

Number of stores at the end of period

1,578 

 

1,649 

 

1,638 

 

1,673 

 

1,653 

 

 

Intellectual Property

 

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 our primary marks: Kangaroo Express®, Kangaroo®,  Bean Street Coffee Company®, Celeste® and Aunt M’s®. In the highly competitive business in which we operate, our trade names, service marks and trademarks are important 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.

 

4

 


 

 

Government Regulation

 

Environmental Matters.    We are subject to various laws and government regulations concerning environmental matters. Federal environmental legislation that affects us includes the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act and the Clean Air Act. Additionally,

the Environmental Protection Agency (“EPA”) has the authority to write regulations that have an effect on our operations.

 

In addition to these federal legislative Acts, various states have authority under the federal statutes mentioned above. Many state and local governments have adopted environmental laws and regulations, some of which are similar to federal requirements.

 

We record environmental reserves for these environmental costs when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Environmental reserves represent our estimates for future expenditures for remediation and related litigation as a result of releases (i.e., overfills, spills and underground storage tank releases) and are based on current regulations, historical results and certain other factors. As of September 27, 2012, environmental reserves of $5.7 million and $62.6 million are included in other accrued liabilities and other noncurrent liabilities, respectively. As of September 29, 2011, environmental reserves of approximately $5.9 million and $62.8 million are included in other accrued liabilities and other noncurrent liabilities, respectively.

 

We rely upon reimbursements from applicable state trust funds and third-party insurance carriers to fund the majority of our environmental costs.  Amounts that are probable of reimbursement under state trust fund programs or third-party insurers, based on our experience, are recognized as receivables, excluding all deductibles. As of September 27, 2012, anticipated reimbursements of $2.9 million are recorded as current receivables and $61.0 million are recorded as other noncurrent assets related to all sites, respectively. As of September 29, 2011, anticipated reimbursements of $7.4 million are recorded as current receivables and $61.8 million are recorded as other noncurrent assets related to all sites, respectively. 

 

Compliance with these environmental laws and regulations effect our operations in the sale and storage of fuel, financial responsibility for corrective actions and compensatory damages to third parties. Federal and state authorities may seek fines and penalties for violating these laws and regulations. A violation or change of these laws or regulations could have a material effect on our business, financial condition, results of operations and cash flows.  

 

Sale of Alcoholic Beverages and Tobacco Products.  In certain areas where our stores are located, state or local laws limit the hours of operation for the sale of alcoholic beverages, prohibit the sale of alcoholic beverages or restrict the sale of alcoholic beverages and tobacco products to persons of a certain age. 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 and tobacco products. 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. Imposition of restrictions or sanctions, including the loss of necessary licenses, fines or penalties, could have a material effect on our business, financial condition, results of operations and cash flows. While the potential exposure for damage claims as a seller of alcoholic beverages and tobacco products 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 failure 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 requirements of mandated health insurance, each of which could materially affect our financial condition, results of operations and cash flows.  

 

5

 


 

 

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.

 

Available Information

 

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, are made available free of charge through our internet website at www.thepantry.com., as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).  The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Executive Officers of the Registrant

 

The following table provides information on our executive officers. There are no family relationships between any of our executive officers:

 

 

 

 

 

 

Name

 

Age

 

Title

Dennis G. Hatchell

 

63

 

President, Chief Executive Officer and Director

Berry L. Epley

 

46

 

Vice President, Assistant Corporate Secretary and Controller

Keith S. Bell

 

49

 

Senior Vice President, Fuels

Thomas D. Carney

 

65

 

Senior Vice President, General Counsel and Secretary

John J. Fisher

 

49

 

Senior Vice President, Retail Merchandising and Restaurant Operations

Paul M. Lemerise

 

67

 

Senior Vice President, Chief Information Officer and Store Planning and Construction

Keith A. Oreson

 

56

 

Senior Vice President, Human Resources

Patrick J. Venezia

 

48

 

Senior Vice President, Operations

 

       

Dennis G. Hatchell joined as our President and Chief Executive Officer and as a Director in March 2012. Prior to joining us, he was with Alex Lee, Inc., (“Alex Lee”), where he served as Vice Chairman since April 2011. Prior to becoming Vice Chairman, Mr. Hatchell served as President and Chief Operating Officer of Alex Lee from December 1995 to April 2011, where he was responsible for developing and implementing the company’s strategic business plan and operating budgets and overseeing its three operating companies as well as carrying out the succession plan, supervision and training of senior leadership. Mr. Hatchell has also served as President of Lowes Food Stores, Inc., a division of Alex Lee, from 1989 to 1995 and Group Vice President of Merchandising and Store Operations from 1986 to 1989 for H. E. Butt Grocery Company in San Antonio, Texas. Prior to that, Mr. Hatchell served as President of Merchant Distributors, Inc., a division of Alex Lee from 1980 to 1986. He also served in several positions rising to Vice President, General Manager of Western Grocers (Super Valu) in Denver, Colorado from 1972 to 1980.  

 

Berry L. Epley joined us as our Director, Financial Reporting in October 1999, and was promoted to Vice President, Corporate Controller in December 2002. In May 2012, Mr. Epley assumed the responsibilities of our principal financial officer on an interim basis. Prior to joining us, Mr. Epley held several positions with PricewaterhouseCoopers’ LLP Audit and Business Advisory Services practice.

 

Keith S. Bell joined us as our Senior Vice President, Fuels in July 2006. Prior to joining us, Mr. Bell spent 18 years with BP and Amoco Oil Company (“Amoco”), which was acquired by BP in 1998, where he most recently spent two years as Vice President of BP’s US branded jobber business. During his career at BP and Amoco, Mr. Bell progressed through a variety of executive positions including two years as Vice President of Pricing and Supply for BP’s US Fuels Northeast Region, two years as Eastern US Regional Vice President of BP’s branded jobber business, and three years as Performance Unit Leader – Southeast.

 

6

 


 

 

Thomas D. Carney joined us as Senior Vice President, General Counsel and Secretary in June 2011. Prior to joining us, Mr. Carney served as Vice President, General Counsel and Secretary for Borders Group, Inc., which filed for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011, from December 1994 until January 2011. Prior to joining Borders Group, Inc. in 1994, Mr. Carney served as a partner at the Dickinson Wright law firm and as Vice President, General Counsel and Secretary of Hoover Universal, Inc.

 

John J. Fisher joined us as our Senior Vice President, Marketing in March 2010. Prior to joining us, Mr. Fisher ran Fisher Consulting from 2009 to 2010, specializing in foodservice marketing and operational execution. Previously he served as Executive Vice President of The Linebeck Group, a privately-held project and construction management firm specializing in complex facility design and project execution. Mr. Fisher was with The Linebeck Group from 2003 to 2008. Prior to The Linebeck Group, Mr. Fisher was with The Coca-Cola Company for 11 years, most recently as Senior Vice President of Marketing for North America Foodservice. Early in Mr. Fisher’s career, he held positions in manufacturing, engineering and brand management with Colgate Palmolive Company.

 

Paul M. Lemerise began serving as a consultant to us in November 2009 in the role of our Chief Information Officer and joined us as our Senior Vice President and Chief Information Officer in March 2010. In August 2010 he assumed the duties of leading our store planning and construction departments. In June 2011, Mr. Lemerise assumed the responsibilities for our corporate procurement and facilities department. Prior to joining us, Mr. Lemerise was an Executive Services Partner with Tatum, LLC, a firm that provides management consulting services, from October 2001 until March 2010. In that capacity, Mr. Lemerise served as Chief Information Officer for numerous clients including Ventana Medical Systems, Inc., Pharmavite, LLC and Foster Farms. Prior to joining Tatum, Mr. Lemerise served as Executive Vice President, CIO for TruServe Corporation, Senior Vice President and CIO for Merisel, Inc., and Vice President of Information Systems for Carter Hawley Hale Corporation.

 

Keith A. Oreson joined us as our Senior Vice President, Human Resources in June 2010. Prior to joining us, Mr. Oreson served as Senior Vice President of Human Resources for Advance Auto Parts from 2005 to 2010. He also served in senior human resource positions for Frank’s Nursery and Crafts for seven years from May 1998 to January 2005 and for ARAMARK Uniform Services for four years. His career also includes human resource positions with Pizza Hut and GTE.

 

Patrick J. Venezia joined us as Senior Vice President, Operations in September 2012. Mr. Venezia recently served as President of TitleMax with responsibilities for overseeing 813 stores in over 13 states. Prior to TitleMax, Mr. Venezia worked in various operations positions at Walmart. Most recently serving as Division President for Wal-Mart’s Northeast Division where he was responsible for 120 thousand associates, 420 stores and $32 billion in sales. Mr. Venezia has also worked as President & General Manager for Wells Fargo Merchant Services and as a Brand Manager for Proctor & Gamble. A graduate of the United States Military Academy in West Point, New York, he has also served as an Officer in the United States Army where he received a Bronze Star for his bravery during Operation Desert Storm.

 

 

Item 1A.   Risk Factors.

 

You should carefully consider the risks described below and under “Part II.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” before making a decision to invest in our securities. The risks and uncertainties described below and elsewhere in this report are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our business, financial condition or results of operations in the future. If any such risks actually occur, our business, financial condition or results of operations could be materially affected. In that case, the trading price of our securities could decline, and you may lose all or part of your investment.

 

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Risks Related to Our Industry

 

The convenience store and retail fuel industries are highly competitive and impacted by new entrants. Increased competition could result in lower margins.

 

The convenience store and retail fuel industries in the geographic areas in which we operate 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. In recent years, several non-traditional retailers, including supermarkets, club stores and mass merchants, have begun to compete directly with convenience stores. These non-traditional fuel retailers have obtained a significant share of the fuel market and their market share is expected to grow, and these retailers may use promotional pricing or discounts, both at the fuel pump and in the store, to encourage in-store merchandise sales and fuel sales. Increased value consciousness among consumers has accelerated sales declines as consumers turn to dollar stores and big box stores to fulfill needs that were traditionally fulfilled by convenience stores. Additionally, major convenience store operators have announced intentions to enter or expand in markets we currently serve. In some of our markets, our competitors have been in existence longer and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry.

 

To remain competitive, we must constantly analyze consumer preferences and competitors’ offerings and prices to ensure we offer a selection of convenience products and services at competitive prices to meet consumer demand. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and drive customer traffic to our 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. From time to time, our competitors may sell fuel or alternative energy products which are not available to us due to our fuel contracts. Competitive pressures could materially impact our fuel and merchandise volume, sales and gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.

 

Volatility in oil and wholesale fuel costs could impact our operating results.

 

Oil and domestic wholesale fuel markets are volatile. General political conditions, acts of war or terrorism, instability in oil producing regions, particularly in the Middle East and South America, and the value of the U.S. dollar could significantly impact oil supplies and wholesale fuel costs. In addition, the supply of fuel and our wholesale purchase costs could be materially impacted in the event of a shortage, which could result from, among other things, lack of capacity at United States oil refineries, sustained increase in global demand, or the fact that our fuel contracts do not guarantee an uninterrupted, unlimited supply of fuel. Significant increases and volatility in wholesale fuel costs have resulted, and could in the future result, in significant increases in the retail price of fuel products and in lower fuel gross margin per gallon. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will have on our operating results and financial condition. Dramatic increases in oil prices squeeze retail fuel margin because fuel costs typically increase faster than retailers are able to pass them along to customers. A significant change in any of these factors could materially impact our fuel and merchandise volume, fuel gross profit and overall customer traffic, which in turn could have a material effect on our business, financial condition and results of operations.

 

In addition, rising fuel costs have other adverse impacts which include (i) liquidity as it increases the cost of our fuel inventory as well as the size of related letters of credit we must obtain and (ii) fuel costs are a focus of national attention and rising fuel costs in the past have lead to political criticisms of fuel sellers as well as investigations into alleged fuel “price gouging”.

 

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Changes in credit card expenses could tighten profit margin, especially on fuel.

 

A significant portion of our fuel sales involve payment using credit cards. We are assessed credit card fees as a percentage of transaction amounts and not as a fixed dollar amount or percentage of our margins. Higher fuel prices trigger higher credit card expenses, and an increase in credit card use or an increase in credit card fees would have a similar effect. Therefore, credit card fees charged on fuel purchases that are more expensive as a result of higher fuel prices are not necessarily accompanied by higher profit margins. In fact, such fees may cause lower profit margins. Lower profit margins on fuel sales caused by higher credit card fees may decrease our overall profit margin and could have a material effect on our business, financial condition and results of operations.

 

Changes in economic conditions, consumer behavior, travel and tourism could impact our business.

 

In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth rates for automobile and commercial truck traffic and trends in travel, tourism and weather. Changes in economic conditions generally, or in the southeastern United States specifically, could adversely impact consumer spending patterns and travel and tourism in our markets. In particular, weakening economic conditions may result in decreases in miles driven and discretionary consumer spending and travel, which impact spending on fuel and convenience items. In addition, changes in the types of products and services demanded by consumers may adversely affect our merchandise sales and gross profit. Additionally, negative publicity or perception surrounding fuel suppliers could adversely affect their reputation and brand image which may negatively affect our fuel sales and gross profit. Similarly, advanced technology and increased use of green automobiles (i.e., those automobiles that do not use petroleum-based fuel or that run on hybrid fuel sources) could drive down demand for fuel. Our success depends on our ability to anticipate and respond in a timely manner to changing consumer demands and preferences while continuing to sell products and services that will positively impact overall merchandise gross profit.

 

Many of our stores are located in coastal/resort or tourist destinations. Historically, travel and consumer behavior in such markets is more severely impacted by weak economic conditions, such as those currently impacting the United States. If the number of visitors to coastal/resort or tourist locations decreases due to economic conditions, changes in consumer preferences, changes in discretionary consumer spending or otherwise, our sales could decline, which in turn could have a material effect on our business, financial condition and results of operations.

Market turmoil and uncertain economic conditions, including increases in food and fuel prices, changes in the credit and housing markets leading to the financial and credit crisis, actual and potential job losses among many sectors of the economy, significant declines in the stock market resulting in large losses in consumer retirement and investment accounts and uncertainty regarding future federal tax and economic policies have resulted in reduced consumer confidence, curtailed retail spending and decreases in miles driven. There can be no assurances that government responses to the disruptions in the financial markets will restore consumer confidence. We have experienced periodic per store sales declines in both fuel and merchandise as a result of these economic conditions. If these economic conditions persist or deteriorate further, we may continue to experience sales declines in both fuel and merchandise, which could have a material effect on our business, financial condition and results of operations.

 

Legal, technological, political and scientific developments regarding climate change may decrease demand for fuel.

 

Developments regarding climate change and the effects of greenhouse gas emissions on climate change and the environment may decrease the demand for our major product, petroleum-based fuel. Attitudes toward our product and its relationship to the environment and the “green movement” may significantly affect our sales and ability to market our product. New technologies developed to steer the public toward non-fuel dependent means of transportation may create an environment with negative attitudes toward fuel, thus affecting the public’s attitude toward our major product and potentially having a material effect on our business, financial condition and results of operations. Further, new technologies developed to improve fuel efficiency or governmental mandates to improve fuel efficiency may result in decreased demand for petroleum-based fuel, which could have a material effect on our business, financial condition and results of operations.

 

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Wholesale cost increases of, tax increases on, and campaigns to discourage tobacco products could adversely impact our operating results.

 

Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as national and local campaigns to discourage the use of tobacco products, may have an adverse effect on demand for cigarettes and other tobacco products. Although the states in which we operate have historically imposed relatively low taxes on tobacco products, each year one or more of these states consider increasing the tax rate for tobacco products, either to raise revenues or deter the use of tobacco. Any increase in federal or state taxes on our tobacco products could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.

 

Currently, major cigarette manufacturers offer substantial rebates to retailers. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are no longer offered, or decreased, our wholesale cigarette costs will increase accordingly. In general, we attempt to pass price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. In addition, reduced retail display allowances on cigarettes offered by cigarette manufacturers negatively impact gross margins. These factors could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.

Federal regulation of tobacco products could adversely impact our operating results.

 

In June 2009, Congress gave the Food and Drug Administration (“FDA”) broad authority to regulate tobacco products through passage of the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”). The FSPTCA:

 

·

Sets national performance standards for tobacco products;

·

Requires manufacturers, with certain exceptions, to obtain FDA clearance or approval for cigarette and smokeless tobacco products commercially launched, or to be launched;

·

Required new and larger warning labels on tobacco products; and

·

Requires FDA approval for the use of terms such as “light” or “low tar”.

 

Under the FSPTCA, the FDA has passed regulations that:

 

·

Prohibit the sale of cigarettes or smokeless tobacco to anyone under the age of 18 years (state laws are permitted to set a higher minimum age);

·

Prohibit the sale of single cigarettes or packs with less than 20 cigarettes;

·

Prohibit the sale or distribution of non-tobacco items such as hats and t-shirts with tobacco brands, names or logos;

·

Prohibits the sale of cigarettes and smokeless tobacco in vending machines, self-service displays or other impersonal modes of sales, except in very limited situations;

·

Prohibits free samples of cigarettes and limits distribution of smokeless tobacco products;

·

Prohibits tobacco brand name sponsorship of any athletic, musical or other social or cultural event, or any team or entry in those events;

·

Prohibits gifts or other items in exchange for buying cigarettes or smokeless tobacco products; and

·

Requires that audio ads use only words with no music or sound effects.

 

Governmental actions and regulations, such as those noted above, as well as statewide smoking bans in restaurants and other public places, combined with the diminishing social acceptance of smoking, declines in the number of smokers in the general population and private actions to restrict smoking, have resulted in reduced industry volume, and we expect that such actions will continue to reduce consumption levels. These governmental actions could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.

 

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Risks Related to Our Business

 

Unfavorable weather conditions, the impact of climate change or other trends or developments in the southeastern United States could adversely affect our business.

 

Substantially all of our stores are located in the southeastern United States. Although the southeast region is generally known for its mild weather, the region is susceptible to severe storms, including hurricanes, thunderstorms, tornadoes, extended periods of rain, ice storms and heavy snow, all of which we have historically experienced.

 

Inclement weather conditions as well as severe storms in the southeast region could damage our facilities, our suppliers or could have a significant impact on consumer behavior, travel and convenience store traffic patterns, as well as our ability to operate our stores. In addition, we typically generate higher revenues and gross margins during warmer weather months in the Southeast, which fall within our third and fourth fiscal quarters. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected. We could also be impacted by regional occurrences in the southeastern United States such as energy shortages or increases in energy prices, fires or other natural disasters.

 

Many of our stores are located in coastal/resort or tourist destinations. Our coastal locations may be particularly susceptible to natural disasters or adverse localized effects of climate change, such as sea-level rise and increased storm frequency or intensity. To the extent broad environmental factors, triggered by climate change or otherwise, lead to localized physical effects, disruption in our business or unexpected relocation costs, the performance of stores in these locations could be adversely impacted.

 

Besides these more obvious consequences of severe weather to our coastal/resort stores, our ability to insure these locations, and the related cost of such insurance, may also impact our business, financial condition and results of operations. Many insurers already have plans in place to address the increased risks that may arise as a result of climate change, with many reducing their near-term catastrophic exposure in both reinsurance and primary insurance coverage along the gulf coast and the eastern seaboard.

 

Our indebtedness could negatively impact our financial health.

 

We are highly leveraged. Our substantial indebtedness could have important consequences such as:

 

·

Make it more difficult for us to satisfy our obligations with respect to our debt and our leases;

·

Increase our vulnerability to general adverse economic and industry conditions;

·

Require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, including lease finance obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

·

Limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

·

Place us at a competitive disadvantage compared to our competitors that have less indebtedness or better access to capital by, for example, limiting our ability to enter into new markets or renovate our stores; and

·

Limit our ability to borrow additional funds in the future.

 

We are vulnerable to increases in interest rates because the debt under our senior credit facility is subject to a variable interest rate.

 

If we are unable to meet our debt obligations, we could be forced to restructure or refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations.

 

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In addition, the credit agreement governing our senior credit facility and the indenture governing our senior subordinated notes (“subordinated notes”) contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would adversely affect our financial health and could prevent us from fulfilling our obligations.

 

Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional debt. This could further increase the risks associated with our substantial leverage.

 

We are able to incur additional indebtedness. The terms of the indenture that governs our senior notes permit us to incur additional indebtedness under certain circumstances. The indenture governing our senior subordinated convertible notes (“convertible notes”), does not contain any limit on our ability to incur debt. In addition, the credit agreement governing our senior credit facility permits us to incur additional indebtedness (assuming certain financial conditions are met at the time) beyond the amounts available under our revolving credit facility. If we incur additional indebtedness, the related risks that we now face could increase.

 

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

 

Our ability to make payments on our indebtedness, including without limitation any payments required to be made to holders of our subordinated notes and our convertible notes, and to refinance our indebtedness and fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next 12 months.

 

We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures, seek additional equity financing or seek third-party financing to satisfy such obligations. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our failure to fund indebtedness obligations at any time

could constitute an event of default under the instruments governing such indebtedness, which would likely trigger a cross-default under our other outstanding debt.

 

If we do not comply with the covenants in the credit agreement governing our senior credit facility and the indenture governing our subordinated notes or otherwise default under them or the indenture governing our convertible notes, we may not have the funds necessary to pay all of our indebtedness that could become due.

 

The credit agreement governing our senior credit facility and the indenture governing our subordinated notes require us to comply with certain covenants. In particular, our credit agreement prohibits us from incurring any additional indebtedness, except in specified circumstances, or materially amending the terms of any agreement relating to existing indebtedness without lender approval. Further, our credit agreement restricts our ability to acquire and dispose of assets, engage in mergers or reorganizations, pay dividends or make investments or capital expenditures. Other restrictive covenants require that we meet a maximum total adjusted leverage ratio and a minimum interest coverage ratio, as defined in our credit agreement. A violation of any of these covenants could cause an event of default under our credit agreement.

 

If we default on the credit agreement governing our senior credit facility, the indenture governing our subordinated notes or the indenture governing our convertible notes because of a covenant breach or otherwise, all outstanding amounts could become immediately due and payable. We cannot assure you that we would have sufficient funds to repay all the outstanding amounts, and any acceleration of amounts due under our credit agreement or either of the indentures governing our outstanding indebtedness likely would have a material effect on us.

 

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If future circumstances indicate that goodwill or indefinite lived intangible assets are impaired, there could be a requirement to write down amounts of goodwill and indefinite lived intangible assets and record impairment charges.

 

Goodwill and indefinite lived intangible assets are initially recorded at fair value and are not amortized, but are reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the recoverability of goodwill and indefinite lived intangible assets, we make estimates and assumptions about sales, operating margin, growth rates, consumer spending levels, general economic conditions and the market prices for our common stock. There are inherent uncertainties related to these factors and managements judgment in applying these factors. We could be required to evaluate the recoverability of goodwill and indefinite lived intangible assets prior to the annual assessment if we experience, among others, disruptions to the business, unexpected significant declines in our operating results, divestiture of a significant component of our business, changes in operating strategy or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill and indefinite lived intangible asset impairment charges in the future. Impairment charges could substantially affect our financial results in the periods of such charges. In addition, impairment charges could negatively impact our financial ratios and could limit our ability to obtain financing on favorable terms, or at all, in the future.

 

We are subject to state and federal environmental laws and other regulations. Failure to comply with, or liabilities pursuant to, these laws and regulations may result in penalties or costs that could have a material effect on our business.

 

We are subject to extensive governmental laws and regulations including, but not limited to, environmental regulations, employment laws and regulations, regulations governing the sale of alcohol and tobacco, minimum wage requirements, working condition requirements, public accessibility requirements, citizenship requirements and other laws and regulations. A violation or change of these laws or regulations could have a material effect on our business, financial condition and results of operations.

 

Under various federal, state and local laws, ordinances and regulations, we may, as the owner or operator of our locations, be liable for the costs of removal or remediation of contamination at these or our former locations, whether or not we knew of, or were responsible for, the presence of such contamination. The failure to properly remediate such contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent such property or to borrow money using such property as collateral. Additionally, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at sites where they are located, whether or not such site is owned or operated by such person. Although we do not typically arrange for the treatment or disposal of hazardous substances, we may be deemed to have arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be liable for removal or remediation costs, as well as other related costs, including governmental fines, and injuries to persons, property and natural resources.

 

Compliance with existing and future environmental laws and regulations regulating underground storage tanks may require significant capital expenditures and increased operating and maintenance costs. The remediation costs and other costs required to clean up or treat contaminated sites could be substantial. We pay tank registration fees and other taxes to state trust funds established in our operating areas and maintain private insurance coverage in Florida and Georgia in support of future remediation obligations.

 

These state trust funds or other responsible third parties (including insurers) are expected to pay or reimburse us for remediation expenses less a deductible. To the extent third parties do not pay for remediation as we anticipate, we will be obligated to make these payments. These payments could materially affect our business, financial condition and results of operations. Reimbursements from state trust funds will be dependent on the maintenance and continued solvency of the various funds.

 

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In the future, we may incur substantial expenditures for remediation of contamination that has not been discovered at existing or acquired locations. We cannot assure you that we have identified all environmental liabilities at all of our current and former locations; that material environmental conditions not known to us do not exist; that future laws, ordinances or regulations will not impose material environmental liability on us; or that a material environmental condition does not otherwise exist as to any one or more of our locations. In addition, failure to comply with any environmental laws, ordinances or regulations or an increase in regulations could adversely affect our business, financial condition and results of operations.

 

Failure to comply with state laws regulating the sale of alcohol and tobacco products may result in the loss of necessary licenses and the imposition of fines and penalties on us, which could have a material effect on our business.

 

State laws regulate the sale of alcohol and tobacco products. A violation or change of these laws could adversely affect our business, financial condition and results of operations because state and local regulatory agencies have the power to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of these products or to seek other remedies. Such a loss or imposition could have a material effect on our business. In addition, certain states regulate relationships, including overlapping ownership, among alcohol manufacturers, wholesalers and retailers, and may deny or revoke licensure if relationships in violation of the state laws exist. We are not aware of any alcoholic beverage manufacturers or wholesalers having a prohibited relationship with our company.

 

Failure to comply with the other state and federal regulations we are subject to may result in penalties or costs that could have a material effect on our business.

 

Our business is subject to various other state and federal regulations, including, without limitation, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate, income or overtime pay, or impact of mandated healthcare benefits would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could have a material effect on our business, financial condition and results of operations.

 

Legislative and regulatory initiatives regarding climate change and greenhouse gas (“GHG”) emissions have accelerated recently in the United States. GHGs are certain gases, including carbon dioxide, that may be contributing to global warming and other climatic changes. For example, in December 2009, the EPA issued an endangerment finding that GHGs endanger public health and welfare and that GHG emissions from motor vehicles contribute to the threat of climate change. Although EPA’s endangerment finding does not itself impose any requirements, it does allow EPA to proceed with, among other things, proposed rules regulating GHG emissions from motor vehicles. The EPA’s endangerment finding has recently been upheld in federal court. These and other governmental climate change or GHG reduction initiatives are enacted, they could have a material impact on our business, financial condition and results of operations by increasing our regulatory compliance expenses, increasing our fuel costs and/or decreasing customer demand for fuel sold at our locations.

 

We depend on one principal supplier for the majority of our merchandise. A disruption in supply or a change in our relationship could have a material effect on our business.

 

The majority of our general merchandise, including most tobacco products and grocery items, is purchased from a single wholesale grocer, McLane. We have a contract with McLane through December 31, 2014, but we may not be able to renew the contract when it expires, or on similar terms. A change of merchandise suppliers, a disruption in supply or a significant change in our relationship with our principal merchandise suppliers could have a material effect on our business, cost of goods sold, financial condition and results of operations.

 

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We depend on three principal suppliers for the majority of our fuel. A disruption in supply or a change in our relationship could have a material effect on our business.

 

During fiscal 2012, Marathon, BP and CITGO supplied the majority of our fuel purchases. Our contracts with these fuel suppliers expire at various times. Refer to Part I, Fuel Operations, of this Annual Report on Form 10-K for further information regarding expiration dates of our fuel contracts.

 

At this time, we cannot provide assurance that our contract with CITGO will automatically renew, or that we will be able to renew our BP or Marathon contracts upon expiration. A change of suppliers, a disruption in supply or a significant change in our relationship with our principal suppliers, or a failure to purchase required minimum volumes under our fuel agreements could materially increase our cost of goods sold, which would negatively impact our business, financial condition and results of operations. 

 

CITGO obtains a significant portion of the crude oil it refines from its ultimate parent, Petroleos de Venezuela, SA (“PDVSA”), which is owned and controlled by the government of Venezuela. The political and economic environment in Venezuela can disrupt PDVSA’s operations and adversely affect CITGO’s  ability to obtain crude oil. In addition, the Venezuelan government can order, and in the past has ordered, PDVSA to curtail the production of oil in response to a decision by the Organization of Petroleum Exporting Countries to reduce production. The inability of CITGO to obtain crude oil in sufficient quantities would adversely affect its ability to provide fuel to us and could have a material effect on our business, financial condition and results of operations.

 

Because we depend on our senior management’s experience and knowledge of our industry, we would be adversely affected if we were to lose any members of our senior management team.

 

We are dependent on the continued efforts of our senior management team. The Board of Directors appointed Dennis G. Hatchell as President and Chief Executive Officer, effective March 5, 2012. Patrick J. Venezia became our Senior Vice President of Operations effective September 20, 2012. Our Senior Vice President and Chief Financial Officer, Mark R. Bierley, resigned effective May 25, 2012, and management is actively conducting a search for Mr. Bierley’s replacement. If, for any reason, our senior executives do not continue to be active in management or management is unable to successfully locate a successor for Mr. Bierley, our business, financial condition, results of operations and cash flows could be adversely affected. We may not be able to attract and retain additional qualified senior personnel as needed in the future. In addition, we do not maintain key personnel life insurance on our senior executives and other key employees. We also rely on our ability to recruit qualified store and field managers. If we fail to continue to attract these individuals at reasonable compensation levels, our operating results may be adversely affected.

 

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Pending or future litigation could adversely affect our financial condition, results of operations and cash flows.

 

We are from time to time party to various legal actions in the course of our business and an adverse outcome in such litigation could adversely affect our business, financial condition and results of operations. Refer to Part I, Item 3, Legal Proceedings, of this Annual Report on Form 10-K for further information regarding our litigation.

 

Litigation and publicity concerning food quality, health and other related issues could result in significant liabilities or litigation costs and cause consumers to avoid our convenience stores.

 

Convenience store businesses and other foodservice operators can be adversely affected by litigation and complaints from customers or government agencies resulting from food quality, illness, or other health or environmental concerns or operating issues stemming from one or more locations. Lack of fresh food handling experience among our workforce increases the risk of food borne illness resulting in litigation and reputational damage. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from purchasing fuel, merchandise or food at one or more of our convenience stores. We could also incur significant liabilities if a lawsuit or claim results in a decision against us. Even if we are successful in defending such litigation, our litigation costs could be significant, and the litigation may divert time and money away from our operations and adversely affect our performance.

 

Pending SEC matters could adversely affect us.

 

On July 26, 2005, we determined that we would restate earnings for the period from fiscal 2000 to fiscal 2005 arising from sale-leaseback accounting for certain transactions. In connection with our decision to restate, we filed a Form 8-K on July 28, 2005, as well as a Form 10-K/A on August 31, 2005 restating the transactions. The SEC issued a comment letter to us in connection with the Form 8-K, and we responded to the comments. Beginning in September 2005, we received requests from the SEC that we voluntarily provide certain information to the SEC staff in connection with our sale-leaseback accounting, our decision to restate our financial statements with respect to sale-leaseback accounting and other lease accounting matters. In November 2006, the SEC informed us that in connection with the inquiry it had issued a formal order of private investigation. As previously disclosed, we are cooperating with the SEC in this ongoing investigation. We are unable to predict how long this investigation will continue or whether it will result in any adverse action.

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.

 

Effective internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. The Sarbanes-Oxley Act of 2002, as well as related rules and regulations implemented by the SEC, NASDAQ and the Public Company Accounting Oversight Board, have required changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have increased our legal and financial compliance costs and made many activities more time-consuming and more burdensome. These laws, rules and regulations are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance, which could result in continuing uncertainty regarding compliance matters. The costs of compliance with these laws, rules and regulations have adversely affected our financial results. Moreover, we run the risk of non-compliance, which could adversely affect our financial condition or results of operations or the trading price of our stock.

 

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We have in the past discovered, and may in the future discover, areas of our internal control over financial reporting that need improvement. We have devoted significant resources to remediate our deficiencies and improve our internal control over financial reporting. Although we believe that these efforts have strengthened our internal control over financial reporting, we are continuing to work to improve our internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

 

The dangers inherent in the storage of fuel could cause disruptions and could expose us to potentially significant losses, costs or liabilities.

 

We store fuel in storage tanks at our retail locations. Our operations are subject to significant hazards and risks inherent in storing fuel. These hazards and risks include, but are not limited to, fires, explosions, spills, discharges and other releases, any of which could result in distribution difficulties and disruptions, environmental pollution, governmentally-imposed fines or clean-up obligations, personal injury or wrongful death claims and other damage to our properties and the properties of others. Any such event could have a material effect on our business, financial condition and results of operations.

 

We rely on information technology systems to manage numerous aspects of our business, and a disruption of these systems could adversely affect our business.

 

We depend on information technology systems (“IT systems”) to manage numerous aspects of our business transactions and provide information to management. Our IT systems are an essential component of our business and growth strategies, and a serious disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently. These systems are vulnerable to, among other things, damage and interruption from power loss or natural disasters, computer system and network failures, loss of telecommunications services, physical and electronic loss of data, security breaches, computer viruses and laws and regulations necessitating mandatory upgrades and timelines with which we may not be able to comply. Any serious disruption could cause our business and competitive position to suffer and adversely affect our operating results.

 

Our business and our reputation could be adversely affected by the failure to protect sensitive customer, employee or vendor data or to comply with applicable regulations relating to data security and privacy. 

 

In the normal course of our business as a fuel and merchandise retailer, we obtain large amounts of personal data, including credit and debit card information from our customers. While we have invested significant amounts in the protection of our information technology and maintain what we believe are adequate security controls over individually identifiable customer, employee and vendor data provided to us, a breakdown or a breach in our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could nonetheless occur and have a material effect on our reputation, operating results and financial condition. Such a breakdown or breach could also materially increase the costs we incur to protect against such risks. Also, a material failure on our part to comply with regulations relating to our obligation to protect such sensitive data or to the privacy rights of our customers, employees and others could subject us to fines or other regulatory sanctions and potentially to lawsuits.

 

Our store improvement strategies require significant resources, which, if they are not completed successfully, may divert our resources from more productive uses and harm our financial results.

 

We expect to devote significant resources to our store improvement strategies, which include re-modeling and/or re-branding certain stores. There can be no assurance that these initiatives will be successful or that they will represent the most productive use of our resources. If we are unable to successfully implement our store improvement strategies,  or if these strategies do not yield the expected benefits, our financial results may be harmed. In addition, our experience is that re-branding our stores often results in a temporary loss of sales at the applicable stores. If such reductions in sales are larger or longer in duration than we expect, we may not realize the anticipated benefits from our initiatives, which could adversely affect our operating results.

 

17

 


 

 

We may not be successful in our efforts to divest non-core stores and may have on-going liabilities with respect to divested or dealer operated properties.

 

We periodically review our store portfolio to identify those stores that, due to their performance, location or other characteristics, merit investment on an on-going basis. We attempt to divest the remaining stores and other non-strategic assets through a variety of means, including asset sales, leases and subleases of property and dealer arrangements. There can be no assurance that we will be able to identify acceptable parties to purchase or lease the assets or operate the stores that we desire to divest. In addition, we may remain liable or contingently liable for obligations relating to the divested or dealer operated properties, and there can be no assurance that the other party to a transaction will be able to satisfy its indemnification or other obligations to us.

 

Other Risks

 

Future sales of additional shares into the market may depress the market price of our common stock.

 

If we or our existing stockholders sell shares of our common stock in the public market, including shares issued upon the exercise of outstanding options, or if the market perceives such sales or issuances could occur, the market price of our common stock could decline. As of December 5, 2012, there were 23,257,223 shares of our common stock outstanding, most of which are freely tradable (unless held by one of our affiliates). Pursuant to Rule 144 under the Securities Act of 1933, as amended, during any three-month period our affiliates can resell up to the greater of (a) 1.0% of our aggregate outstanding common stock or (b) the average weekly trading volume for the four weeks prior to the sale. Sales by our existing stockholders also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate or to use equity as consideration for future acquisitions.

 

In addition, we have filed with the SEC a registration statement that covers up to 839,385 shares of common stock issuable upon the exercise of stock options currently outstanding under our 1999 Stock Option Plan, as well as a registration statement that covers up to 2.4 million shares issuable pursuant to share-based awards under our Omnibus Plan, plus any options issued under our 1999 Stock Option Plan that are forfeited or cancelled after March 29, 2007. Generally, shares registered on a registration statement may be sold freely at any time after issuance.

 

Any issuance of shares of our common stock in the future could have a dilutive effect on your investment.

 

We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for capital at that time. In other circumstances, we may issue shares of our common stock pursuant to existing agreements or arrangements.

 

The market price for our common stock has been and may in the future be volatile, which could cause the value of your investment to decline.

 

There currently is a public market for our common stock, but there is no assurance that there will always be such a market. Securities markets worldwide experience significant price and volume fluctuations. This market volatility could significantly affect the market price of our common stock without regard to our operating performance. In

addition, the price of our common stock could be subject to wide fluctuations in response to the following factors among others:

 

·

A deviation in our results from the expectation of public market analysts and investors;

·

Statements by research analysts about our common stock, our Company or our industry;

·

Changes in market valuations of companies in our industry and market evaluations of our industry generally;

·

Additions or departures of key personnel;

·

Actions taken by our competitors;

·

Sales or other issuances of common stock by us or our senior officers or other affiliates; or

·

Other general economic, political or market conditions, many of which are beyond our control.

 

18

 


 

 

The market price of our common stock will also be impacted by our quarterly operating results and quarterly comparable store sales growth, which may fluctuate from quarter to quarter. Factors that may impact our quarterly results and comparable store sales include, among others, general regional and national economic conditions, competition, unexpected costs and changes in pricing, consumer trends, the number of stores we open and/or close during any given period, costs of compliance with corporate governance and Sarbanes-Oxley requirements and other factors discussed in this Item 1A and throughout “Part II.—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You may not be able to resell your shares of our common stock at or above the price you pay.

 

Provisions in our certificate of incorporation, our bylaws and Delaware law may have the effect of preventing or hindering a change in control and adversely affecting the market price of our common stock.

 

Provisions in our certificate of incorporation and our bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Our certificate of incorporation and bylaws:

 

·

Authorize the issuance of up to five million shares of “blank check preferred stock that could be issued by our Board of Directors to thwart a takeover attempt without further stockholder approval;

·

Prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;

·

Limit who may call special meetings;

·

Limit stockholder action by written consent, generally requiring all actions to be taken at a meeting of the stockholders; and

·

Establish advance notice requirements for any stockholder that wants to propose a matter to be acted upon by stockholders at a stockholders’ meeting, including the nomination of candidates for election to our Board of Directors.

 

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our Board of Directors has not approved.

 

These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and may apply even if some of our stockholders consider the proposed transaction beneficial to them. For example, these provisions might discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common

stock. These provisions could also limit the price that investors are willing to pay in the future for shares of our common stock.

 

We may, in the future, adopt other measures that may have the effect of delaying, deferring or preventing an unsolicited takeover, even if such a change in control were at a premium price or favored by a majority of unaffiliated stockholders. Such measures may be adopted without vote or action by our stockholders.

 

 

Item 1B.   Unresolved Staff Comments.

 

Not applicable.

 

 

19

 


 

 

Item 2.   Properties.

 

As of September 27, 2012, we own the real property at 410 of our stores and lease the real property at 1,168 stores. Management believes that none of these leases are individually material. Most of these leases are net leases requiring us to pay all costs related to the property, including taxes, insurance and maintenance costs. Certain of these leases are accounted for as lease finance obligations whereby the leased assets and related lease liabilities are included in our Consolidated Balance Sheets. The aggregate rent paid in fiscal 2012 for operating leases and leases accounted for as lease finance obligations was $70.0 million and $73.3 million, respectively. The following table lists our leases by calendar year of expiration:

 

 

 

 

 

 

 

Lease Expiration

 

With Renewal Options

 

Without Renewal Options

 

Total Leased

2012 - 2016

 

434 

 

33 

 

467 

2017 - 2021

 

381 

 

14 

 

395 

2022 - 2026

 

288 

 

 

292 

2027- 2031

 

11 

 

 -

 

11 

2032 - 2036

 

 -

 

 

 

 

1,114 

 

54 

 

1,168 

 

 

Management anticipates that it will be able to negotiate acceptable extensions of the leases that expire for those locations that we intend to continue operating. We do not believe early termination of these leases would result in significant penalties to us.

 

When appropriate, we have chosen to sell and then lease back properties. Factors leading to this decision include alternative desires for use of cash, beneficial taxation, minimization of the risks associated with owning the property (especially changes in valuation due to population shifts, urbanization and/or proximity to high volume streets) and the economic terms of such lease finance transactions.

 

We own a two-story, 62,000 square foot office building in Cary, North Carolina that functions as our corporate headquarters. We also own a three story, 51,000 square foot corporate support building in Sanford, North Carolina, and lease our corporate annex buildings in Sanford, North Carolina. We believe that we will continue to have adequate office space for the foreseeable future.

 

 

Item 3.   Legal Proceedings.

 

Since the beginning of fiscal 2007, over 45 class action lawsuits have been filed in federal courts across the country against numerous companies in the petroleum industry. Major petroleum companies and significant retailers in the industry have been named as defendants in these lawsuits. Initially, we were named as a defendant in eight of these cases, three of which have recently been dismissed without prejudice. We remain as a defendant in five cases: one in North Carolina (Neese, et al. v. Abercrombie Oil Company, Inc., et al., E.D.N.C., No. 5:07-cv-00091-FL, filed 3/7/07); one in Alabama (Cook,et al. v. Chevron USA, Inc., et al., N.D. Ala., No. 2:07-cv-750-WKW-CSC, filed 8/22/07); one in Georgia (Rutherford, et al. v. Murphy Oil USA, Inc., et al., No. 4:07-cv-00113-HLM, filed 6/5/07); one in Tennessee (Shields, et al. v. RaceTrac Petroleum, Inc., et al., No. 1:07-cv-00169, filed 7/13/07); and one in South Carolina (Korleski v. BP Corporation North America, Inc., et al., D.S.C., No 6:07-cv-03218-MDL, filed 9/24/07). Pursuant to an Order entered by the Joint Panel on Multi-District Litigation, all of the cases, including those in which we are named, have been transferred to the United States District Court for the District of Kansas and consolidated for all pre-trial proceedings. The plaintiffs in the lawsuits generally allege that they are retail purchasers who received less motor fuel than the defendants agreed to deliver because the defendants measured the amount of motor fuel they delivered in non-temperature adjusted gallons which, at higher temperatures, contain less energy. These cases seek, among other relief, an order requiring the defendants to install temperature adjusting equipment on their retail motor fuel dispensing devices. In certain of the cases, including some of the cases in which we are named, plaintiffs also have alleged that because defendants pay fuel taxes based on temperature adjusted 60 degree gallons, but allegedly collect taxes from consumers on non-temperature adjusted gallons, defendants receive a greater amount of tax from consumers than they paid on the same gallon of fuel. The plaintiffs in these cases seek, among other relief, recovery of excess taxes paid and punitive damages. Both types of cases seek compensatory damages, injunctive relief, attorneys’ fees and costs, and prejudgment interest. The defendants filed motions to dismiss all cases for failure to state a claim, which were denied by the court on February 21, 2008. A number of the

20

 


 

 

defendants, including the Company, subsequently moved to dismiss for lack of subject matter jurisdiction or, in the alternative, for summary judgment on the grounds that plaintiffs’ claims constitute non-justiciable “political questions.”  The Court denied the defendants’ motion to dismiss on political question grounds on December 3, 2009, and defendants request to appeal that decision to the United States Court of Appeals for the Tenth Circuit was denied on August 31, 2010. In May 2010, in a lawsuit in which we are not a party, the Court granted class certification to Kansas fuel purchasers seeking implementation of automated temperature controls and/or certain disclosures, but deferred ruling on any class for damages. Defendants sought permission to appeal that decision to the Tenth Circuit in June 2010, and that request was denied on August 31, 2010. On November 12, 2011, Defendants in the Kansas case filed a motion to decertify the Kansas classes in light of a new favorable United States Supreme Court decision. On January 19, 2012, the Judge denied the Defendants’ motion to decertify and granted the Plaintiffs’ motion to certify a class as to liability and injunctive relief aspects of Plaintiffs’ claims. The court has continued to deny certification of a damages class.  On September 24, 2012, the jury in the Kansas case returned a verdict in favor of defendants finding that defendants did not violate Kansas law by willfully failing  to disclose temperature and its effect on the energy content of motor fuel.  On October 3, 2012 the judge in the Kansas case also ruled that defendants’ practice of selling motor fuel without disclosing temperature or disclosing the effect of temperature was not unconscionable under Kansas law.   We filed a motion on December 3, 2012 requesting that cases filed in Arkansas and Virginia, to neither of which we are party, be remanded for further adjudication and the remaining cases be stayed until these two cases are concluded.  Plaintiffs requested that cases filed in California, in which we are not a party, be remanded for further adjudication and the remaining cases be stayed until the California cases are concluded. We have opposed class certification and filed dispositive motions in each of the cases in which we have been sued.  At this stage of proceedings, losses are reasonably possible, however, we cannot estimate our loss, range of loss or liability, if any, related to these lawsuits because there are a number of unknown facts and unresolved legal issues that will impact the amount of any potential liability, including, without limitation: (i) whether defendants are required, or even permitted under state law, to sell temperature adjusted gallons of motor fuel; (ii) the amounts and actual temperature of fuel purchased by plaintiffs; and (iii) whether or not class certification is proper in cases to which the Company is a party. An adverse outcome in this litigation could have a material effect on our business, financial condition, results of operations and cash flows.

 

On October 19, 2009, Patrick Amason, on behalf of himself and a putative class of similarly situated individuals, filed suit against The Pantry in the United States District Court for the Northern District of Alabama, Western Division (Patrick Amason v. Kangaroo Express and The Pantry, Inc. No. CV-09-P-2117-W). On September 9, 2010, a first amended complaint was filed adding Enger McConnell on behalf of herself and a putative class of similarly situated individuals. The plaintiffs seek class action status and allege that The Pantry included more information than is permitted on electronically printed credit and debit card receipts in willful violation of the Fair and Accurate Credit Transactions Act, codified at 15 U.S.C. § 1681c(g). The amended complaint alleges that: (i) plaintiff Patrick Amason seeks to represent a subclass of those class members as to whom the Company printed receipts containing the first four and last four digits of their credit and/or debit card numbers; and (ii) Plaintiff Enger McConnell seeks to represent a subclass of those class members as to whom the Company printed receipts containing all digits of their credit and/or debit card numbers. The plaintiffs seek an award of statutory damages of $100 to $1,000 for each alleged willful violation of the statute, as well as attorneys' fees, costs, punitive damages and a permanent injunction against the alleged unlawful practice. On July 25, 2011, the court denied plaintiffs’ initial motion for class certification but granted the plaintiffs the right to file an amended motion. On October 3, 2011, Plaintiff filed an amended motion for class certification seeking to certify two classes. The first purported class, represented by Mr. Amason,  consists of (A) all natural persons whose credit and/or debit card was used at an in-store point of sale owned or operated by the Company from June 4, 2009 through the date of the final judgment in the action, (B) where the transaction was in a Company store located in the State of Alabama; and (C) in connection with the transaction, a receipt was printed by Retalix software containing the first four and last four digits of the credit/debit card number on the receipt provided to the customer. The second purported class, represented by Ms. McConnell, consists of (A) all natural persons whose credit and/or debit card was used at an in-store point of sale owned or operated by the Company from June 1, 2009 through the date of the final judgment in the action, and (B) in connection with the transaction, a receipt was printed containing all of the digits of the credit/debit card numbers on the receipt provided to the customer. The Company is opposing the motion for class certification, and also has made a motion to dismiss the plaintiffs’ claims on the basis that the plaintiffs lack standing or alternatively to stay the case until the Supreme Court of the United States rules in First American Financial Corp. v. Edwards, another case involving a standing issue. On January 19, 2012, the Court issued an order staying the case until a decision is issued in the Edwards case, and subsequently administratively terminated plaintiffs’ motion for class certification, subject to plaintiffs’ right to refile the motion after the stay is removed. On June 28, 2012, the Supreme Court of the United States dismissed the writ of certiorari in the Edwards case as having been improvidently granted, an action that has

21

 


 

 

no precedential effect on our case. The parties filed a Joint Report to the Court on July 10, 2012 requesting that plaintiffs’ Renewed Motion for Class Certification and our Motion to Dismiss for Lack of Standing be deemed refiled.  At this stage of the proceedings, losses are reasonably possible, however; we cannot reasonably estimate our loss, range of loss or liability, if any, related to this lawsuit because there are a number of unknown facts and unresolved legal issues that will impact the amount of our potential liability, including, without limitation: (i) whether the plaintiffs have standing to assert their claims; (ii) whether a class or classes will be certified; (iii) if a class or classes are certified, the identity and number of the putative class members; and (iv) if a class or classes are certified, the resolution of certain unresolved statutory interpretation issues that may impact the size of the putative class(es) and whether or not the plaintiffs are entitled to statutory damages. An adverse outcome in this litigation could have a material effect on our business, financial condition, results of operations and cash flows.

 

We are party to various other legal actions in the ordinary course of our business. We believe these other actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the resolution of these matters will not have a material impact on our business, financial condition, results of operations and cash flows. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations and cash could be materially affected.

 

 

Item 4.            Mine Safety Disclosures.

 

Not applicable.

 

 

 

22

 


 

 

PART II

 

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock, $.01 par value, represents our only voting securities. There were 23,260,468 shares of common stock issued and outstanding as of September 27, 2012. Our common stock is traded on The NASDAQ Global Select Market under the symbol “PTRY”. The following table sets forth for each fiscal quarter the high and low sale prices per share of our common stock over the last two fiscal years as reported by NASDAQ, based on published financial sources.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

Quarter

 

High

 

Low

 

High

 

Low

First

 

$

14.84 

 

$

9.52 

 

$

24.43 

 

$

17.10 

Second

 

$

13.53 

 

$

11.25 

 

$

20.52 

 

$

13.29 

Third

 

$

14.37 

 

$

12.45 

 

$

19.47 

 

$

14.43 

Fourth

 

$

16.36 

 

$

13.59 

 

$

19.42 

 

$

10.54 

 

 

 

As of December 5, 2012, there were 145 holders of record of our common stock. This number does not include beneficial owners of our common stock whose stock is held in nominee or “street” name accounts through brokers.

 

During the last three fiscal years, we have not paid any cash dividends on our common stock, and we do not expect to pay cash dividends on our common stock for the foreseeable future. We intend to retain earnings to support operations, reduce debt, repurchase our common stock, and finance expansion. The payment of cash dividends in the future will depend upon our ability to remove certain loan restrictions, and other factors such as our earnings, operations, capital requirements, financial condition and other factors deemed relevant by our Board of Directors. Currently, the payment of cash dividends is prohibited under restrictions contained in our senior credit facility. Refer to Note 7,  Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our debt obligations.

 

There were no sales of unregistered equity securities during the fourth quarter of fiscal 2012.

 

The following table lists all repurchases during the fourth quarter of fiscal 2012 of any of our securities registered under Section 12 of the Exchange Act by or on behalf of us or any affiliated purchaser.

 

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Approximate

 

 

 

 

 

 

 

Purchased as

 

Dollar Value of

 

 

 

 

 

 

 

Part of Publicly

 

Shares that May

 

 

Total Number

 

Average

 

Announced

 

Yet Be Purchased

 

 

of Shares

 

Price Paid

 

Plans or

 

Under the Plans

Period

  

Purchased(1)

  

per Share(2)

  

Programs

 

or Programs

June 29, 2012 - July 26, 2012

 

 -

 

$

 -

 

-

 

$

-

July 27, 2012 - August 30, 2012

 

327 

 

 

14.60 

 

-

 

 

-

August 31, 2012 - September 27, 2012

 

363 

 

 

14.77 

 

-

 

 

-

   Total

 

690 

 

$

14.69 

 

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

(1)  Represents shares repurchased in connection with tax withholding obligations under The Pantry, Inc. 2007 Omnibus Plan ("Omnibus Plan").

(2)  Represents the average price paid per share for the shares repurchased in connection with tax withholding obligations under the Omnibus Plan.

 

 

 

 

 

 

 

 

 

 

 

 

23

 


 

 

Total Return to Shareholders

 

The following table and graph compare the total returns (assuming reinvestment of dividends) of the Company's common stock, the Russell 2000 Index, the NASDAQ Retail Trade Index and our peer group. The graph assumes $100 invested on September 27, 2007 in stock or September 30, 2007 in index (calculated on a month-end basis), including reinvestment of dividends.

 

Total Return Chart 2.JPG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9/27/07

 

9/25/08

 

 

9/24/09

 

9/30/10

 

9/29/11

 

9/27/12

The Pantry, Inc.

$

100.00 

 

$

69.25 

 

 

$

59.61 

 

$

89.43 

 

$

47.55 

 

$

54.78 

Russell 2000

$

100.00 

 

$

85.52 

 

 

$

77.35 

 

$

87.68 

 

$

84.58 

 

$

111.57 

NASDAQ Retail Trade

$

100.00 

 

$

92.84 

 

 

$

90.47 

 

$

104.24 

 

$

111.72 

 

$

153.07 

Peer Group

$

100.00 

 

$

97.92 

 

 

$

98.12 

 

$

134.02 

 

$

152.53 

 

$

211.48 

 

 

The above graph compares the cumulative total stockholder return on our common stock from September 27, 2007 through September 27, 2012, with the cumulative total return for the same period on the Russell 2000 Index, the NASDAQ Retail Trade Index and a peer group consisting of Casey’s General Stores, Inc and Susser Holdings Corporation.

 

The graph assumes that, at the beginning of the period indicated, $100 was invested in our common stock, the stock of our peer group companies and the companies comprising the Russell 2000 Index and the NASDAQ Retail trade Index and that all dividends were reinvested.

 

The stockholder return shown on the graph above is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

 

 

Item 6.   Selected Financial Data.

 

The following table sets forth our historical consolidated financial data and store operating information for the periods indicated. The selected historical annual consolidated statement of operations and balance sheet data as of and for each of the five fiscal years presented are derived from, and are qualified in their entirety by, our consolidated financial statements. Historical results are not necessarily indicative of the results to be expected in the future. You should read the following data together with Part I - Item 1. Business, Part II. - Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes in Part II. - Item 8. Consolidated Financial Statements and Supplementary Data.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 


 

 

(in millions, except per share and as otherwise

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  indicated)

2012

 

2011

 

2010(1)

 

2009

 

2008

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

8,253.2 

 

$

8,138.5 

 

$

7,265.3 

 

$

6,390.1 

 

$

8,995.6 

Net income (loss)

$

(2.5)

 

$

9.8 

 

$

(165.6)

 

$

54.1 

 

$

28.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

$

(0.11)

 

$

0.44 

 

$

(7.42)

 

$

2.43 

 

$

1.29 

  Diluted

$

(0.11)

 

$

0.44 

 

$

(7.42)

 

$

2.42 

 

$

1.29 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Working capital

$

(4.9)

 

$

173.3 

 

$

185.3 

 

$

158.2 

 

$

161.0 

  Total assets (3)

$

1,799.5 

 

$

1,985.2 

 

$

1,943.4 

 

$

2,199.4 

 

$

2,214.7 

  Total debt and lease finance obligations

$

1,017.4 

 

$

1,204.6 

 

$

1,216.7 

 

$

1,238.9 

 

$

1,283.7 

  Shareholders’ equity

$

324.6 

 

$

322.3 

 

$

308.1 

 

$

467.2 

 

$

406.4 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Store Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Average weekly sales per store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Merchandise revenue (in thousands)

$

22.0 

 

$

20.7 

 

$

20.5 

 

$

19.3 

 

$

19.1 

Retail fuel gallons (in thousands)

 

22.1 

 

 

22.2 

 

 

23.7 

 

 

24.4 

 

 

24.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Merchandise gross margin

 

33.7% 

 

 

33.9% 

 

 

33.8% 

 

 

35.4% 

 

 

36.4% 

     Average retail fuel gross margin per gallon(2)

$

0.115 

 

$

0.135 

 

$

0.129 

 

$

0.149 

 

$

0.123 

 

 

(1)

Fiscal 2010 included 53 weeks.

 

(2)

Fuel gross profit per gallon represents fuel revenue less cost of product and expenses associated with credit card processing fees and repairs and maintenance on fuel equipment. Fuel gross profit per gallon as presented may not be comparable to similarly titled measures reported by other companies.

 

(3)

Total assets were adjusted in prior years as a result of our immaterial restatement. Refer to Note 1,  Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information.

 

 

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of The Pantry, Inc. MD&A is provided as a supplement to, and should be read in conjunction with “Part II. - Item 6. Selected Financial Data” and our consolidated financial statements and the related notes appearing in “Part II. - Item 8. Consolidated Financial Statements and Supplementary Data.”

 

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 and references to “fiscal 2010” refer to our fiscal year which ended September 30, 2010. All fiscal years presented included 52 weeks, except fiscal 2010, which included 53 weeks.

 

25

 


 

 

Safe Harbor Discussion

 

This report, including, without limitation, our MD&A, contains statements that we believe are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by the use of phrases such as “believe,” “plan,” “expect,” “anticipate,” “intend,” “forecast,” “goal,” “guidance” or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, anticipated financial performance, projected costs and burdens of environmental remediation, anticipated capital expenditures, expected cost savings and benefits and anticipated synergies from acquisitions, and expectations regarding remodeling, re-branding, re-imaging or otherwise converting our stores are forward-looking statements, as are our statements relating to our anticipated liquidity and debt reduction, our pricing strategies and their anticipated impact and our expectations relating to the costs and benefits of our merchandising and marketing initiatives. These

forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:

 

·

Competitive pressures from convenience stores, fuel stations and other non-traditional retailers located in our markets;

·

Volatility in oil and wholesale fuel costs;

·

Political conditions in oil producing regions and global demand;

·

Changes in credit card expenses;

·

Changes in economic conditions generally and in the markets we serve;

·

Consumer behavior, travel and tourism trends;

·

Legal, technological, political and scientific developments regarding climate change;

·

Wholesale cost increases of, tax increases on and campaigns to discourage the use of tobacco products;

·

Federal and state regulation of tobacco products;

·

Unfavorable weather conditions, the impact of climate change or other trends or developments in the southeastern United States;

·

Inability to identify, acquire and integrate new stores or to divest our non-core stores to qualified buyers or operators on acceptable terms;

·

Financial leverage and debt covenants, including increases in interest rates;

·

Federal and state environmental, tobacco and other laws and regulations;

·

Dependence on one principal supplier for merchandise and three principal suppliers for fuel;

·

Dependence on senior management;

·

Litigation risks, including with respect to food quality, health and other related issues;

·

Inability to maintain an effective system of internal control over financial reporting;

·

Disruption of our IT systems or a failure to protect sensitive customer, employee or vendor data;

·

Inability to effectively implement our store improvement strategies; and

·

Other unforeseen factors.

 

For a discussion of these and other risks and uncertainties, please refer to “Part I. - Item 1A. Risk Factors.” The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of December 11, 2012. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available.

 

Our Business

 

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 United States based on store count.  As of September 27, 2012, we operated 1,578 stores in 13 states primarily under the Kangaroo Express®  operating banner. All but our very smallest stores offer a wide selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers. A limited number of stores do not offer fuel.

 

26

 


 

 

Business Strategy

 

Our strategy is to:

 

·

Increase merchandise sales and gross margin with targeted merchandising and foodservice initiatives to decrease reliance on fuel gross profit;

·

Optimize fuel gallons sold and fuel margin;

·

Manage our corporate general and administrative expenses and our store operating expenses;

·

Generate  strong operating cash flow to reinvest in our business and reduce debt levels;

·

Invest capital as needed in stores that we have identified as core operating properties;

·

Divest under-performing store assets and non-productive surplus properties; and

·

Invest in the development of the best and most energized people.

 

Executive Summary

 

Our net loss for fiscal 2012 was $2.5 million, or ($.11) per share, and Adjusted EBITDA for fiscal 2012 was $210.1 million. Our total revenue for the year increased 1.4% to $8.3 billion primarily driven by higher merchandise revenue as a result of comparable store growth and higher retail fuel prices which increased from an average of $3.33 a gallon in fiscal 2011 to an average of $3.50 a gallon in fiscal 2012. We believe several factors, including lower consumer retail fuel demand, our lower average retail store count and the year over year increase in our average retail fuel price per gallon, contributed to a 4.1% decline in our retail fuel gallons sold during fiscal 2012.

 

During fiscal 2012, we reduced our long-term debt obligations by $214.7 million to $500.6 million as part of our continuing initiative to reduce debt levels. During the fourth quarter of fiscal 2012, we engaged in several refinancing transactions (our “Refinancing”) to replace our senior credit facility and to retire our 7.75% senior subordinated notes due in 2014 (“subordinated notes”). In connection with our Refinancing, we: (i) replaced our senior credit facility with a new $480 million senior facility consisting of a revolving credit facility of $225 million which expires in 2017 and $255 million of term loans which mature in 2019; and (ii) issued $240 million of 8.375% senior notes which mature in 2020. Our liquidity, including cash on hand and borrowing availability under our revolving credit facility, decreased $128.9 million from fiscal 2011 to $205.7 million at the end of fiscal 2012 as a result of our use of approximately $107.2 million of available cash in the Refinancing. Subsequent to the end of our fiscal year, our convertible notes matured and we used available cash to repay the $61.3 million of outstanding notes.

 

We continued our initiative to divest under-performing store assets and non-productive surplus properties during fiscal 2012. We converted 17 operating stores to dealer locations with fuel supply agreements, converted 12 operating stores to commission marketer arrangements and closed or sold 42 under-performing stores. Although our retail store count decreased by 71 stores during fiscal 2012, we believe this initiative is conducive to increasing our overall profitability.

 

During fiscal 2012, we continued our initiative to reduce store operating expenses and general and administrative expenses. Store operating expenses decreased $11.6 million or 2.2% and general and administrative expenses decreased $6.9 million or 6.7% in fiscal 2012 compared to 2011, respectively, as a result of implementing expense control measures and the impact of closed and converted stores.

 

During fiscal 2012, we assessed the results of the “Fresh” initiative that we began in fiscal 2010 to enhance our foodservice offerings in approximately 340 locations. As a result of that assessment, we are currently implementing a remodel program that incorporates aspects of the foodservice initiative but also addresses other aspects of the stores, including improving the condition and appearance of both the internal and external portions of the stores and redesigning the amount and nature of the selling space within the stores. We also are implementing lifestyle merchandising programs to provide merchandise offerings in each store that we believe are consistent with the customer demographics for that particular store. 

 

27

 


 

 

Market and Industry Trends

 

There is currently a trend in the convenience store industry of companies concentrating on increasing and improving in-store foodservice 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 fuel sales for such stores. We are attempting to capitalize on this trend by improving our in-store food offerings. Other significant trends include a national decline in retail fuel gallons sold and the number of cigarettes sold. We believe our focus on foodservice offerings will compensate for lower sales and gross profit resulting from cigarettes and retail fuel.

 

While the U.S. and global economies have shown signs of recovery, unemployment, underemployment and declining home prices remain above normal in the markets where a vast majority of our stores are located. The following table illustrates the unemployment trends, as published by the U.S. Bureau of Labor Statistics, in our

primary markets and the U.S. over the last five calendar years (prior year information updated as of February 29, 2012):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012(1)

 

2011

 

2010

 

2009

 

2008

North Carolina

9.6 

%

 

10.5 

%

 

10.9 

%

 

10.5 

%

 

6.3 

%

South Carolina

9.1 

%

 

10.3 

%

 

11.2 

%

 

11.5 

%

 

6.8 

%

Florida

8.7 

%

 

10.5 

%

 

11.3 

%

 

10.4 

%

 

6.3 

%

United States

7.8 

%

 

8.9 

%

 

9.6 

%

 

9.3 

%

 

5.8 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Data as of September, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As the chart above illustrates, our markets have seen higher unemployment than the U.S. Looking at relevant indices, there are mixed indicators with some showing signs of improvement, while other are not. As a result, the economy is still struggling to recover in our markets. Our business is highly congruent with the economic well being of the construction business. New housing permits in our markets have started to improve. From September 2011 to September 2012, the southern region of the U.S. experienced a 30.0% increase in new housing permits and consumer confidence, as measured by The Conference Board Consumer Confidence Index®, increased 22.0 points from 46.4 in September 2011 to 68.4 in September 2012. However, consumer credit levels have continued to increase throughout fiscal 2012 and the housing market continues to be unstable, especially in our markets. These mixed economic indicators, as well as rising fuel prices, have resulted in lower recreational travel and discretionary consumer spending, which resulted in suppressed demand for our fuel and merchandise. We believe that in challenging economic conditions, our success will depend on our ability to anticipate and respond in a timely manner to changing consumer demands and preferences while continuing to sell products and services that will positively impact overall merchandise gross profit.

 

Wholesale fuel prices were volatile during the last three fiscal years and we expect that they will remain volatile into the foreseeable future. During fiscal 2012,  the closing Gulf Spot unleaded regular fuel price began the year at $2.56 per gallon, reaching a high of  $3.30 per gallon in the fourth quarter, before returning to $3.04 per gallon to finish our fiscal year. We attempt to pass along wholesale fuel cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower fuel margins when the cost of fuel is increasing gradually over a longer period and higher fuel margins when the cost of fuel is declining or more volatile over a shorter period of time.

 

28

 


 

 

Results of Operations

 

We believe the data presented in the table below are important in evaluating the performance of our business operations. We operate in one business segment and believe the information presented in MD&A provides an understanding of our business segment, our operations and our financial condition. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

(in thousands except gallons and unless otherwise noted)

2012

 

2011

 

2010(1)

 

2012/2011

 

2011/2010

Merchandise data:

 

 

 

 

 

 

 

 

 

 

 

 

  Merchandise revenue

$

1,809,288 

 

$

1,778,819 

 

$

1,797,860 

 

1.7% 

 

(1.1%)

  Merchandise gross profit(2)

$

609,835 

 

$

603,189 

 

$

607,464 

 

1.1% 

 

(.7%)

  Merchandise margin

 

33.7% 

 

 

33.9% 

 

 

33.8% 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel data:

 

 

 

 

 

 

 

 

 

 

 

 

  Financial data:

 

 

 

 

 

 

 

 

 

 

 

 

     Fuel revenue

$

6,443,955 

 

$

6,359,681 

 

$

5,467,402 

 

1.3% 

 

16.3% 

     Fuel gross profit(2) (3)

$

210,317 

 

$

257,074 

 

$

264,685 

 

(18.2%)

 

(2.9%)

 

 

 

 

 

 

 

 

 

 

 

 

 

  Retail Fuel data:

 

 

 

 

 

 

 

 

 

 

 

 

     Gallons (in millions)

 

1,811 

 

 

1,889 

 

 

2,047 

 

(4.1%)

 

(7.7%)

     Margin per gallon(3)

$

0.115 

 

$

0.135 

 

$

0.129 

 

(14.8%)

 

4.7% 

     Retail price per gallon

$

3.50 

 

$

3.33 

 

$

2.64 

 

5.1% 

 

26.1% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial data:

 

 

 

 

 

 

 

 

 

 

 

 

  Store operating expenses

$

512,782 

 

$

524,357 

 

$

536,618 

 

(2.2%)

 

(2.3%)

  General and administrative expenses

$

97,244 

 

$

104,178 

 

$

95,683 

 

(6.7%)

 

8.9% 

  Impairment charges

$

6,257 

 

$

12,555 

 

$

267,079 

 

(50.2%)

 

(95.3%)

  Depreciation and amortization

$

119,672 

 

$

117,025 

 

$

120,605 

 

2.3% 

 

(3%)

  Loss on extinguishment of debt

$

5,532 

 

$

15 

 

$

791 

 

NM

 

(98.1%)

  Interest expense, net

$

84,219 

 

$

87,491 

 

$

88,256 

 

(3.7%)

 

(.9%)

  Income tax (benefit) expense

$

(3,007)

 

$

4,827 

 

$

(71,268)

 

(162.3%)

 

(106.8%)

  Adjusted EBITDA(4)

$

210.1 

 

$

231.7 

 

$

239.8 

 

(9.3%)

 

(3.4%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparable store data (5):

 

 

 

 

 

 

 

 

 

 

 

 

  Merchandise sales increase (%)

 

3.3% 

 

 

0.2% 

 

 

5.6% 

 

N/A

 

N/A

  Merchandise sales increase

$

56,210 

 

$

2,908 

 

$

91,849 

 

NM

 

(96.8%)

  Retail fuel gallons (decrease) (%)

 

(3.1%)

 

 

(7.4%)

 

 

(4.9%)

 

N/A

 

N/A

  Retail fuel gallons (decrease)

 

(55,786)

 

 

(147,239)

 

 

(102,629)

 

(62.1%)

 

43.5% 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of stores:

 

 

 

 

 

 

 

 

 

 

 

 

  End of period

 

1,578 

 

 

1,649 

 

 

1,638 

 

(4.3%)

 

0.7% 

  Weighted-average

 

1,611 

 

 

1,655 

 

 

1,652 

 

(2.7%)

 

0.2% 

 

 

(1)  Fiscal 2010 included 53 weeks.

 

(2)  We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.

 

(3)    Fuel margin per gallon represents fuel revenue less cost of product and expenses associated with credit card processing fees and repairs and maintenance on fuel equipment. Fuel margin per gallon as presented may not be comparable to similarly titled measures reported by other companies.

 

(4)  For the definition of Adjusted EBITDA, see our discussion of fiscal 2012 results compared to fiscal 2011 results.

 

(4) The stores included in calculating comparable store data are existing or replacement retail stores, which were in operation during the entire comparable period of all fiscal years. Remodeling, physical expansion or changes in store square footage are not considered when computing comparable store data as amounts have no meaningful impact on measures. Comparable store data as defined by us may not be comparable to similarly titled measures reported by other companies.

 

29

 


 

 

Fiscal 2012 Compared to Fiscal 2011

 

Merchandise Revenue and Gross Profit.  Merchandise revenue for fiscal 2012 increased $30.5 million, or 1.7%, from fiscal 2011  primarily due to comparable store sales growth, which is partially offset by lost revenue from closed or converted stores. Comparable store merchandise sales grew 3.3% or $56.2 million in fiscal 2012 from fiscal 2011 primarily due to growth in foodservice and packaged beverage revenues. This comparable store growth was partially offset by lost revenue of $29.2 million from stores closed or converted since the beginning of fiscal 2011.

 

Merchandise gross profit for fiscal 2012 increased $6.6 million, or 1.1%, from fiscal 2011  primarily due to the $30.5 million increase in merchandise revenue discussed above partially offset by a 20 basis points decline in merchandise margin to 33.7% in fiscal 2012 from 33.9% in fiscal 2011. The decline in merchandise margin is primarily the result of margin pressure in the cigarette category. 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 2012 increased $84.3 million, or 1.3%, from fiscal 2011  primarily due to a 5.1% increase in the average retail fuel price per gallon from $3.33 in fiscal 2011 to $3.50 in fiscal 2012, partially offset by a decrease in retail fuel gallons sold of 77.2 million gallons, or 4.1%. The increase in our average retail price per gallon was primarily due to rising wholesale fuel costs as demonstrated by the change in Gulf Spot prices. In fiscal 2011,  Gulf Spot prices began the fiscal year at $2.08 per gallon, reaching a high of $3.46 per gallon and ending the year at $2.55 per gallon. In fiscal 2012,  Gulf Spot prices began the fiscal year at $2.56 per gallon, reaching a high of $3.30 per gallon and ending the year at $3.04 per gallon.  The decrease in retail fuel gallons sold for fiscal 2012 is primarily attributable to a decrease in comparable store gallons sold of 55.8 million gallons or 3.1% and lost gallons sold from closed or converted stores of 21.4 million gallons. The decrease in comparable store retail fuel gallons sold is primarily due to lower consumer demand and the year-over-year increase in retail prices.

Fuel gross profit for fiscal 2012 decreased $46.8 million, or 18.2%, from fiscal 2011 primarily due to a decrease in retail margin per gallon from 13.5 cents in fiscal 2011 to 11.5 cents in fiscal 2012 and a decline in gallon volume discussed above for fiscal 2012. The decrease in retail margin per gallon is primarily attributable to the volatility in fuel prices during fiscal 2012 including significant periods of rising wholesale costs during our fiscal second and fourth quarters. 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 $0.068 per gallon and $0.066 per gallon for fiscal 2012 and fiscal 2011, respectively. The increase in these fees was primarily due to higher average retail fuel prices.

 

Store Operating.  Store operating expenses for fiscal 2012 decreased $11.6 million or 2.2% from fiscal 2011 primarily due to lower store facilities costs and the impact of closed or converted stores. We continued our effort to manage store expenses through active lease negotiations and reducing controllable expenses such as utilities and postage. We have also had positive trends in insurance costs resulting from favorable claims experience. These decreases in store operating expenses were partially offset by higher labor costs as we work to retain and train store personnel to enhance our customers’ store experience.

 

General and Administrative.  General and administrative expenses for fiscal 2012 decreased $6.9 million, or 6.7%, from fiscal 2011 primarily due to gains realized from store sales, store condemnations and insurance claims. We also experienced a reduction in incentive compensation and reduced bank fees, travel expenses and temporary labor through our initiatives to reduce general and administrative expenses. These reductions were partially offset by higher contract maintenance expenses as a result of several information technology initiatives.

 

Impairment Charges.  Impairment charges for fiscal 2012 decreased $6.3 million or 50.2% from fiscal 2011 primarily due to lower impairment charges on surplus properties. We continued our effort to focus on divesting non-productive and surplus properties in fiscal 2012 that began in fiscal 2011. However, the majority of impairment charges on surplus properties were incurred in fiscal 2011 when management made a strategic decision to market a significant number of properties. Impairment charges incurred on our operating stores, including those under-performing stores that we have divested or plan to divest, has not changed significantly from fiscal 2011 to fiscal 2012.

 

30

 


 

 

Gain(Loss) on Extinguishment of Debt.  The loss on extinguishment of debt for fiscal 2012 increased $5.5 million from fiscal 2011 due to purchasing convertible notes, repaying our subordinated notes and transactions related to our Refinancing. We purchased $48.5 million in principal amount of our convertible notes on the open market which resulted in a loss on debt extinguishment of approximately $2.5 million resulting from a premium paid of $407 thousand, the non-cash write-off of deferred financing costs of $131 thousand and the unamortized debt discount of $1.9 million. Additionally, we repaid $237 million of our subordinated notes which resulted in a loss on debt extinguishment of approximately $2.0 million resulting from a premium paid of $742 thousand, the non-cash write-off of deferred financing costs of $943 thousand and fees of $273 thousand. As part of our Refinancing, we also had a non-cash write-off of $1.1 million related to deferred financing costs.

 

Income Tax Expense (Benefit).  Our effective tax rate for fiscal 2012 was 52.7% compared to 33.0% for fiscal 2011. The increase in our effective rate is primarily the result of the net loss before tax for fiscal 2012 as well as recording significant work opportunity credits. Our low level of pre-tax net income (loss) causes the recurring credits to have a more significant impact on the effective tax rate.

 

Net Income (Loss).  Net loss for fiscal 2012 was $2.5 million or ($.11) per share compared to net income of $9.8 million or $.44 per diluted share in fiscal 2011 primarily due to lower fuel gross profit and increased debt extinguishment expenses.

 

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 2012 was $210.1 million, which was a decrease of $21.6 million, or 9.3%, from fiscal 2011. This decrease is primarily attributable to our lower gross profit and 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. 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 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.

 

Because non-GAAP financial measures are not standardized, Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare our use of Adjusted EBITDA with non-GAAP financial measures having the same or similar names used by other companies.

 

The following table contains a reconciliation of Adjusted EBITDA to net income (loss):

 

 

 

 

 

 

 

 

(in thousands)

2012

 

2011

Adjusted EBITDA

$

210,126 

 

$

231,728 

  Impairment charges

 

(6,257)

 

 

(12,555)

  Loss on extinguishment of debt

 

(5,532)

 

 

(15)

  Interest expense, net

 

(84,219)

 

 

(87,491)

  Depreciation and amortization

 

(119,672)

 

 

(117,025)

  Income tax benefit (expense)

 

3,007 

 

 

(4,827)

Net income (loss)

$

(2,547)

 

$

9,815 

 

31

 


 

 

The following table contains a reconciliation of Adjusted EBITDA to net cash provided by operating activities:

 

 

 

 

 

 

 

 

(in thousands)

2012

 

2011

Adjusted EBITDA

$

210,126 

 

$

231,728 

  Loss on extinguishment of debt

 

(5,532)

 

 

(15)

  Interest expense, net

 

(84,219)

 

 

(87,491)