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 25, 2008. References to "the Company," "The Pantry," "Pantry," "we," "us" and "our" mean The Pantry, Inc. and its subsidiaries.

Safe Harbor Discussion

This report, including, without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by the use of phrases such as "believe," "plan," "expect," "anticipate," "intend," "forecast" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs and burdens of environmental remediation, anticipated capital expenditures, expected cost savings and benefits and anticipated synergies from acquisitions, and expectations regarding remodeling, rebranding, re-imaging or otherwise converting our stores are also forward-looking statements. 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, gasoline stations and other non-traditional retailers located in our markets;
• Volatility in crude oil and wholesale petroleum costs;
• Political conditions in crude oil producing regions and global demand;
• Changes in economic conditions generally and in the markets we serve;
• Consumer behavior, travel and tourism trends;
• Wholesale cost increases of, tax increases on and campaigns to discourage the use of tobacco products;
• Unfavorable weather conditions or other trends or developments in the southeastern United States;
• Inability to identify, acquire and integrate new stores;
• Financial leverage and debt covenants;
• Federal and state environmental, tobacco and other laws and regulations;
• Dependence on one principal supplier for merchandise and two principal suppliers for gasoline;
• 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; and
• Other unforeseen factors.

For a discussion of these and other risks and uncertainties, please refer to "Part II.-Item 1A. Risk Factors." The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Because actual results and events may vary materially from those anticipated in these forward-looking statements all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of August 4, 2009. 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.

Executive Overview

We are the leading independently operated convenience store chain in the southeastern United States with 1,679 stores in 11 states as of June 25, 2009. Our stores operate under a number of select banners, with 1,571 of our stores operating under Kangaroo and Kangaroo Express, our primary operating banners. We derive our revenue from the sale of merchandise, gasoline and other ancillary products and services designed to appeal to the convenience needs of our customers. Our strategy is to continue to improve upon our position as the leading independently operated convenience store chain in the southeastern United States in the following ways:

• generating profitable growth through merchandising initiatives;
• sophisticated management of our gasoline business;
• leveraging our geographic economies of scale;
• benefiting from the favorable demographics of our markets;
• selectively pursuing acquisitions; and
• developing new stores.

Our third quarter fiscal 2009 results were impacted by several factors. First, our retail gasoline margin for the quarter was low, driven by a rapid rise in wholesale gasoline costs. In addition, we experienced a sharp increase in cigarette and tobacco federal excise taxes which resulted in a decline in cigarette unit sales and caused a reduction in our percentage margin. Finally, the economy was significantly weaker in the third quarter of this year versus the third quarter of last fiscal year leading to reduced consumer demand.

In our gasoline business, our volumes were relatively stable with comparable store retail gasoline gallons down only 0.5% this quarter. Diesel sales continue to be a drag on comparable gas gallons as diesel gallons were down 15.1% versus the third quarter of last fiscal year while gas gallons, excluding diesel, were up 1.4%. Miles driven in our markets decreased by 0.3% in the first two months of the quarter versus the same period a year ago; however, our region still trailed the national average which showed a 0.3% improvement in miles driven.

As noted above, our results for the third quarter of fiscal 2009 were primarily hampered by our weak gasoline margin. Oil prices began the quarter at approximately $48 a barrel and consistently rose to over $70 a barrel before easing slightly at the end of the quarter. Constant increases in the price of oil hindered our ability to achieve our historical gasoline margin. The increase in oil and gasoline prices resulted in a margin of 9.3 cents per gallon for the third quarter of fiscal 2009, compared to 10.7 cents per gallon for the third quarter of fiscal 2008.

For the quarter, comparable store merchandise revenues were up 0.2%, versus a 2.5% decline in the third quarter of fiscal 2008. Our merchandise gross margin was 35.0%, down 150 basis points from the third quarter of fiscal 2008. The boost in merchandise revenues was primarily due to a large increase in federal excise taxes on cigarettes and tobacco. The increase in excise taxes had a negative impact on cigarette units and margin but because excise taxes are included in revenues, they contributed positively to merchandise revenues.

During the fiscal third quarter, we completed the acquisition of 38 stores from Herndon Oil Corporation located in Alabama, Mississippi, Louisiana and Florida. We believe these stores will be immediately accretive and will be an excellent fit within our existing system.

Market and Industry Trends

In our markets, we saw our state weighted-average unemployment rate increase to 10.4% during our third fiscal quarter up from 5.9% during the third fiscal quarter of 2008 and 9.6% during the second fiscal quarter of 2009. The high unemployment rate and a slumping housing market continue to weigh on consumers in our market area.

In our largest category, cigarettes, we saw large increases in federal excise taxes to support the State Children's Health Insurance Program (SCHIP). The federal excise tax on cigarettes increased $0.62 per pack on April 1, 2009. While we attempted to pass on the increased cost to our customers, the tax increase resulted in lower unit volumes and reduced merchandise margins. While overall comparable store cigarette revenues were up approximately 11% in the third quarter of fiscal 2009, cigarette unit sales in the third quarter of fiscal 2009 were down in the low double digits percent from the third quarter of fiscal 2008. We also began to experience, and expect to continue to see, increases in state cigarette excise taxes, as states look for additional revenue sources to cover their revenue shortfalls caused by the soft economy. During the quarter, we saw an increase in Kentucky's state tax by $0.30 per pack on April 1, 2009, a $0.50 per pack increase in Mississippi on May 15, 2009 and a $1.00 per pack increase in Florida on July 1, 2009.

As discussed above, during the third quarter of fiscal 2009, oil and gasoline prices increased throughout the third quarter. We attempt to pass along wholesale gasoline cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower gasoline margins in periods of rising wholesale costs and higher margins in periods of decreasing wholesale costs.

Results of Operations

The table below provides a summary of our selected financial data for the three and nine months ended June 25, 2009 and June 26, 2008 (dollars and gallons, except per gallon data, in thousands):

                                  Three Months Ended                                 Nine Months Ended
                         June 25,                   June 26,                June 25,                   June 26,
                           2009                       2008                    2009                       2008
Selected financial
data:
Merchandise gross
profit [1]             $     151,062             $      156,616         $         434,556          $        445,477
Merchandise margin              35.0 %                     36.5 %                    35.9 %                    37.0 %
Retail gasoline
data:
Gallons                      533,978                    532,195                 1,525,896                 1,575,799
Margin per gallon      $      0.0930             $       0.1068         $          0.1533          $         0.1008
Retail price per
gallon                 $        2.21             $         3.72         $            2.17          $           3.25
Total gasoline
gross profit [1]       $      50,048             $       57,523         $         235,627          $        160,619

Comparable store
data:
Merchandise sales
increase
(decrease)                       0.2 %                     (2.5 %)                   (0.5 %)                   (1.7 %)
Merchandise sales
increase
(decrease)             $         888             $       (9,856 )       $          (6,307 )        $        (18,139 )
Gasoline gallons
decrease (%)                    (0.5 %)                    (5.2 %)                   (4.8 %)                   (3.7 %)
Gasoline gallons
decrease                      (2,441 )                  (25,960 )                 (75,140 )                 (51,108 )
Number of stores:
End of period                  1,679                      1,660                     1,679                     1,660
Weighted-average
store count                    1,649                      1,659                     1,650                     1,649

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

Three Months Ended June 25, 2009 Compared to the Three Months Ended June 26, 2008

Merchandise Revenue and Gross Profit. Merchandise revenue for the third quarter of fiscal 2009 increased $2.0 million, or 0.5%, from the third quarter of fiscal 2008. This increase was primarily attributable to the increase in comparable store merchandise revenue of 0.2%, or $0.9 million, and an increase in merchandise revenue of $3.7 million from newly constructed and acquired stores since the beginning of the third quarter of fiscal 2008, offset by lost merchandise revenue of $2.7 million from closed stores. Merchandise gross profit for the third quarter of 2009 decreased $5.6 million, or 3.5%, from the third quarter of fiscal 2008. This decrease was primarily attributable to a 150 basis point decrease in merchandise gross margin to 35.0% for the third quarter of fiscal 2009 compared to 36.5% for the third quarter of fiscal 2008. The decrease in merchandise gross margin was primarily due to lower cigarette margins resulting from the excise tax increases and an unfavorable mix shift away from higher margin categories like packaged beverage, partially offset by reduced inventory shrinkage.

Gasoline Revenue, Gallons and Gross Profit. Total gasoline revenue for the third quarter of fiscal 2009 decreased $840.1 million, or 41.2%, from the third quarter of fiscal 2008. This decrease was primarily attributable to the 40.4% decrease in the average retail price per gallon to $2.21 and a decrease in wholesale and diesel gasoline gallons sold, offset by an increase in retail gasoline gallons sold. Retail gasoline gallons sold for the third quarter of fiscal 2009 increased 1.8 million gallons, or 0.3%, from the third quarter of fiscal 2008. The increase was primarily attributable to the increase of 6.2 million gallons sold by stores that were newly constructed or acquired since the beginning of the third quarter of fiscal 2008, offset by the decrease in comparable store gasoline gallons sold of 2.4 million gallons, or 0.5% and lost gallons from closed stores of 2.0 million. The decrease in comparable store gasoline gallons sold was primarily due to a 15.1% decline in comparable store diesel volume and weakened consumer demand for gasoline due to continued unemployment and the current economic downturn. Excluding diesel, our comparable store gasoline volumes were up 1.4%.

Gasoline gross profit for the third quarter of fiscal 2009 decreased $7.5 million, or 13.0%, from the third quarter of fiscal 2008. The decrease was primarily attributable to the 1.4 cent decrease in retail gross profit per gallon to 9.3 cents for the third quarter of fiscal 2009 from 10.7 cents in the third quarter of fiscal 2008. The decrease in retail gross profit per gallon was due to increasing wholesale fuel costs during the third quarter of fiscal 2009 offset by decreased credit card fees resulting from a lower average retail price per gallon. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present gasoline gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on gasoline equipment. These fees totaled 4.4 cents per gallon and 6.2 cents per gallon for the three months ended June 25, 2009 and June 26, 2008, respectively.

Store Operating and General and Administrative. Store operating and general and administrative expenses for the third quarter of fiscal 2009 increased $4.9 million, or 3.3%, from the third quarter of fiscal 2008. Average per store operating expenses for the third quarter of fiscal 2009 were relatively unchanged from the third quarter of fiscal 2008. The increase in general and administrative expenses is primarily related to real estate gains and losses, CEO transition costs and the accelerated vesting of stock-based compensation.

Depreciation and Amortization. Depreciation and amortization expenses for the third quarter of fiscal 2009 increased $106 thousand, or 0.4%, from the third quarter of fiscal 2008.

Income from Operations. Income from operations for the third quarter of fiscal 2009 decreased $18.0 million, or 46.8%, from the third quarter of fiscal 2008. This decrease was primarily attributable to the decreases in merchandise and gasoline gross profits due to lower margins and the increase in general and administrative expenses, each of which is discussed above.

EBITDA and Adjusted EBITDA. We define EBITDA as net income (loss) before interest expense, net, gain/loss on extinguishment of debt, income taxes and depreciation and amortization. Adjusted EBITDA includes the lease payments we make under our lease finance obligations as a reduction to EBITDA. EBITDA for the third quarter of fiscal 2009 decreased $18.2 million, or 27.5%, from the third quarter of fiscal 2008. Adjusted EBITDA for the third quarter of fiscal 2009 decreased $18.5 million, or 33.9%, from the third quarter of fiscal 2008. These decreases were primarily attributable to the variances discussed above.

EBITDA and Adjusted EBITDA are not measures of operating performance or liquidity under accounting principles generally accepted in the United States ("GAAP") and should not be considered as substitutes for net income, cash flows from operating activities or other income or cash flow statement data. We have included information concerning EBITDA and 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 EBITDA and Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting and field operations compensation targets.

In accordance with GAAP, certain of our leases, including all of our sale-leaseback arrangements, are accounted for as lease finance obligations. As a result, payments made under these lease arrangements are accounted for as interest expense and a reduction of the principal amounts outstanding under our lease finance obligations. By including in Adjusted EBITDA the amounts we pay under our lease finance obligations, we are able to present such payments as operating costs instead of financing costs. We believe that this presentation helps investors better understand our operating performance relative to other companies that do not account for their leases as lease finance obligations.

Any measure that excludes interest expense, gain/loss on extinguishment of debt, depreciation and amortization 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 EBITDA and 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, EBITDA and Adjusted EBITDA, each 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 EBITDA and Adjusted EBITDA with non-GAAP financial measures having the same or similar names used by other companies.

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net income (amounts in thousands):

                                                        Three Months Ended
                                                      June 25,      June 26,
                                                        2009          2008
        Adjusted EBITDA                               $  36,117     $  54,667
        Payments made for lease finance obligations      11,835        11,450
        EBITDA                                           47,952        66,117
        Interest expense, net                           (20,908 )     (21,775 )
        Depreciation and amortization                   (27,374 )     (27,268 )
        Income tax benefit (expense)                        373        (6,406 )
        Net income                                    $      43     $  10,668

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net cash provided by operating activities (amounts in thousands):

                                                            Three Months Ended
                                                          June 25,      June 26,
                                                            2009          2008
    Adjusted EBITDA                                       $  36,117     $  54,667
    Payments made for lease finance obligations              11,835        11,450
    EBITDA                                                   47,952        66,117
    Interest expense, net                                   (20,908 )     (21,775 )
    Income tax benefit (expense)                                373        (6,406 )
    Stock-based compensation expense                          1,619           808
    Changes in operating assets and liabilities              11,142        12,064
    Other                                                       804         9,199
    Net cash provided by operating activities             $  40,982     $  60,007
    Net cash used in investing activities                 $ (65,971 )   $ (24,914 )
    Net cash (used in) provided by financing activities   $  (2,372 )   $  77,857

Interest Expense, Net. Interest expense, net was primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for the third quarter of fiscal 2009 was $20.9 million compared to $21.8 million for the third quarter of fiscal 2008. This decrease is primarily due to the reduction in the principal outstanding on our debt and changes in the interest rates on our variable rate debt. Please refer to "Part
I.-Item 1. Financial Statements-Notes to Condensed Consolidated Financial Statements-Note 5-Long-Term Debt" for a discussion of the interest rates on our variable rate debt.

Nine Months Ended June 25, 2009 Compared to the Nine Months Ended June 26, 2008

Merchandise Revenue and Gross Profit. Merchandise revenue for the first nine months of fiscal 2009 increased $5.8 million, or 0.5%, from the first nine months of fiscal 2008. This increase was primarily attributable to the merchandise revenue of $19.5 million from newly constructed stores and stores acquired since the beginning of fiscal 2008, offset by a decrease in comparable store merchandise revenue of 0.5%, or $6.3 million and by $7.7 million of lost revenue from closed stores. Merchandise gross profit for the first nine months of 2009 decreased $10.9 million, or 2.5%, from the first nine months of fiscal 2008. This decrease was primarily attributable to a 110 basis point decrease in merchandise gross margin to 35.9% for the first nine months of fiscal 2009 compared to 37.0% for the first nine months of fiscal 2008. The decrease in merchandise gross margin was primarily due to unfavorable mix changes out of higher margin categories.

Gasoline Revenue, Gallons and Gross Profit. Total gasoline revenue for the first nine months of fiscal 2009 decreased $1.9 billion, or 36.3%, from the first nine months of fiscal 2008. This decrease was primarily attributable to the 33.3% decrease in the average retail price per gallon to $2.17 and a decrease in gasoline gallons sold. Retail gasoline gallons sold for the first nine months of fiscal 2009 decreased 49.9 million gallons, or 3.2%, from the first nine months of fiscal 2008. The decrease was primarily attributable to a decrease in comparable store gasoline gallons sold of 75.1 million gallons, or 4.8%, and by lost gallons sold from closed stores of 6.1 million offset by the increase of 31.6 million gallons sold by newly constructed and acquired stores since the beginning of fiscal 2008. The decrease in comparable store gasoline gallons sold was due to decreased consumer demand for gasoline and diesel due to a sluggish economy and a decline in miles driven in our markets.

Gasoline gross profit for the first nine months of fiscal 2009 increased $75.0 million, or 46.7%, from the first nine months of fiscal 2008. The increase was primarily attributable to the 5.2 cent increase in retail gross profit per gallon to 15.3 cents for the first nine months of fiscal 2009 from 10.1 cents for the first nine months of fiscal 2008 offset by the decrease in gasoline gallons sold. The increase in retail gross profit per gallon was primarily due to declining wholesale fuel costs during the first several months of fiscal 2009 and decreased credit card fees resulting from a lower average retail price per gallon. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present gasoline gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on gasoline equipment. These fees totaled 4.3 cents per gallon and 5.5 cents per gallon for the nine months ended June 25, 2009 and June 26, 2008, respectively.

Store Operating and General and Administrative. Store operating and general and administrative expenses for the first nine months of fiscal 2009 increased $13.8 million, or 3.1%, from the first nine months of fiscal 2008. Average per store operating expenses for the first nine months of fiscal 2009 increased slightly from the first nine months of fiscal 2008 primarily due to higher utilities costs, repairs and maintenance expense and store lease expense. The increase in general and administrative expenses is primarily related to increased bonus accruals, accelerated vesting of stock based compensation and CEO transition costs.

Depreciation and Amortization. Depreciation and amortization expenses for the first nine months of fiscal 2009 were consistent with the first nine months of fiscal 2008.

Income from Operations. Income from operations for the first nine months of fiscal 2009 increased $50.4 million, or 64.4%, from the first nine months of fiscal 2008. This increase was primarily attributable to the increase in gasoline gross profit and decreases in store operating expenses, offset by increases in general and administrative expenses, each of which are discussed above.

EBITDA and Adjusted EBITDA. EBITDA for the first nine months of fiscal 2009 increased $49.8 million, or 31.2%, from the first nine months of fiscal 2008. Adjusted EBITDA for the first nine months of fiscal 2009 increased $48.7 million, or 38.8%, from the first nine months of fiscal 2008. These increases were primarily attributable to the variances discussed above.

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to net income (amounts in thousands):

                                                         Nine Months Ended
                                                      June 25,      June 26,
                                                        2009          2008
        Adjusted EBITDA                               $ 174,272     $ 125,572
        Payments made for lease finance obligations      35,324        34,221
        EBITDA                                          209,596       159,793
        Gain on extinguishment of debt                    7,163             -
        Interest expense, net                           (63,304 )     (65,255 )
        Depreciation and amortization                   (80,528 )     (80,679 )
        Income tax expense                              (27,108 )      (5,021 )
        Net income                                    $  45,819     $   8,838

The following table contains a reconciliation of EBITDA and Adjusted EBITDA to . . .