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Recession Reaches Texas

Susser readies investors for tough fourth quarter as unemployment spikes
CORPUS CHRISTI, Texas -- Even as Susser Holdings Corp. reported healthy same-store sales increases and boosts in fuel volumes in its third-quarter results yesterday, CEO Sam Susser set the stage for what could be a challenging fourth quarter as more evidence of the U.S. recession crops up in its core markets in Texas, Oklahoma and New Mexico.

"Although third-quarter results were strong, we did experience softening in sales trends as we progressed through the quarter," Susser said on a conference call with investors. "We are clearly seeing a considerably more challenging [image-nocss] economic environment emerging the past three or four months, and it doesn't seem to have abated."

Susser cited several key indicators, including unemployment, which he said has jumped more than 300 basis points over the past 12 months across the chain's core markets.

He added, "Many of the communities we operate in that were enjoying double-digit increases in retail-sales tax receipts at the end of last year are now experiencing double-digit declines. That said, the c-store industry remains recession resistant, but we are not immune to changes in consumer behavior."

Three industries most hit by the recessionoil-and-gas exploration, construction and truckingpresent a particular cause for concern for Susser.

"The oil-and-gas industry in Texas is operating with slightly less than half of the drilling rigs that were in operation last year at this time," he said. "Texas, Oklahoma and New Mexico did not experience the rapid run up in real-estate prices, and we therefore haven't experienced a sudden collapse or the high foreclosure rates seen in other parts of the country. That said, there are very few new homes being built, and downward pressures are being felt across all sectors of real estate.

"We believe the oil-patch, construction and trucking workers are historically the core customer for stripes and especially our Laredo Taco Co. [foodservice offer], and the unemployment within these sectors is probably much higher than the overall 8.2% state average."

In response, Susser said he's seen competitors take an increasingly aggressive stance on pricing, "and we are responding appropriately to maintain and grow our market share."

In setting the stage for the company's next quarterly report, Susser noted, "The fourth quarter of 2008 was a very robust time period for our business, with a 6.5% increase in same-store merchandise sales and a 6.2% increase in average retail gallons per store. This next quarter will be challenging for us to comp up against, and we have adjusted our full-year guidance accordingly."

Susser reported that same-store merchandise sales for the third quarter ended Sept. 27, 2009, increased by 4.0%. Convenience store merchandise sales from all stores totaled $201.2 million in the latest quarter, up 6.3% from third-quarter 2008. Retail merchandise margin was 33%, versus 34.9% a year ago.

Third-quarter adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) totaled $33.1 million, compared with $31.8 million a year ago. Companywide gross profit totaled $119.8 million, an increase of 0.5% from last year's third quarter.

Total revenues were $882.1 million, compared with $1.2 billion in the third quarter of 2008, which largely reflects the significant decline in average retail and wholesale fuel prices vs. a year ago that reduced fuel revenues by a combined $400.8 million. Lower fuel price-related revenues were partly offset by the higher merchandise sales, along with increased fuel volumes sold in both the retail and wholesale fuel segments vs. a year ago.

Net income was $6.5 million, or $0.38 per diluted share, vs. income of $6.9 million, or $0.40 per diluted share, for the third quarter of last year.

"We continued to see solid growth in same-store sales during the third quarter, although the rate of growth declined throughout the quarter," Susser said. "At the same time, we experienced pressure on margins in some of our product categories, such as packaged drinks, cigarettes and foodservice, as our customers looked to us for greater value and competitors increased discounting to attract sales. Fortunately, we have been able to offset some of that pressure through aggressive pricing promotions partially funded by our supplier partners and associated market basket sales.

For the first nine months of 2009, Susser reported merchandise sales of $583.0 million, up 6.8% from the comparable nine-month period last year. Total revenues were $2.4 billion, down 30.7% due to the lower fuel prices year-over-year. Gross profit was $324.7 million, up 0.3% from the first nine months of last year, reflecting higher fuel gallons sold and higher merchandise sales, partly offset by lower fuel margins in both the retail and wholesale segments. Adjusted EBITDA was $77.3 million, down 3.5%. Net income totaled $7.7 million, or 45 cents per diluted share, compared with $10.2 million, or 60 cents per diluted share for the same period last year.

Corpus Christi, Texas-based Susser Holdings Corp. is a third-generation, family-led business that operates more than 525 c-stores in Texas, New Mexico and Oklahoma under the Stripes and Town & Country banners. Restaurant service is available in more than 300 of its stores, primarily under the proprietary Laredo Taco Co. and Country Cookin' brands. The company also supplies branded motor fuel to more than 380 independent dealers through its wholesale fuel division.

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