UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedJune 26, 2014

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)

(919) 774-6700

(Registrant’s telephone number, including area code)

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  ý      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  ý     No  ¨

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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer    ý
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  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

COMMON STOCK, $0.01 PAR VALUE	23,443,906 SHARES
(Class)	(Outstanding at July 24, 2014)

THE PANTRY, INC.

TABLE OF CONTENTS 

Part I - Financial Information		Page
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited)	3
	Condensed Consolidated Statements of Operations (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
Part II - Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	30
	Signature	31
	Exhibit Index

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

THE PANTRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
(in thousands, except par value and shares)	June 26, 2014		September 26, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	50,005	$	57,168
Receivables	67,815		64,936
Inventories	148,291		132,229
Prepaid expenses and other current assets	19,769		19,120
Deferred income taxes	20,418		18,698
Total current assets	306,298		292,151
Property and equipment, net	878,192		902,796
Other assets:
Goodwill and other intangible assets	440,712		440,982
Other noncurrent assets	83,086		79,297
Total other assets	523,798		520,279
TOTAL ASSETS	$	1,708,288	$	1,715,226
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	2,550	$	2,550
Current maturities of lease finance obligations	11,468		11,018
Accounts payable	156,760		153,693
Accrued compensation and related taxes	13,274		10,315
Other accrued taxes	21,397		26,207
Self-insurance reserves	28,560		30,700
Other accrued liabilities	46,030		47,178
Total current liabilities	280,039		281,661
Other liabilities:
Long-term debt	496,775		498,414
Lease finance obligations	425,878		434,022
Deferred income taxes	61,129		59,182
Deferred vendor rebates	9,250		10,152
Other noncurrent liabilities	111,390		108,096
Total other liabilities	1,104,422		1,109,866
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock, $.01 par value, 50,000,000 shares authorized; 23,443,906 and 23,556,291 issued and
outstanding at June 26, 2014 and September 26, 2013, respectively	234		236
Additional paid-in capital	220,206		218,911
Accumulated other comprehensive loss, net of deferred income taxes of $0 and $170 at June 26, 2014 and
September 26, 2013, respectively	—		(266		)
Retained earnings	103,387		104,818
Total shareholders’ equity	323,827		323,699
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,708,288	$	1,715,226

See Notes to Condensed Consolidated Financial Statements

3

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended				Nine Months Ended
(in thousands, except per share data)	June 26, 2014		June 27, 2013		June 26, 2014			June 27, 2013
Revenues:
Merchandise	$	484,522	$	476,596	$	1,351,384		$	1,324,393
Fuel	1,534,603		1,516,055		4,239,021			4,475,682
Total revenues	2,019,125		1,992,651		5,590,405			5,800,075
Costs and operating expenses:
Merchandise cost of goods sold (exclusive of items shown separately below)	320,202		315,741		894,526			875,499
Fuel cost of goods sold (exclusive of items shown separately below)	1,479,682		1,462,222		4,092,868			4,324,242
Store operating	123,385		123,275		376,917			371,808
General and administrative	24,623		26,078		76,278			75,179
Impairment charges	1,082		776		2,818			3,955
Depreciation and amortization	27,259		29,446		84,894			87,570
Total costs and operating expenses	1,976,233		1,957,538		5,528,301			5,738,253
Income from operations	42,892		35,113		62,104			61,822
Interest expense	21,398		21,959		64,081			67,218
Income (loss) before income taxes	21,494		13,154		(1,977		)	(5,396		)
Income tax expense (benefit)	7,473		7,216		(546		)	(1,412		)
Net income (loss)	$	14,021	$	5,938	$	(1,431	)	$	(3,984	)
Earnings (loss) per share:
Basic	$	0.61	$	0.26	$	(0.06	)	$	(0.18	)
Diluted	$	0.61	$	0.26	$	(0.06	)	$	(0.18	)

See Notes to Condensed Consolidated Financial Statements

4

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended				Nine Months Ended
(in thousands)	June 26, 2014		June 27, 2013		June 26, 2014			June 27, 2013
Net income (loss)	$	14,021	$	5,938	$	(1,431	)	$	(3,984	)
Other comprehensive income (loss), net of tax:
Amortization of accumulated other comprehensive loss onterminated interest              rate swap agreements, net of deferred income taxes of $46, $63, $170 and              $188, respectively	69		98		266			295
Comprehensive income (loss)	$	14,090	$	6,036	$	(1,165	)	$	(3,689	)

See Notes to Condensed Consolidated Financial Statements

5

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
(in thousands)	June 26, 2014			June 27, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,431	)	$	(3,984	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	84,894			87,570
Impairment charges	2,818			3,955
Provision for deferred income taxes	56			(1,056		)
Stock-based compensation expense	2,349			2,348
Other	3,755			4,340
Changes in operating assets and liabilities:
Receivables	(3,600		)	2,042
Inventories	(16,062		)	(8,646		)
Prepaid expenses and other current assets	200			(1,450		)
Accounts payable	3,067			7,443
Other current liabilities	3,980			(6,919		)
Other noncurrent assets and liabilities, net	(2,543		)	(4,530		)
Net cash provided by operating activities	77,483			81,113
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment	(76,159		)	(58,726		)
Proceeds from sales of property and equipment	3,631			3,359
Acquisition of business, net of cash acquired	—			(502		)
Other	—			351
Net cash used in investing activities	(72,528		)	(55,518		)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt, including redemption premiums	(1,913		)	(62,621		)
Repayments of lease finance obligations	(10,104		)	(7,393		)
Borrowings under revolving credit facility	161,000			158,000
Repayments of revolving credit facility	(161,000		)	(158,000		)
Other	(101		)	(609		)
Net cash used in financing activities	(12,118		)	(70,623		)
Net decrease in cash and cash equivalents	(7,163		)	(45,028		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	57,168			89,175
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	50,005		$	44,147
Cash paid (received) during the period:
Interest	$	56,659		$	60,631
Income taxes	$	(51	)	$	(391	)
Non-cash investing and financing activities:
Capital expenditures financed through capital leases	$	1,671		$	1,312
Accrued purchases of property and equipment	$	7,753		$	13,557

See Notes to Condensed Consolidated Financial Statements

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The Pantry

As of June 26, 2014, we operated 1,527 convenience stores primarily in the southeastern United States. Our stores offer a broad selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers, including fuel, car care products and services, tobacco products, beer, soft drinks, self-service fast food and beverages, publications, dairy products, groceries, health and beauty aids, money orders and other ancillary services. In all states, except Alabama and Mississippi, we also sell lottery products. As of June 26, 2014, we operated 225 quick service restaurants and 235 of our stores included car wash facilities. Self-service fuel is sold at 1,516 locations, of which 1,020 sell fuel under major oil company brand names including BP^® Products North America, Inc. ("BP"), CITGO^®, ConocoPhillips^®, ExxonMobil^®, Marathon^®Petroleum Company, LLC ("Marathon"), Shell^® and Valero^®.

The accompanying unaudited condensed consolidated financial statements include the accounts of The Pantry, Inc. and its wholly owned subsidiary. References in this report to "the Company," "Pantry," "The Pantry," "we," "us" and "our" refer to The Pantry, Inc. and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation. Transactions and balances of our wholly owned subsidiary are immaterial to the condensed consolidated financial statements.

Unaudited Condensed Consolidated Financial Statements

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated financial statements have been prepared from the accounting records and all amounts as of June 26, 2014 are unaudited. Pursuant to Regulation S-X, certain information and note disclosures normally included in our annual financial statements have been condensed or omitted. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented, and which are of a normal, recurring nature.

The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 26, 2013.

Our results of operations for the three and nine months endedJune 26, 2014 and June 27, 2013 are not necessarily indicative of results to be expected for the full fiscal year. The convenience store industry in our marketing areas generally experiences higher sales volumes during the summer months than during the winter months.

References in this report to "fiscal 2014" refer to our current fiscal year, which ends on September 25, 2014, references to "fiscal 2013" refer to our prior fiscal year, which ended September 26, 2013, and references to "fiscal 2012" refer to our fiscal year, which ended September 27, 2012, all of which are 52 week years.

Excise and Other Taxes

We pay federal and state excise taxes on petroleum products. Fuel revenues and cost of goods sold included excise and other taxes of approximately $198.5 million and $579.3 million for the three and nine months endedJune 26, 2014, respectively and $203.5 million and $601.0 million for the three and nine months endedJune 27, 2013, respectively.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out method for merchandise inventories and using the weighted-average method for fuel inventories. The fuel we purchase from our vendors is temperature adjusted. The fuel we sell at retail is sold at ambient temperatures. The volume of fuel we maintain in inventory can expand or contract with changes in temperature. Depending on the actual temperature experience and other factors, we may realize a net increase or decrease in the volume of our fuel inventory during our fiscal year. At interim periods, we record any projected increases or decreases through fuel cost of goods sold ratably over the fiscal year, which we believe more fairly reflects our results by better matching our costs to our retail sales. As of June 26, 2014 and June 27, 2013, we increased inventory by

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capitalizing fuel expansion variances of approximately $11.5 million and $11.3 million, respectively. At the end of any fiscal year, the entire variance is absorbed into fuel cost of goods sold.

New Accounting Standards

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This update requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. This new standard is effective for fiscal years beginning after December 15, 2013, with early adoption permitted, and may be applied either retrospectively or on a prospective basis to all unrecognized tax benefits that exist at the adoption date. We are currently assessing the impact this ASU will have on our financial position, results of operations and cash flows.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations. The update requires that only those disposals which represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results be reported as discontinued operations. The new standard is effective for all disposals occurring within annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted for disposals that have not yet been reported in financial statements previously issued or available for issuance. We adopted this ASU in the third quarter of fiscal 2014. The adoption of this new guidance did not have an impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU changes the requirements for revenue recognition. The ASU prescribes a five step process in order for entities to be able to recognize revenue, in which they must 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The new standard is effective for all revenue transactions occurring during annual reporting periods beginning on or after December 15, 2016, including interim reporting periods within this reporting period. Early adoption is not permitted. We will adopt this standard in the first quarter of fiscal 2018 and are currently assessing the impact this ASU will have on our financial position, results of operations and cash flows.

NOTE 2 - GOODWILL AND OTHER INTANGIBLE ASSETS

We test goodwill for possible impairment in the second quarter of each fiscal year and more frequently if impairment indicators arise. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. An impairment indicator represents an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

In completing step one of the annual impairment test, if our fair value exceeds our book value, then our goodwill is not considered impaired and no additional analysis is required. If our book value exceeds our fair value we will proceed to step two of the goodwill impairment test to determine the amount of the impairment, if any. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair value of the assets and liabilities reflects market conditions, thus volatility in prices could have a material impact on the determination of the implied fair value of the reporting unit goodwill at the annual testing date.

Our market capitalization was greater than our book value at our annual testing date. We determined in step one of the annual impairment test that fair value of our one reporting unit was substantially in excess of the book value.

Our other intangible assets have finite lives and are amortized over their estimated useful lives using the straight-line method. We review our other intangible assets for impairment whenever events or circumstances indicate that it is more likely than not that fair value of the asset is below its carrying amount.

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No impairment charges related to goodwill and other intangible assets were recognized during the first nine months of fiscal 2014 or fiscal 2013.

The following table reflects goodwill and other intangible asset balances for the periods presented:

(in thousands)	June 26, 2014								September 26, 2013
	Weighted Average Useful Life	Gross Amount		Accumulated Amortization			Net Book Value		Weighted Average Useful Life	Gross Amount		Accumulated Amortization			Net Book Value
Unamortized
Goodwill	N/A	$	436,102	N/A			$	436,102	N/A	$	436,102	N/A			$	436,102
Amortized
Customer agreements	13.3	1,356		(986		)	370		13.3	1,356		(923		)	433
Non-compete agreements	33.3	7,974		(3,734		)	4,240		32.8	7,974		(3,527		)	4,447
		$	9,330	$	(4,720	)	$	4,610		$	9,330	$	(4,450	)	$	4,880
Total goodwill and other    intangible assets		$	445,432	$	(4,720	)	$	440,712		$	445,432	$	(4,450	)	$	440,982

NOTE 3 – IMPAIRMENT CHARGES

The following table reflects asset impairment charges for the periods presented:

	Three Months Ended				Nine Months Ended
(in thousands)	June 26, 2014		June 27, 2013		June 26, 2014		June 27, 2013
Operating stores	$	672	$	491	$	2,321	$	2,103
Surplus properties	410		285		497		1,852
Total impairment charges	$	1,082	$	776	$	2,818	$	3,955

Operating Stores.  We test our operating stores for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We compared the carrying amount of these operating store assets to their estimated future undiscounted cash flows to determine recoverability. If the sum of the estimated undiscounted cash flows did not exceed the carrying value, we then estimated the fair value of these operating stores to measure the impairment, if any. We recorded impairment charges related to operating stores as detailed in the table above. There were no operating stores classified as held for sale as of June 26, 2014 and September 26, 2013.

Surplus Properties.  We test our surplus properties for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Periodically management determines that certain surplus properties should be classified as held for sale because of a change in facts and circumstances, including increased marketing and bid activity. We estimate the fair value of these and other surplus properties where events or changes in circumstances indicated, based on marketing and bid activity, that the carrying amount of the assets may not be recoverable. Based on these estimates, we determined that the carrying values of certain surplus properties exceeded fair value resulting in the impairment charges as detailed above. Surplus properties classified as held for sale and included in prepaid expenses and other current assets on the accompanying Condensed Consolidated Balance Sheets were $5.6 million and $4.7 million as of June 26, 2014 and September 26, 2013, respectively.

The impairment evaluation process requires management to make estimates and assumptions with regard to fair value. Actual values may differ significantly from these estimates. Such differences could result in future impairment that could have a material impact on our consolidated financial statements.

Refer to Note 9, Fair Value Measurements, for additional information regarding the determination of fair value.

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NOTE 4 - DEBT

The components of long-term debt for the periods presented consisted of the following:

(in thousands)	June 26, 2014			September 26, 2013
Senior secured term loan	$	251,175		$	253,087
Senior unsecured notes	250,000			250,000
Total long-term debt	501,175			503,087
Less—current maturities	(2,550		)	(2,550		)
Less—unamortized debt discount	(1,850		)	(2,123		)
Long-term debt, net of current maturities and unamortized debt discount	$	496,775		$	498,414

We are party to the Fourth Amended and Restated Credit Agreement, as amended, which provides for a $480.0 million senior secured credit facility ("credit facility"). Our credit facility includes a $225.0 million senior secured revolving credit facility which expires in 2017 and a $255.0 million senior secured term loan which matures in 2019. In addition, the credit facility provides for the ability to incur additional term loans and increases in the secured revolving credit facility in an aggregate principal amount of up to $200.0 million provided certain conditions are satisfied. The interest rate on borrowings under the revolving credit facility is dependent on our consolidated total leverage ratio, and at our option, is either the base rate (generally the applicable prime lending rate of Wells Fargo Bank, National Association, as announced from time to time) plus 250 to 350 basis points or LIBOR plus 350 to 450 basis points. Our current interest rate under the revolving credit facility is, at our option, either the base rate plus 350 basis points or LIBOR plus 450 basis points, with an unused commitment fee of 50 basis points. The interest rate on the senior secured term loan is also dependent on our consolidated total leverage ratio and ranges between LIBOR plus 350 to 375 basis points, with a LIBOR floor of 100 basis points. Based on our current leverage ratio, the interest rate is LIBOR plus 375 basis points with a LIBOR floor of 100 basis points.

Our credit facility is secured by substantially all of our assets and is required to be fully and unconditionally guaranteed by any material, direct and indirect, domestic subsidiaries. Our credit facility contains customary affirmative and negative covenants for financings of its type, including the following financial covenants: maximum total adjusted leverage ratio and minimum interest coverage ratio (as defined in our credit agreement). Additionally, our credit facility contains restrictive covenants regarding our ability to incur indebtedness, make capital expenditures, enter into mergers, acquisitions, and joint ventures, pay dividends or change our line of business, among other things. If we are able to satisfy a leverage ratio incurrence test and no default under our credit facility is continuing or would result therefrom, we are permitted under the credit facility to pay dividends in an aggregate amount not to exceed $35.0 million per fiscal year, plus the sum of (i) any unused amount from preceding years beginning with fiscal year 2012 and (ii) the amount of excess cash flow, if any, not required to be utilized to prepay outstanding amounts under our credit facility for the previous fiscal year. Based on our consolidated senior secured leverage ratio incurrence test we are not permitted to pay dividends. We do not expect to pay dividends in the foreseeable future.

In addition, a change of control of our company, which includes among other things, the majority of the directors on our Board consisting of new directors whose nomination was not recommended by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities or a change of control occurring under the indenture governing our senior unsecured notes, would constitute an event of default, upon which, the lenders holding a majority of the outstanding term loans and revolving credit commitments under the credit facility would be able to accelerate any unpaid loan amounts requiring us to immediately repay all such amounts (plus accrued interest to the date of repayment).

As of June 26, 2014, we had approximately $84.9 million of standby letters of credit issued under the credit facility. After taking into account outstanding letters of credit and the consolidated total adjusted leverage ratio constraint to availability, approximately $140.1 million was available for future borrowing under the revolving credit facility, of which $75.1 million was available for the issuances of letters of credit. The standby letters of credit primarily relate to vendor contracts, self-insurance programs and regulatory requirements.

We have outstanding $250.0 million of 8.375% senior unsecured notes ("senior notes") maturing in 2020. Interest on the senior notes is payable semi-annually in February and August of each year until maturity. If a change of control occurs under the indenture governing our senior notes, which includes among other things, the majority of the directors on our Board consisting

10

of new directors whose election or nomination for election was not approved by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities, certain mergers or consolidations, and the sale of all or substantially all of our assets, we must give holders of the senior notes an opportunity to sell their senior notes to us at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the purchase date, subject to certain conditions. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility. Additionally, an event of default under our credit facility that results in the acceleration of indebtedness thereunder would result in an event of default under the indenture governing our senior notes. Upon an event of default under the indenture governing our senior notes, the requisite noteholders would be able to accelerate and require us to immediately repay all unpaid senior unsecured note amounts (plus accrued interest to the date of repayment).

The indenture governing our senior notes contains restrictive covenants that are similar to those contained in our credit facility. If we are able to satisfy a fixed charge coverage ratio incurrence test and no default under our indenture is continuing or would result therefrom, we are permitted to pay dividends, subject to certain exceptions and qualifications, not exceeding 50% of our consolidated net income (as defined in our indenture) from June 29, 2012 to the end of our most recently ended fiscal quarter, plus proceeds received from certain equity issuances and returns or dispositions of certain investments made from August 3, 2012, less the aggregate amount of dividends or other restricted payments made under this provision and the amount of certain other restricted payments that our indenture permits us to make. Notwithstanding the indenture provision described in the prior sentence, so long as no default under our indenture is continuing or would result therefrom, we are permitted to pay dividends in an aggregate amount not to exceed $20.0 million since August 3, 2012.

As of June 26, 2014, we were in compliance with all covenants and restrictions. Our ability to access our credit facility is subject to our compliance with the terms and conditions of the credit agreement governing our credit facility, including financial and negative covenants.

The fair value of our long-term debt is disclosed in Note 9, Fair Value Measurements.

The remaining annual maturities of our long-term debt as of June 26, 2014 are as follows:

(in thousands)
Fiscal year
2014	$	638
2015	2,550
2016	2,550
2017	2,550
2018	2,550
Later years	490,337
Total principal payments	$	501,175

NOTE 5 – STOCK-BASED COMPENSATION

We account for stock-based compensation by estimating the fair value of stock options using the Black-Scholes option pricing model. Restricted stock awards and restricted stock units (collectively time-based restricted stock) and performance-based restricted stock are valued at the market price of a share of our common stock on the date of grant. We recognize this fair value as an expense in general and administrative expenses in our Condensed Consolidated Statements of Operations over the requisite service period using the straight-line method. We adjust the expense recognized on performance-based restricted stock based on the probability of achieving performance metrics.

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Stock-based compensation grants, for the periods presented are as follows:

	Three Months Ended				Nine Months Ended
(in thousands)	June 26, 2014		June 27, 2013		June 26, 2014		June 27, 2013
Shares granted
Stock options	1		—		128		165
Time-based restricted stock	7		5		144		253
Performance-based restricted stock	3		2		202		256
Total shares granted	11		7		474		674
Fair value of shares granted
Stock options	$	5	$	—	$	573	$	1,898
Time-based restricted stock	91		19		2,242		2,912
Performance-based restricted stock	48		76		3,184		2,978
Total fair value of shares granted	$	144	$	95	$	5,999	$	7,788

The components of stock-based compensation expense in general and administrative expenses in our Condensed Consolidated Statements of Operations for the periods presented are as follows:

	Three Months Ended				Nine Months Ended
(in thousands)	June 26, 2014		June 27, 2013		June 26, 2014		June 27, 2013
Stock options	$	93	$	66	$	322	$	268
Time-based restricted stock	439		512		1,693		1,854
Performance-based restricted stock	88		45		334		226
Total stock-based compensation expense	$	620	$	623	$	2,349	$	2,348

NOTE 6 - INTEREST EXPENSE

The components of interest expense for the periods presented are as follows:

	Three Months Ended				Nine Months Ended
(in thousands)	June 26, 2014		June 27, 2013		June 26, 2014		June 27, 2013
Interest on long-term debt, including amortization of deferred    financing costs	$	10,055	$	10,553	$	29,931	$	32,444
Interest on lease finance obligations	10,959		11,026		32,895		33,258
Amortization of terminated interest rate swaps	115		161		436		483
Amortization of debt discount	91		84		273		696
Miscellaneous	178		135		546		337
Interest expense	$	21,398	$	21,959	$	64,081	$	67,218

NOTE 7 - EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed on the basis of the weighted-average number of common shares available to common shareholders. Diluted earnings (loss) per share is computed on the basis of the weighted-average number of common shares available to common shareholders, plus the effect of unvested restricted stock and stock options using the "treasury stock" method.

Stock options and restricted stock representing 56 thousand and 294 thousand shares for the three months ended June 26, 2014 and June 27, 2013, respectively, were anti-dilutive and were not included in the diluted earnings per share calculation. Stock options and restricted stock representing 1.1 million and 1.5 million shares for the nine months endedJune 26, 2014 and June 27, 2013, respectively, were anti-dilutive and were not included in the diluted loss per share calculation. In periods in which a net loss is incurred, no common stock equivalents are included since they are anti-dilutive. As such, all stock options and restricted stock outstanding are excluded from the computation of diluted loss per share in those periods.

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The following table reflects the calculation of basic and diluted earnings (loss) per share for the periods presented:

	Three Months Ended				Nine Months Ended
(in thousands, except per share data)	June 26, 2014		June 27, 2013		June 26, 2014			June 27, 2013
Net earnings (loss)	$	14,021	$	5,938	$	(1,431	)	$	(3,984	)
Earnings (loss) per share—basic:
Weighted-average shares outstanding	22,910		22,739		22,853			22,673
Earnings (loss) per share—basic	$	0.61	$	0.26	$	(0.06	)	$	(0.18	)
Earnings (loss) per share—diluted:
Weighted-average shares outstanding	22,910		22,739		22,853			22,673
Weighted-average potential dilutive shares outstanding	101		157		—			—
Weighted-average shares and potential dilutive shares outstanding	23,011		22,896		22,853			22,673
Earnings (loss) per share—diluted	$	0.61	$	0.26	$	(0.06	)	$	(0.18	)

NOTE 8 - COMMITMENTS AND CONTINGENCIES

As of June 26, 2014, we were contingently liable for outstanding letters of credit in the amount of approximately $84.9 million primarily related to vendor contracts, self-insurance programs and regulatory requirements. The letters of credit are not to be drawn against unless we default on the timely payment of related liabilities.

Legal and Regulatory Matters

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-9-P-2117-W). On September 9, 2010, a first amended complaint was filed adding Enger McConnell as a plaintiff on behalf of herself and a putative class of similarly situated individuals. The plaintiffs sought class action status, alleging 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 plaintiffs sought 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 October 8, 2013, we reached a proposed settlement in principle with the plaintiffs. We incurred a charge of $3.1 million in the fourth quarter of fiscal 2013 relating to the proposed settlement. The settlement was finalized in a definitive agreement and, on July 3, 2014, the District Court approved the settlement and certified a settlement class consisting of all natural persons residing in the State of Alabama who (1) purchased items inside a store located in Alabama and operated by The Pantry from June 1, 2009 through November 30, 2009, inclusive, (2) paid with a debit card or credit card, (3) were responsible for the charges on the debt card or credit card used in the transaction, and (4) received at the point of sale or transaction an electronically-printed receipt showing the first four and last four digits of the card number. The approval of the settlement resulted in the dismissal of this lawsuit except that the Court retained jurisdiction to enforce the terms of the settlement agreement.

Under the settlement, our minimum liability is $1.5 million plus the amount of attorneys’ fees awarded and our maximum liability, including legal fees and expenses, is $5.0 million. Based upon the claims filed, we estimate that our liability, inclusive of attorneys’ fees and expenses, will approximate the $3.1 million previously accrued.

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 flows could be materially affected. 

Our Board of Directors has approved employment agreements for our executives, which create certain liabilities in the event of the termination of these executives, including termination following a change of control. These agreements have original terms

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of at leastone year and specify the executive’s current compensation, benefits and perquisites, the executive’s entitlements upon termination of employment and other employment rights and responsibilities.

Environmental Liabilities and Contingencies

We are subject to various federal, state and local environmental laws and regulations. We make financial expenditures in order to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In particular, at the federal level, the Resource Conservation and Recovery Act of 1976, as amended, requires the U.S. Environmental Protection Agency ("EPA") to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks (e.g., overfills, spills and underground storage tank releases).

Federal and state laws and regulations require us to provide and maintain evidence that we are taking financial responsibility for corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with these requirements, as of June 26, 2014, we maintained letters of credit in the aggregate amount of approximately $1.4 million in favor of state environmental agencies in North Carolina, South Carolina, Virginia, Georgia, Indiana, Tennessee, Kentucky and Louisiana.

We also rely upon the reimbursement provisions of applicable state trust funds. In Florida, we meet our financial responsibility requirements by state trust fund coverage for releases occurring through December 31, 1998 and meet such requirements for releases thereafter through private commercial liability insurance. In Georgia, we meet our financial responsibility requirements by a combination of state trust fund coverage, private commercial liability insurance and a letter of credit.

As of June 26, 2014, environmental reserves of approximately $5.2 million and $69.7 million are included in other accrued liabilities and other noncurrent liabilities, respectively. As of September 26, 2013, environmental liabilities of approximately $5.2 million and $66.2 million are included in other accrued liabilities and other noncurrent liabilities, respectively. These environmental liabilities represent our estimates for future expenditures for remediation associated with 571 and 582 known contaminated sites as of June 26, 2014 and September 26, 2013, respectively, as a result of releases (e.g., overfills, spills and underground storage tank releases) and are based on current regulations, historical results and certain other factors. We estimate that approximately $67.5 million of our environmental obligations will be funded by state trust funds and third-party insurance; as a result we estimate we will spend up to approximately $7.4 million for remediation.

As of June 26, 2014, anticipated reimbursements of $1.8 million are recorded as current receivables and $67.5 million are recorded as other noncurrent assets. As of September 26, 2013, anticipated reimbursements of $2.4 million were recorded as current receivables and $63.6 million were recorded as other noncurrent assets. Remediation costs for known sites are expected to be incurred over the next one to ten years. Environmental liabilities have been established with remediation costs based on internal and external estimates for each site. Future remediation for which the timing of services can be reliably estimated is discounted at 6.3% to determine the reserve.

Although we anticipate that we will be reimbursed for certain expenditures from state trust funds and private insurance, until such time as a claim for reimbursement has been formally accepted for coverage and payment, there is a risk of our reimbursement claims being rejected by a state trust fund or insurer. In Florida, remediation of such contamination reported before January 1, 1999 will be performed by the state (or state approved independent contractors) and substantially all of the remediation costs, less any applicable deductibles, will be paid by the state trust fund. We will perform remediation in other states through the use of independent contractor firms. For certain sites, the state trust fund does not cover a deductible or has a co-pay which may be less than the cost of such remediation. Although we are not aware of releases or contamination at other locations where we currently operate or have operated stores, any such releases or contamination could require substantial remediation expenditures, some or all of which may not be eligible for reimbursement from state trust funds or private insurance. 

As of June 26, 2014 and September 26, 2013, there are 143 and 147 sites, respectively, identified as contaminated that are being remediated by third parties who have indemnified us as to responsibility for cleanup matters. These sites are not included in our environmental liabilities. Additionally, we are awaiting closure notices on several other locations that will release us from responsibility related to known contamination at those sites. These sites continue to be considered in our environmental liabilities until a final closure notice is received. 

Unamortized Liabilities Associated with Vendor Payments

Service and supply allowances are amortized over the life of each service or supply agreement, respectively, in accordance with the agreement’s specific terms. As of June 26, 2014, other accrued liabilities and deferred vendor rebates included the

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unamortized liabilities associated with these payments of $5.2 million and $9.3 million, respectively. As of September 26, 2013, other accrued liabilities and deferred vendor rebates included the unamortized liabilities associated with these payments of $1.3 million and $10.2 million, respectively.

We purchase over 50% of our general merchandise from a single wholesaler, McLane Company, Inc. ("McLane"). During the second quarter of fiscal 2014 we entered into a new distribution service agreement with McLane that expires December 31, 2019. The new distribution service agreement replaced the distribution service agreement dated August 1, 2008, as amended, between the parties.

We have entered into product brand imaging agreements with numerous oil companies to buy fuel at market prices. The initial terms of these agreements have expiration dates ranging from 2015 to 2019 as of June 26, 2014. In connection with these agreements, we may receive upfront vendor allowances, volume incentive payments and other vendor assistance payments. If we default under the terms of any contract or terminate any supply agreement prior to the end of the initial term, we must reimburse the respective oil company for the unearned, unamortized portion of the payments received to date. These payments are amortized and recognized as a reduction to fuel cost of goods sold using the specific amortization periods based on the terms of each agreement, either using the straight-line method or based on fuel volume purchased. Therefore, the contractual obligation we must reimburse the respective oil company if we default may be different than the unamortized balance recorded as deferred vendor rebates.

Fuel Contractual Contingencies

Our Product Supply Agreement, Guaranteed Supply Agreement and Master Conversion Agreement with Marathon provides for Marathon to supply, and us to purchase, certain minimum amounts of motor fuel for our specified convenience store locations. Subject to certain adjustments, Marathon may terminate the agreements if we do not purchase a minimum volume of a combination of Marathon branded and unbranded gasoline and distillates annually. Based on current forecasts, we anticipate attaining the annual minimum fuel requirements. If Marathon terminates our agreement due to a failure to purchase the annual minimum amounts, Marathon is entitled to receive the unamortized balance of the investment provided for under the Master Conversion Agreement.

Our Branded Jobber Contract with BP provides for BP to supply, and us to purchase, certain minimum amounts of motor fuel for our specified convenience store locations. Our obligation to purchase a minimum volume of BP branded fuel is measured each year over a one-year period during the remaining term of the agreement. Subject to certain adjustments, in any year in which we fail to meet our minimum volume purchase obligation, we have agreed to pay BP two cents per gallon times the difference between the actual volume of BP branded product purchased and the minimum volume requirement. Based on current forecasts, we anticipate attaining the minimum volume requirements for the one-year period ending December 31, 2014. The agreement expires on December 31, 2019.

We have agreements with other fuel suppliers that contain minimum volume provisions. A failure to purchase the minimum volumes could result in an increase in our fuel costs and/or other remedies available to the supplier. Based on our current forecasts, we do not expect these requirements to have a material effect on our results of operations, financial position or cash flows.

NOTE 9 - FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance for accounting for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels of inputs are defined as follows:

Tier	Description
Level 1	Defined as observable inputs such as quoted prices in active markets.
Level 2	Defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3	Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Our financial instruments not measured at fair value on a recurring basis includes cash and cash equivalents, receivables, accounts payable, accrued liabilities and long-term debt and are reflected in the condensed consolidated financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. We

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believe the fair value determination of these short-term financial instruments is a Level 1 measure. Estimated fair values for long-term debt have been determined using available market information, including reported trades and benchmark yields. The fair value of our indebtedness was approximately $523.1 million and $522.5 million as of June 26, 2014 and September 26, 2013, respectively. We believe the fair value determination of long-term debt is a Level 2 measure. 

Significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition included long-lived tangible assets as described in Note 3, Impairment Charges. 

In determining the impairment of operating stores and surplus properties, we determined the fair values by estimating selling prices of the assets. We generally determine the estimated selling prices using information from comparable sales of similar assets and assumptions about demand in the market for these assets. Significant judgment was required to select certain inputs from observed market data. We believe the fair value determination of surplus properties and operating stores are Level 2 measures.

For non-financial assets and liabilities measured at fair value on a non-recurring basis, quantitative disclosure of the fair value for each major category and any resulting realized losses included in earnings is presented below. Because these assets are not measured at fair value on a recurring basis, certain carrying amounts and fair value measurements presented in the table below may reflect values at earlier measurement dates and may no longer represent their fair values as of the three months and nine months endedJune 26, 2014 and June 27, 2013.

	Three Months Ended												Nine Months Ended
	June 26, 2014						June 27, 2013						June 26, 2014						June 27, 2013
(in thousands)	Operating Stores			Surplus Properties			Operating Stores			Surplus Properties			Operating Stores			Surplus Properties			Operating Stores			Surplus Properties
Non-recurring basis
Fair value measurement	$	893		$	1,218		$	1,473		$	1,565		$	4,536		$	1,730		$	4,609		$	4,972
Carrying amount	1,565			1,628			1,964			1,850			6,857			2,227			6,712			6,824
Realized loss	$	(672	)	$	(410	)	$	(491	)	$	(285	)	$	(2,321	)	$	(497	)	$	(2,103	)	$	(1,852	)

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis of our financial condition and results of operations is provided to increase the understanding of, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes appearing elsewhere in this report. Additional discussion and analysis related to our business is contained in our Annual Report on Form 10-K for the fiscal year ended September 26, 2013. References in this report to "the Company," "Pantry," "The Pantry," "we," "us" and "our" refer to The Pantry, Inc. and its subsidiary.

Safe Harbor Discussion

This report, including, without limitation, our MD&A, contains statements that 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," "will," "may," "intend," "outlook," "target", "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, the ability to divest non-core assets, and expectations regarding remodeling, re-branding, re-imaging or otherwise converting our stores or opening new stores are forward-looking statements, as are our statements relating to our anticipated liquidity, financial position and compliance with our covenants under our credit and other agreements, our pricing and merchandising strategies and their anticipated impact and our intentions with respect to acquisitions, the construction of new stores, including additional quick service restaurants, the remodeling of our existing stores and store closures. 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;

• Enhancing our operating performance through in-store initiatives and our store remodel program;

• Realizing the expected benefits from our fuel supply agreements, including our ability to satisfy minimum fuel provisions;

• Financial difficulties of suppliers, including our principal suppliers of fuel and merchandise, and their ability to continue to supply our stores;

• Volatility in domestic and global petroleum and fuel markets;

• 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;

• Our ability to identify suitable acquisition targets and to take advantage of expected synergies in connection with acquisitions;

• 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 information technology 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 the Risk Factors and Critical Accounting Policies and Estimates included in our Annual Report on Form 10-K and the description of material changes therein, if any, included in our Quarterly Reports on Form 10-Q. 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

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understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of July 30, 2014. 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 a leading independently operated convenience store chain in the southeastern United States. As of June 26, 2014, we operated 1,527 stores in 13 states primarily under the Kangaroo Express^® operating banner. All but our 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.

Business Strategy

Our strategy is to grow revenue and profitability by focusing  on prioritizing our markets and improving the stores within those markets. We then remodel stores, selectively open  new stores and restaurants and acquire stores. In addition we have seven initiatives designed to improve the performance of our company. This strategy is intended to allow us to reinvest in our business and maintain sufficient liquidity and financial flexibility. Our initiatives are as follows:

• Invest in the development of the best and most energized people;

• Increase merchandise sales and gross margin with targeted merchandising and food service initiatives;

• Optimize fuel gallons sold and fuel margin;

• Reduce our corporate general and administrative and store operating expenses as a percent of revenue;

• Generate strong operating cash flow to reinvest in our business and reduce our leverage;

• Divest underperforming store assets and non-productive surplus properties; and

• Utilize technology throughout the business to improve the customer experience, our performance, and our people.

Executive Overview

Our net income for the third quarter of fiscal 2014 was $14.0 million, or $0.61 per share, compared to $5.9 million, or $0.26 per share, in the third quarter of fiscal 2013. Adjusted EBITDA for the third quarter of fiscal 2014 was $71.2 million, an increase of $5.9 million, or 9.0%, from the third quarter of fiscal 2013. For the definition of Adjusted EBITDA, see our discussion of the Three Months Ended June 26, 2014 Compared to the Three Months Ended June 27, 2013.

Our total revenue for the third quarter of fiscal 2014 increased $26.5 million or 1.3% from the third quarter of fiscal 2013, primarily due to an increase in our retail price per gallon of 4.1%, partially offset by a decline in comparable fuel gallons sold of 2.3%. Our comparable store merchandise revenue increased 2.3%. We were able to grow comparable store merchandise revenue through a 3.9% increase in sales per customer. Comparable store merchandise revenue increased 3.9% excluding the impact of cigarettes.

We remained focused on upgrading our store base in the third quarter of fiscal 2014. We completed a scrape and rebuild with a new, large-format store. We continue to target 20 new quick service restaurants in fiscal 2014 and opened four during the third quarter bringing our total openings to 11 year to date. We paused our remodel program during the third quarter of fiscal 2014 in order to avoid store disruptions during peak selling periods and to allow us to focus on optimizing returns on remodels recently completed. We plan to resume our remodel program in fiscal 2015. In addition we continue to develop a pipeline of sites to support growth in high potential markets in the future. Over the next several quarters we plan to continue executing our merchandising programs as well as balancing our fuel profitability and volumes throughout our store portfolio. In addition we intend to continue strengthening our position in key markets through remodels, adding quick service restaurants and opening new stores. We also continue evaluating opportunities to enhance density in key markets through disciplined acquisitions of individual stores or chains of stores.

Market and Industry Trends

Wholesale fuel costs, as measured by the Gulf Spot price, were volatile during the third quarter of fiscal 2014. Wholesale fuel costs fluctuated within a range of approximately $0.24 throughout the quarter with a low on May 6, 2014 of $2.69 and a high on June 19, 2014 of $2.93. These cost increases peaked late in the third quarter after a steady decline midway through the third quarter of fiscal 2014, in comparison to relatively consistent costs with the exception of an initial sharp decline in the third quarter of fiscal 2013. These changes in wholesale fuel costs yielded a retail margin per gallon of 12.9 cents in the third quarter

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of fiscal 2014 compared to 12.3 cents in the same period of fiscal 2013. 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 higher fuel margins when the cost of fuel is declining gradually over a longer period and lower fuel margins when the cost of fuel is increasing or more volatile over a shorter period of time.

Results of Operations

The table below provides a summary of our selected financial data for the three and nine months endedJune 26, 2014 and June 27, 2013:

	Three Months Ended			Nine Months Ended
(in thousands, except per gallon and store count data)	June 26, 2014	June 27, 2013	Percent Change	June 26, 2014	June 27, 2013	Percent Change
Merchandise data:
Merchandise revenue	$484,522	$476,596	1.7%	$1,351,384	$1,324,393	2.0%
Merchandise gross profit (1)	$164,320	$160,855	2.2%	$456,858	$448,894	1.8%
Merchandise margin	33.9%	33.8%	N/A	33.8%	33.9%	N/A
Fuel data:
Financial data:
Fuel revenue	$1,534,603	$1,516,055	1.2%	$4,239,021	$4,475,682	(5.3)%
Fuel gross profit (1)(2)	$54,921	$53,833	2.0%	$146,153	$151,440	(3.5)%
Retail fuel data:
Gallons (in millions)	420.2	432.1	(2.8)%	1,222.3	1,267.0	(3.5)%
Margin per gallon (2)	$0.129	$0.123	4.9%	$0.118	$0.118	—%
Retail price per gallon	$3.59	$3.45	4.1%	$3.41	$3.47	(1.7)%
Financial data:
Store operating expenses	$123,385	$123,275	0.1%	$376,917	$371,808	1.4%
General and administrative expenses	$24,623	$26,078	(5.6)%	$76,278	$75,179	1.5%
Impairment charges	$1,082	$776	39.4%	$2,818	$3,955	(28.7)%
Depreciation and amortization	$27,259	$29,446	(7.4)%	$84,894	$87,570	(3.1)%
Interest expense	$21,398	$21,959	(2.6)%	$64,081	$67,218	(4.7)%
Income tax expense (benefit)	$7,473	$7,216	3.6%	$(546)	$(1,412)	(61.3)%
Adjusted EBITDA (3)	$71,233	$65,335	9.0%	$149,816	$153,347	(2.3)%
Comparable store data(4):
Merchandise sales increase (%)	2.3%	1.3%	N/A	2.7%	0.5%	N/A
Merchandise sales increase	$10,767	$5,908	NM	$34,891	$7,006	NM
Retail fuel gallons decrease (%)	(2.3)%	(4.4)%	N/A	(3.1)%	(5.7)%	N/A
Retail fuel gallons decrease	(9,761)	(19,916)	NM	(38,915)	(75,838)	NM
Number of stores:
End of period	1,527	1,562	(2.2)%	1,527	1,562	(2.2)%
Weighted-average store count	1,532	1,567	(2.2)%	1,538	1,571	(2.1)%

NM = Not meaningful

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

(2) 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.

(3) For the definition of Adjusted EBITDA, see our discussion of the Three Months Ended June 26, 2014 Compared to the Three Months Ended June 27, 2013.

(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.

Three Months EndedJune 26, 2014 Compared to the Three Months EndedJune 27, 2013

Merchandise Revenue and Gross Profit. Merchandise revenue in the third quarter of fiscal 2014 increased $7.9 million from the third quarter of fiscal 2013. Our comparable store merchandise revenue increased 2.3%, or $10.8 million driven by a 3.9% increase in merchandise revenue per customer. We experienced stronger comparable store merchandise revenue growth in

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packaged beverage products and proprietary food service categories, while we continue to see declining comparable store sales in cigarettes. Our comparable store merchandise revenue increased 3.9% excluding the impact of cigarettes. Merchandise revenue also increased $2.8 million from the third quarter of fiscal 2013 as a result of new convenience store openings and acquisitions since the beginning of the third quarter of fiscal 2013. These increases were partially offset by lost merchandise revenue from stores closed since the beginning of the third quarter of fiscal 2013 of $6.1 million.

Our merchandise gross profit increased $3.5 million or 2.2% from the third quarter of fiscal 2013 primarily due to the increase in sales described above and a 10 basis point improvement in merchandise margin to 33.9% from 33.8% in the third quarter of fiscal 2013. 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 in the third quarter of fiscal 2014 increased $18.5 million or 1.2% as a result of an increase in our average retail fuel price per gallon of 4.1% to $3.59 in the third quarter of fiscal 2014 from $3.45 in the third quarter of fiscal 2013, largely due to rising wholesale fuel costs as demonstrated by the changes in Gulf Spot prices. The impact of the higher average fuel price was partially offset by lower retail fuel gallons sold for the third quarter of fiscal 2014, down 2.8%, or 11.9 million gallons compared to the third quarter of fiscal 2013. The gallon decline is due to a 2.3%, or 9.8 million gallon decline in comparable store retail fuel gallons sold, along with 4.6 million gallons lost from stores closed since the beginning of the third quarter of fiscal 2013. The gallons lost from stores closed was partially offset by the impact of new convenience store openings and acquisitions since the beginning of the third quarter of fiscal 2013 of 1.9 million gallons. We achieved further sequential quarterly improvement in comparable store retail fuel gallons sold during the third quarter of fiscal 2014.

Our fuel gross profit increased $1.1 million or 2.0% as the result of an increase in our retail margin per gallon to 12.9 cents in the third quarter of fiscal 2014 from 12.3 cents in the third quarter of fiscal 2013. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses and inclusive of credit card processing fees and cost of repairs and maintenance on fuel equipment. These fees totaled 7.2 cents and 6.8 cents per retail gallon for the three months ended June 26, 2014 and June 27, 2013, respectively.

Store Operating. Store operating expenses for the third quarter of fiscal 2014 increased $109 thousand, or 0.1%, from the third quarter of fiscal 2013. The increase is primarily due to an increase in medical and other insurance costs, which is partially offset by a decrease in store labor costs resulting from productivity initiatives and the impact of closed stores.

General and Administrative. General and administrative expenses for the third quarter of fiscal 2014 decreased $1.5 million or 5.6% from the third quarter of fiscal 2013. This decrease is driven by gains related to various property transactions and lower professional fees in the third quarter of fiscal 2014. Professional fees during the third quarter of fiscal 2013, included consulting expenses for a strategic planning initiative.

Impairment Charges. Impairment charges related to operating stores and surplus properties were $1.1 million and $776 thousand for the three months ended June 26, 2014 and June 27, 2013, respectively, as a result of changes in expected cash flows at certain operating stores and management determining that certain facts and circumstances changed regarding specific surplus properties. See Note 3, Impairment Charges and Note 9, Fair Value Measurements in Part I, Item 1, Financial Statements, Notes to Condensed Consolidated Financial Statements.

Interest Expense. Interest expense is primarily comprised of interest on our long-term debt and lease finance obligations. Interest expense for the third quarter of fiscal 2014 was $21.4 million compared to $22.0 million for the third quarter of fiscal 2013. The decrease is primarily due to lower interest rates on our term loan and lower average outstanding borrowings.

Income Tax Expense. Our effective tax rate for the third quarter of fiscal 2014 was 34.8% compared to 54.9% in the third quarter of fiscal 2013. Variances in our effective tax rate are primarily driven by changes in our forecasted level of pre-tax income and the anticipated amount of work opportunity tax credits (“WOTC”). We anticipate our effective tax rate will be approximately 29.0% for fiscal 2014.

Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, gain (loss) on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA for the third quarter of fiscal 2014 increased $5.9 million, or 9.0%, from the third quarter of fiscal 2013. This increase is primarily attributable to the increase in merchandise gross profit and higher fuel gross profit noted above.

Adjusted EBITDA is not a measure of operating performance or liquidity under generally accepted accounting principles ("GAAP") and should not be considered as a substitute for net income, cash flows from operating activities or other income or

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cash flow statement data. We have included information concerning Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting compensation targets. Adjusted EBITDA does not include impairment of long-lived assets and other charges. We excluded the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets.

Any measure that excludes interest expense, gain (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.

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 for the periods presented:

	Three Months Ended
(in thousands)	June 26, 2014			June 27, 2013
Adjusted EBITDA	$	71,233		$	65,335
Impairment charges	(1,082		)	(776		)
Interest expense	(21,398		)	(21,959		)
Depreciation and amortization	(27,259		)	(29,446		)
Income tax expense	(7,473		)	(7,216		)
Net income	$	14,021		$	5,938

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

	Three Months Ended
(in thousands)	June 26, 2014			June 27, 2013
Adjusted EBITDA	$	71,233		$	65,335
Interest expense	(21,398		)	(21,959		)
Income tax expense	(7,473		)	(7,216		)
Stock-based compensation expense	620			623
Changes in operating assets and liabilities	12,096			19,147
Benefit for deferred income taxes	7,817			7,421
Other	1,031			1,567
Net cash provided by operating activities	$	63,926		$	64,918
Net cash used in investing activities	$	(20,303	)	$	(19,658	)
Net cash used in financing activities	$	(3,312	)	$	(10,104	)

Nine Months EndedJune 26, 2014 Compared to the Nine Months EndedJune 27, 2013

Merchandise Revenue and Gross Profit. The increase in merchandise revenue of $27.0 million or 2.0% is primarily attributable to an increase in comparable store merchandise revenue of 2.7% or $34.9 million. We experienced stronger comparable store merchandise revenue growth in packaged beverage products and proprietary food service categories, while we continue to see declining comparable store sales in cigarettes. Our comparable store merchandise revenue increased 4.6% excluding the impact of cigarettes. Merchandise revenue also increased $8.1 million from the beginning of fiscal 2013 as a result of new convenience store openings and acquisitions. This increase was partially offset by the impact of lost merchandise revenue from stores closed or converted to dealer operations since the beginning of fiscal 2013 of $16.3 million.

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Our merchandise gross profit increased $8.0 million or 1.8% from the first nine months of fiscal 2013 as a result of the increase in merchandise revenues. The impact from increased merchandise revenues was partially offset by the decline in merchandise margin to 33.8% from 33.9% in the first nine months of fiscal 2014, which was driven by sales mix and more competitive pricing. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.

Fuel Revenue, Gallons and Gross Profit. The decrease in fuel revenue of $236.7 million or 5.3% is attributable to the decrease in retail fuel gallons sold and a decline in our average retail fuel price per gallon. For the first nine months of fiscal 2014, our average retail fuel price per gallon declined 1.7% to $3.41 from $3.47 in the first nine months of fiscal 2013. Additionally, retail fuel gallons sold decreased 3.5% or 44.7 million gallons compared to the first nine months of fiscal 2014 and 2013, respectively. The gallon decline is primarily attributable to a 3.1% or 38.9 million gallon decline in comparable store retail fuel gallons sold along with 13.3 million gallons lost from stores closed or converted to dealer operations since the beginning of fiscal 2013. This was partially offset by the impact of new convenience store openings and acquisitions since the beginning of fiscal 2013 of 7.9 million gallons. We believe lower consumer retail fuel demand resulting from several factors, including fewer miles driven and colder temperatures, contributed to our decline in comparable retail fuel gallons sold during the first nine months of fiscal 2014.

Our fuel gross profit decreased $5.3 million, or 3.5%, due to the decline in retail fuel gallons sold as our retail margin per gallon was 11.8 cents in the first nine months of fiscal 2014 as well as fiscal 2013. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses and inclusive of credit card processing fees and cost of repairs and maintenance on fuel equipment. These fees totaled 6.9 cents per retail gallon for the nine months endedJune 26, 2014 and June 27, 2013.

Store Operating. Store operating expenses for the first nine months of fiscal 2014 increased $5.1 million, or 1.4%, from the first nine months of fiscal 2013. The increase is primarily due to higher utilities costs related to the colder temperatures in our markets in the second quarter of fiscal 2014 and higher insurance costs, related to lower actuarial-based adjustments to our self-insurance reserves for workers compensation and general liability.

General and Administrative. General and administrative expenses for the first nine months of fiscal 2014 increased $1.1 million or 1.5% from the first nine months of fiscal 2013. This increase is driven by higher expected annual incentive plan realization as compared to the prior period, partially offset by lower professional fees.

Impairment Charges. Impairment charges related to operating stores and surplus properties were $2.8 million and $4.0 million for the nine months endedJune 26, 2014 and June 27, 2013, respectively, as a result of changes in expected cash flows at certain operating stores and management determining that certain facts and circumstances changed regarding specific surplus properties. See Note 3, Impairment Charges and Note 9, Fair Value Measurements in Part I, Item 1, Financial Statements, Notes to Condensed Consolidated Financial Statements.

Interest Expense. Interest expense is primarily comprised of interest on our long-term debt and lease finance obligations. Interest expense for the first nine months of fiscal 2014 was $64.1 million compared to $67.2 million for the first nine months of fiscal 2013. The decrease is primarily due to lower interest rates on our term loan and lower average outstanding borrowings as a result of repaying $61.3 million of outstanding convertible notes upon maturity in November 2012.

Income Tax Benefit. Our effective tax rate for the first nine months of fiscal 2014 was 27.6% compared to 26.2% in the first nine months of fiscal 2013. Variances in our effective tax rate are primarily driven by changes in our forecasted level of pre-tax income and the anticipated amount of work opportunity tax credits (“WOTC”). We anticipate our effective tax rate will be approximately 29.0% for fiscal 2014.

Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, gain (loss) on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA for the first nine months of fiscal

2014 decreased $3.5 million, or 2.3%, from the first nine months of fiscal 2013. This decrease is primarily attributable to the decrease in fuel gross profit and increased store operating and general administrative expenses, which is partially offset by higher merchandise gross profit noted above.

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The following table contains a reconciliation of Adjusted EBITDA to net loss for the periods presented:

	Nine Months Ended
(in thousands)	June 26, 2014			June 27, 2013
Adjusted EBITDA	$	149,816		$	153,347
Impairment charges	(2,818		)	(3,955		)
Interest expense	(64,081		)	(67,218		)
Depreciation and amortization	(84,894		)	(87,570		)
Income tax benefit	546			1,412
Net loss	$	(1,431	)	$	(3,984	)

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

	Nine Months Ended
(in thousands)	June 26, 2014			June 27, 2013
Adjusted EBITDA	$	149,816		$	153,347
Interest expense	(64,081		)	(67,218		)
Income tax benefit	546			1,412
Stock-based compensation expense	2,349			2,348
Changes in operating assets and liabilities	(14,958		)	(12,060		)
Benefit for deferred income taxes	56			(1,056		)
Other	3,755			4,340
Net cash provided by operating activities	$	77,483		$	81,113
Net cash used in investing activities	$	(72,528	)	$	(55,518	)
Net cash used in financing activities	$	(12,118	)	$	(70,623	)

Liquidity and Capital Resources

	Nine Months Ended
(in thousands)	June 26, 2014			June 27, 2013
Cash and cash equivalents at beginning of year	$	57,168		$	89,175
Net cash provided by operating activities	77,483			81,113
Net cash used in investing activities	(72,528		)	(55,518		)
Net cash used in financing activities	(12,118		)	(70,623		)
Cash and cash equivalents at end of period	$	50,005		$	44,147
Consolidated total adjusted leverage ratio (1)	5.43			5.37
Consolidated interest coverage ratio (1)	2.42			2.40

⁽¹⁾  As defined by the senior credit facility agreement.

Due to the nature of our business, substantially all sales are for cash and credit cards which are converted to cash shortly after the transaction. Cash provided by operations is our primary source of liquidity. We rely primarily on cash provided by operating activities, supplemented as necessary from time to time by borrowings under our revolving credit facility to finance our operations, pay principal and interest on our debt and fund capital expenditures. We generally experience higher sales volumes during the summer months, and therefore our cash flow from operations tends to be higher during our third and fourth fiscal quarters. We had approximately $84.9 million of standby letters of credit issued under our revolving credit facility as of June 26, 2014.

Cash Flows provided by Operating Activities. Cash provided by operating activities was $77.5 million for the first nine months of fiscal 2014 compared to $81.1 million for the first nine months of fiscal 2013. The decrease is primarily due to changes in working capital of $4.9 million. Changes in working capital used cash of $12.4 million in the first nine months of fiscal 2014 compared to a use of cash of $7.5 million in the first nine months of fiscal 2013. The changes in working capital during the current fiscal year resulted from increases in inventories and receivables and a decrease in other current liabilities.

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Cash Flows used in Investing Activities. Cash used in investing activities was $72.5 million for the first nine months of fiscal 2014 compared to $55.5 million for the first nine months of fiscal 2013. Capital expenditures for the first nine months of fiscal 2014 were $76.1 million which was partially offset by proceeds from the sale of property and equipment of $3.6 million. Capital expenditures for the first nine months of fiscal 2013 were $58.7 million which was partially offset by proceeds from the sale of property and equipment of $3.4 million. Capital expenditures primarily relate to store improvements, store equipment, new store development including quick service restaurants, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. The increase in capital expenditures in the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013 is primarily due to our store remodel, quick service restaurants and new store initiatives. The proceeds from the sale of property and equipment relate to our ongoing initiative to divest our under-performing store assets and non-productive surplus properties. We finance substantially all capital expenditures through cash flows from operations, asset dispositions and vendor reimbursements. We anticipate that capital expenditures for fiscal 2014 will be approximately $100.0 million.

Cash Flows used in Financing Activities. Cash used in financing activities was $12.1 million for the first nine months of fiscal 2014 compared to $70.6 million for the first nine months of fiscal 2013. The decrease in cash flows from financing activities is primarily related to the use of available cash to repay the $61.3 million of outstanding convertible notes in the first three months of fiscal 2013.

Sources of Liquidity

As of June 26, 2014, we had approximately $50.0 million in cash and cash equivalents and approximately $140.1 million in available borrowing capacity under our revolving credit facility after taking into account outstanding letters of credit and the consolidated total adjusted leverage ratio constraint to availability. Approximately $75.1 million was available for the issuances of letters of credit.

Due to the nature of our business, substantially all sales are for cash and credit cards which are converted to cash shortly after the transaction. Funds generated by operating activities, available cash and cash equivalents, our credit facility and asset dispositions continue to be our most significant sources of liquidity.

We believe our sources of liquidity will be sufficient to sustain operations and to finance anticipated strategic initiatives for the next twelve months. However, in the event our liquidity is insufficient, we may be required to limit our spending on future initiatives or other business opportunities. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms.

Our financing strategy is to maintain liquidity and access to capital markets while reducing our leverage. We expect to continue to have access to capital markets on both short and long-term bases when needed for liquidity purposes. Our continued access to these markets depends on multiple factors including the condition of debt capital markets, our operating performance and maintaining our credit ratings. Our credit ratings and outlooks issued by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Services ("Standard & Poor's") as of June 26, 2014, are summarized below:

Rating Agency	Senior Secured Credit Facility	Senior Unsecured Notes due 2020	Corporate Rating	Corporate Outlook
Moody's	B1	Caa1	B2	Stable
Standard & Poor's	BB	B+	B+	Stable

Credit rating agencies review their ratings periodically and therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the convenience store industry, our financial position and changes in our business strategy. If further changes in our credit ratings were to occur, they could impact, among other things, our future borrowing costs, access to capital markets and vendor financing terms.

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Capital Resources

Capital Expenditures

We anticipate investing approximately $100.0 million in capital expenditures during fiscal 2014. Our capital expenditures typically include store improvements, store equipment, new store development including quick service restaurants, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. Refer to Note 8, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further information regarding our significant commitments.

Debt

Our credit facility includes a $225.0 million senior secured revolving credit facility which expires in 2017 and a $255.0 million senior secured term loan which matures in 2019. The senior secured revolving credit facility is available for working capital and general corporate purposes, and a maximum of $160.0 million is available for issuance of letters of credit. The issuance of letters of credit will reduce the amount otherwise available for borrowing under the senior secured revolving credit facility. In addition, the credit facility provides for the ability to incur additional senior secured term loans and/or increases in the senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million provided certain conditions are satisfied, and provided that the aggregate principal amount for all increases in the senior secured revolving credit facility cannot exceed $100.0 million.

The interest rate on borrowings under the revolving credit facility is dependent on our consolidated total leverage ratio, and at our option, is either the base rate (generally the applicable prime lending rate of Wells Fargo Bank, National Association, as announced from time to time) plus 250 to 350 basis points or LIBOR plus 350 to 450 basis points. Our current interest rate under the revolving credit facility is, at our option, either the base rate plus 350 basis points or LIBOR plus 450 basis points, with an unused commitment fee of 50 basis points. The interest rate on the senior secured term loan is also dependent on our consolidated total leverage ratio and ranges between LIBOR plus 350 to 375 basis points, with a LIBOR floor of 100 basis points. Our current interest rate under the senior secured term loan is LIBOR (with a floor of 100 basis points) plus 375 basis points. Interest under the credit facility is paid on the last day of each LIBOR interest period, but no less than every three months.

Borrowings under our senior secured term loan are required to be paid in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount, with the remainder due on the maturity date. In addition, borrowings under our credit facility are required to be prepaid with: (a) 100% of the net cash proceeds of the issuance or incurrence of debt by the Company or any of its subsidiaries, subject to certain exceptions; (b) 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries and other asset dispositions by the Company or its subsidiaries, if any, subject to reinvestment provisions and certain other exceptions; and (c) to the extent the total leverage ratio is greater than 3.5 to 1.0 at the end of any fiscal year, the lesser of (i) 50% of excess cash flow during such fiscal year minus voluntary prepayments of our senior secured term loan or senior unsecured notes or (ii) the amount of prepayment necessary to lower the total leverage ratio to 3.5 to 1.0, after giving pro forma effect to such prepayment.

Our ability to access our credit facility is subject to our compliance with the terms and conditions of the credit agreement governing our credit facility, including financial and negative covenants.

The financial covenants under our credit facility currently include the following: (a) maximum total adjusted leverage ratio, which is the maximum ratio of debt (net of cash and cash equivalents in excess of $40.0 million) plus eight times rent expenses to EBITDAR (which represents EBITDA plus rental expenses for operating leases); and (b) minimum interest coverage ratio. The financial covenants apply to the Company and its subsidiaries, if any, on a consolidated basis.

The negative covenants under our credit facility include, without limitation, restrictions on the following: capital expenditures; indebtedness; liens and related matters; investments and joint ventures; contingent obligations; dividends and other restricted payments; fundamental changes, asset sales and acquisitions; sales and leasebacks; sale or discount of receivables; transactions with shareholders and affiliates; disposal of subsidiary capital stock and formation of new subsidiaries; conduct of business; certain amendments; senior debt status; fiscal year, state of organization and accounting practices; and management fees.

In addition, a change of control of our company, which includes among other things, the majority of the directors on our Board consisting of new directors whose nomination was not recommended by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities or a change of control occurring under the indenture governing our senior unsecured notes, would constitute an event of default, upon which, the lenders holding a majority of the

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outstanding term loans and revolving credit commitments under the credit facility would be able to accelerate any unpaid loan amounts requiring us to immediately repay all such amounts (plus accrued interest to the date of repayment).

We have outstanding $250.0 million of 8.375% senior unsecured notes (“senior notes”) maturing in 2020. Interest on the notes is payable semiannually in February and August of each year until maturity. If a change of control occurs under the indenture governing our senior notes, which includes among other things, the majority of the directors on our Board consisting of new directors whose election or nomination for election was not approved by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities, certain mergers or consolidations, and the sale of all or substantially all of our assets, we must give holders of the senior notes an opportunity to sell their senior notes to us at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the purchase date, subject to certain conditions. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility. Additionally, an event of default under our credit facility that results in the acceleration of indebtedness thereunder would result in an event of default under the indenture governing our senior notes. Upon an event of default under the indenture governing our senior notes, the requisite noteholders would be able to accelerate and require us to immediately repay all unpaid senior unsecured note amounts (plus accrued interest to the date of repayment).

In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the senior notes at 100% of their principal amount, together with accrued and unpaid interest and additional interest, if any, to the date of purchase. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility.

The negative covenants under the indenture governing our senior notes are similar to those under our credit facility and include, without limitation, the following: restricted payments; dividend and other payment restrictions affecting subsidiaries; incurrence of indebtedness and issuance of preferred stock; asset sales; transactions with affiliates; liens; corporate existence; and no layering of debt.

As of June 26, 2014, we were in compliance with all covenants under our credit facility and senior notes.

If we default under our credit facility or the indenture governing our senior notes because of a covenant breach or otherwise, all outstanding amounts thereunder could become immediately due and payable. Any acceleration of amounts due would have a material adverse effect on our liquidity and financial condition, and we cannot assure you that we would be able to obtain a waiver of any such default, that we would have sufficient funds to repay all of the outstanding amounts, or that we would be able to obtain alternative financing to satisfy such obligations on commercially reasonable terms or at all.

We use capital leases and sale leaseback transactions to finance a portion of our stores. The net present value of our capital lease obligations and sale leaseback transactions are reflected in our Condensed Consolidated Balance Sheets in lease finance obligations and current maturities of lease finance obligations.

Refer to Note 4, Debt, of the Notes to Condensed Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further information on our debt obligations.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commercial commitments outside the ordinary course of business since the end of fiscal 2013. Refer to our Annual Report on Form 10-K for the fiscal year ended September 26, 2013 for additional information regarding our contractual obligations and commercial commitments.

New Accounting Standards

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This update requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined

26

with an unrelated deferred tax asset. This new standard is effective for fiscal years beginning after December 15, 2013, with early adoption permitted, and may be applied either retrospectively or on a prospective basis to all unrecognized tax benefits that exist at the adoption date. We are currently assessing the impact this ASU will have on our financial position, results of operations and cash flows.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations. The update requires that only those disposals which represent a strategic shift that will have a major effect on the Company’s financial statements be reported as discontinued operations. The new standard is effective for all disposals occurring within annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted for disposals that have not yet been reported in financial statements previously issued or available for issuance. We adopted this ASU in the third quarter of fiscal 2014. The adoption of this new guidance did not have a significant impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU changes the requirements for revenue recognition. The ASU prescribes a five step process in order for entities to be able to recognize revenue, in which they must 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The new standard is effective for all revenue transactions occurring during annual reporting periods beginning on or after December 15, 2016, including interim reporting periods within this reporting period. Early adoption is not permitted. We will adopt this standard in the first quarter of fiscal 2018 and are currently assessing the impact this ASU will have on our financial position, results of operations and cash flows.

Critical Accounting Policies

As discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended September 26, 2013, we consider our accounting policies on store closing and impairment charges, goodwill, asset retirement obligations, self-insurance liabilities and environmental liabilities and related receivables to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. Other than the goodwill critical accounting policy disclosures described in our Form 10-Q for the quarter ended March 29, 2014, there have been no material changes in our critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 26, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to interest rate risk on our existing long-term debt and any future financing requirements. Our fixed rate debt consists primarily of outstanding balances on our senior notes due in 2020 and our variable rate debt relates to borrowings under our senior credit facility. We are exposed to market risks inherent in our financial instruments. These instruments arise from transactions entered into in the normal course of business and, in some cases, relate to our acquisitions of related businesses.

Our primary exposure relates to:

• Interest rate risk on long-term and short-term borrowings resulting from changes in LIBOR;

• Our ability to pay or refinance long-term borrowings at maturity at market rates;

• The impact of interest rate movements on our ability to meet interest expense requirements and exceed financial covenants; and

• The impact of interest rate movements on our ability to obtain adequate financing to fund future strategic business initiatives.

As of June 26, 2014 and September 26, 2013, we had fixed-rate debt outstanding of $250.0 million, and we had variable-rate debt outstanding of $251.2 million and $253.1 million, respectively. The following table presents the future principal cash flows and weighted-average interest rates by fiscal year on our existing long-term debt instruments based on rates in effect as of June 26, 2014. Fair values have been determined using available market information, including reported trades and benchmark yields as of June 26, 2014.

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	Expected Maturity Date
(in thousands)	2014			2015			2016			2017			2018			Thereafter			Total		Fair Value
Long-term debt (fixed rate)	$	—		$	—		$	—		$	—		$	—		$	250,000		$	250,000	$	270,313
Weighted-average interest rate	8.38		%	8.38		%	8.38		%	8.38		%	8.38		%	8.38		%
Long-term debt (variable rate)	$	638		$	2,550		$	2,550		$	2,550		$	2,550		$	240,337		$	251,175	$	252,745
Weighted-average interest rate	4.75		%	4.75		%	4.75		%	4.75		%	4.75		%	4.75		%

At June 26, 2014 and September 26, 2013, the interest rate on approximately 50.0% of our debt was fixed by the nature of the obligation. The annualized effect of a one percentage point change in our floating rate debt obligations at June 26, 2014 would result in an increase to interest expense of approximately $2.5 million.

While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, management evaluates our financial position on an ongoing basis.

Item 4. Controls and Procedures.

As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective in that they provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

For a description of legal proceedings, see Note 8, Commitments and Contingencies - Legal and Regulatory Matters of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A.  Risk Factors.

Except for the risk factors described in our Form 10-Q for the quarter ended December 26, 2013, there have been no material changes to the risk factors described in our annual report on Form 10-K for the fiscal year ended September 26, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no sales of unregistered equity securities during the third quarter of fiscal 2014.

The following table lists all repurchases during the third quarter of fiscal 2014 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

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
March 28, 2014 - April 24, 2014	—	$	—	—	$	—
April 25, 2014 - May 29, 2014	315	$	14.43	—	—
May 30, 2014 - June 26, 2014	—	$	—	—	—
Total	315	$	14.43	—	$	—

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

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

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Item 6.  Exhibits.

Exhibit Number	Description of Document
3.1	Amended and Restated Certificate of Incorporation of The Pantry (incorporated by reference to Exhibit 3.3 to The Pantry’s Registration Statement on Form S-1, as amended (Registration No. 333-74221)).
3.2	Amended and Restated By-Laws of The Pantry (incorporated by reference to Exhibit 3.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 25, 2009).
4.1	Indenture dated August 3, 2012 by The Pantry and U.S. National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.2	Supplemental Indenture dated April 23, 2013 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% senior notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2013).
10.1	Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan.
10.2	Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan.
10.3	Employment Agreement effective as of April 17, 2014 by and between Gordon Schmidt and the Company.
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
32.2	Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

30

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE PANTRY, INC.
By:                       /s/ B. Clyde Preslar
B. Clyde Preslar
Senior Vice President and Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
Date:	July 30, 2014

31

EXHIBIT INDEX

Exhibit Number	Description of Document
3.1	Amended and Restated Certificate of Incorporation of The Pantry (incorporated by reference to Exhibit 3.3 to The Pantry’s Registration Statement on Form S-1, as amended (Registration No. 333-74221)).
3.2	Amended and Restated By-Laws of The Pantry (incorporated by reference to Exhibit 3.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 25, 2009).
4.1	Indenture dated August 3, 2012 by The Pantry and U.S. National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.2	Supplemental Indenture dated April 23, 2013 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% senior notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2013).
10.1	Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan.
10.2	Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan.
10.3	Employment Agreement effective as of April 17, 2014 by and between Gordon Schmidt and the Company.
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
32.2	Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document