7-Eleven 2Q Profit Jumps on Higher Sales

DALLAS – 7-Eleven Inc., the world’s largest convenience-store operator, said Tuesday that its second-quarter profit jumped 22 percent as a result of higher sales and cost controls.

The company earned $57.2 million, or 45 cents per share, in the three months ended June 30, up from $47 million, or 38 cents per share, a year ago. It said its core earnings – which exclude a number of non-operating items – totaled $55.3 million, or 44 cents per share, up from $48.1 million, or 39 cents per share, a year ago. Excluding only an accounting adjustment, 7-Eleven said it would have earned 46 cents per share.

The results beat analysts’ expectations for profit of 43 cents per share, according to a Thomson Financial poll.

Revenue rose 9 percent to $3.43 billion from $3.14 billion, as higher gas prices boosted pump revenue. Gasoline sales rose 15 percent to $1.25 billion while merchandise sales increased 7 percent to $2.15 billion.

However, gasoline profit was basically flat with a year ago at $90.9 million.

Jim Keyes, 7-Eleven chief executive, told analysts in a conference call that gas prices may have prompted consumers to choose a less expensive fuel grade but have not kept people from coming into the stores.

“People may defer the purchase of a television set or a new car, but seemingly they are going to have their morning coffee and doughnut,” he said. “The daily nature of our business seems to give us a little bit of protection in our market.”

The company’s convenience stores saw a 8 percent increase in gross profit, which 7-Eleven attributed to “favorable changes in mix.”

Merchandise sales at U.S. stores open at least a year rose 5 percent, 7-Eleven said. The strongest-performing categories included fresh food, hot and cold beverages, cigarettes and services, the company said.

Offerings such as the fresh food have helped the company slowly redefine the mission of convenience stores, said analyst Michael J. Coleman of Southwest Securities Inc.

“It’s allowed them to change the perception of their store and the perception of the industry,” Coleman said.

“In the generic term, convenience stores might sell cigarettes, gas and beer when in fact (7-Eleven) is changing what convenience means. But it’s a slow change; it’s not something that happens overnight,” he said.

The second quarter marked the 35th straight period for overall same-store growth. Keyes touted growth for each of the last four quarters – 4.2 percent; 4.4 percent; 4.6 percent and 5 percent – to illustrate steady increases.

“We’ve accomplished this consistency through good and bad economic times, good and bad gasoline markets and good and bad weather conditions,” he said. “We see this consistency as evidence that our business model works.”

This kind of consistency bodes well for the long term, Coleman said.

“A lot of stores and a lot of companies might see one or two years of solid earnings growth,” he said. “But this is a story where you can count on four or five years of solid growth.”

Meanwhile, 7-Eleven said it kept tight control over expenses. Costs for operating, selling, general and administrative items accounted for 23 percent of sales, down from 24 percent a year ago. After adjusting for the jump in gasoline revenue, the company said these costs would have equaled about 24.1 percent of sales.

7-Eleven also reaffirmed its full-year earnings outlook of $1.12 to $1.16 per share. Analysts are looking for 2005 earnings of $1.13 per share on sales of $13.16 billion.

7-Eleven operates, licenses or franchises about 26,000 stores in 18 countries.

Shares of the company, trading near the high end of a 52-week range of $16.18 to $35.18, fell by 50 cents, or 1.5 percent, to close at $33.83 Tuesday on the New York Stock Exchange. The level is slightly more than double that of a year ago today.