10-Q

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 ended March 31, 2011

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. Yesx            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 ¨        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 filerx
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¨        Nox

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	22,986,792 SHARES
(Class)	(Outstanding at May 6, 2011)

THE PANTRY, INC.

FORM 10-Q

March 31, 2011

TABLE OF CONTENTS

		Page
Part I—Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Operations (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29
Part II—Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 6.	Exhibits	43

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

THE PANTRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 (Dollars in thousands)

	March 31, 2011	September 30, 2010
ASSETS
Current assets:
Cash and cash equivalents	$106,641	$200,637
Receivables, net	113,294	92,118
Inventories	171,871	130,949
Prepaid expenses and other current assets	13,481	21,848
Deferred income taxes	22,760	11,468
Total current assets	428,047	457,020
Property and equipment, net	1,013,461	1,005,152
Other assets:
Goodwill	431,763	403,193
Other intangible assets	8,003	6,722
Other noncurrent assets	24,782	24,363
Total other assets	464,548	434,278
Total assets	$1,906,056	$1,896,450
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$4,281	$6,321
Current maturities of lease finance obligations	7,338	7,024
Accounts payable	159,172	144,358
Accrued compensation and related taxes	13,582	14,736
Other accrued taxes	20,243	31,748
Self-insurance reserves	31,931	29,681
Other accrued liabilities	28,522	37,866
Total current liabilities	265,069	271,734
Other liabilities:
Long-term debt	751,416	753,020
Lease finance obligations	448,702	450,312
Deferred income taxes	62,579	38,388
Deferred vendor rebates	14,742	10,212
Other noncurrent liabilities	64,740	64,675
Total other liabilities	1,342,179	1,316,607
Commitments and contingencies (Note 10)
Shareholders’ equity:
Common stock, $.01 par value, 50,000,000 shares authorized; 22,986,792 and 22,736,051 issued and outstanding at March 31, 2011 and September 30, 2010, respectively	229	227
Additional paid-in capital	211,498	209,410
Accumulated other comprehensive loss, net of deferred income taxes of $642 at March 31, 2011 and $1,325 at September 30, 2010	(1,015)	(2,090)
Retained earnings	88,096	100,562
Total shareholders’ equity	298,808	308,109
Total liabilities and shareholders’ equity	$1,906,056	$1,896,450

See Notes to Condensed Consolidated Financial Statements

3

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended		Six Months Ended
	March 31, 2011	March 25, 2010	March 31, 2011	March 25, 2010
	(13 weeks)	(13 weeks)	(26 weeks)	(26 weeks)
Revenues:
Merchandise	$422,494	$409,267	$842,359	$826,839
Fuel	1,473,216	1,268,175	2,857,157	2,587,001
Total revenues	1,895,710	1,677,442	3,699,516	3,413,840
Costs and operating expenses:
Merchandise cost of goods sold (exclusive of items shown separately below)	277,531	271,044	556,847	552,328
Fuel cost of goods sold (exclusive of items shown separately below)	1,411,385	1,202,790	2,744,577	2,464,628
Store operating	127,200	129,774	259,084	260,623
General and administrative	29,047	26,306	56,397	47,902
Goodwill impairment	—	227,414	—	227,414
Other impairment charges	797	1,681	797	34,318
Depreciation and amortization	29,356	30,614	58,187	59,583
Total costs and operating expenses	1,875,316	1,889,623	3,675,889	3,646,796
Income (loss) from operations	20,394	(212,181)	23,627	(232,956)
Interest expense, net	(21,801)	(22,323)	(43,538)	(44,586)
Loss before income taxes	(1,407)	(234,504)	(19,911)	(277,542)
Income tax benefit	1,138	68,422	7,445	85,391
Net loss	$(269)	$(166,082)	$(12,466)	$(192,151)
Loss per share:
Basic	$(0.01)	$(7.44)	$(0.56)	$(8.62)
Diluted	$(0.01)	$(7.44)	$(0.56)	$(8.62)

See Notes to Condensed Consolidated Financial Statements

4

THE PANTRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Six Months Ended
	March 31,  2011	March 25,  2010
	(26 weeks)	(26 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(12,466)	$(192,151)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	58,187	59,583
Impairment charges	797	261,732
Amortization of convertible note discount	2,544	2,689
(Benefit) provision for deferred income taxes	12,214	(69,186)
Stock-based compensation expense	1,686	1,737
Other	1,632	2,725
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables	(21,697)	(8,193)
Inventories	(37,386)	(11,690)
Prepaid expenses and other current assets	5,242	1,670
Other noncurrent assets	(1,142)	(1,169)
Accounts payable	14,814	13,605
Other current liabilities and accrued expenses	(17,801)	(15,029)
Other noncurrent liabilities	3,876	(3,232)
Net cash provided by operating activities	10,500	43,091
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment	(52,901)	(29,692)
Proceeds from sales of property and equipment	5,366	596
Insurance recoveries	203	—
Acquisitions of businesses, net of cash acquired	(47,564)	(10)
Net cash used in investing activities	(94,896)	(29,106)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt, including redemption premiums	(6,188)	(2,158)
Repayments of lease finance obligations	(3,510)	(3,145)
Other	98	(58)
Net cash used in financing activities	(9,600)	(5,361)
Net (decrease) increase in cash	(93,996)	8,624
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	200,637	169,880
CASH AND CASH EQUIVALENTS, END OF PERIOD	$106,641	$178,504
Cash paid during the period:
Interest	$40,336	$41,035
Non-cash investing and financing activities:
Capital expenditures financed through capital leases	$     2,214	$     458
Accrued purchases of property and equipment	$2,071	$8,902

See Notes to Condensed Consolidated Financial Statements

5

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The Pantry

As of March 31, 2011, we operated 1,660 convenience stores located in Florida (404), North Carolina (379), South Carolina (276), Georgia (130), Alabama (112), Tennessee (101), Mississippi (97), Virginia (50), Kansas (43), Kentucky (29), Louisiana (27), Indiana (9) and Missouri (3). 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 March 31, 2011, we operated 241 quick service restaurants within 235 of our locations and 277 of our stores included car wash facilities. Self-service fuel is sold at 1,645 locations, 1,119 of which sell fuel under major oil company brand names including BP®, Chevron®, CITGO®, Texaco®, ExxonMobil®, Marathon®, Shell® and ConocoPhillips®.

The accompanying condensed consolidated financial statements include the accounts of The Pantry, Inc. and its wholly owned subsidiaries (references to “the Company,” “Pantry,” “The Pantry,” “we,” “us” and “our” mean The Pantry, Inc. and its subsidiaries). All intercompany transactions and balances have been eliminated in consolidation. Transactions and balances of each of our wholly owned subsidiaries 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 March 31, 2011, and for the three and six months ended March 31, 2011 and March 25, 2010 are unaudited. Pursuant to Regulation S-X, certain information and note disclosures normally included in 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 balance sheet at September 30, 2010 has been derived from our audited consolidated financial statements.

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 30, 2010.

Our results of operations for the three and six months ended March 31, 2011 and March 25, 2010 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 levels of revenues during the summer months than during the winter months.

References in this report to “fiscal 2011” refer to our current fiscal year, which ends on September 29, 2011, references to “fiscal 2010” refer to our fiscal year which ended September 30, 2010 and references to “fiscal 2009” refer to our fiscal year which ended September 24, 2009.

Accounting Period

We operate on a 52-53 week fiscal year ending on the last Thursday in September. Fiscal 2011 is a 52 week year. Fiscal 2010 was a 53 week year.

Reclassifications

Certain prior period amounts have been reclassified to conform to current classifications.  Fees associated with our senior credit facility previously in general and administrative expenses are now in interest expense, net.  Consistent with the presentation in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010,  environmental remediation costs previously included in store operating expense in our condensed consolidated statements of operations are now included in fuel cost of goods sold.  These changes were not material and had no impact on the condensed consolidated balance sheets or the condensed consolidated statements of cash flows for any of the periods presented.

Excise Taxes

We pay federal and state excise taxes on petroleum products. Fuel sales and cost of goods sold included excise and other taxes of approximately $204.7 million and $428.4 million for the three and six months ended March 31, 2011, respectively, and $208.9 million and $437.5 million for the three and six months ended March 25, 2010, respectively.

6

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 cost of goods sold during the year based on gallon volume, which we believe more fairly reflects our results by better matching our costs to our retail sales. As of March 31, 2011 and March 25, 2010, we have increased inventory by capitalizing fuel expansion variances of approximately $19.2 million and $14.4 million, respectively. At the end of any fiscal year, the entire variance is absorbed into cost of goods sold.

Income Tax Examination

We are subject to examination by various domestic taxing authorities.  The Internal Revenue Service is currently performing an examination of our U.S. federal income tax returns for 2008 and 2009.  We are subject to examination in major state tax jurisdictions for years beginning with 2007.  We believe appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

NOTE 2—ACQUISITIONS

We generally focus on selectively acquiring convenience store chains within or contiguous to our existing market areas. Our ability to create synergies due to our relative size and geographic concentration contributes to a purchase price that is generally in excess of the fair value of assets acquired and liabilities assumed, which results in the recognition of goodwill.

During the first six months of fiscal 2011, we purchased one store in North Carolina and separately purchased 47 stores from Presto Convenience Stores, LLC (“Presto”) in Kansas (44) and Missouri (3). The 47 stores purchased from Presto operate under the Presto tradename. The Presto acquisition included the real estate underlying 36 of the stores. These acquisitions were funded using available cash on hand.

Following are the aggregate purchase price allocations for the stores acquired during the first six months of fiscal 2011. Certain allocations are preliminary estimates based on available information and assumptions management believes to be reasonable. These values are subject to change until valuations have been finalized and management completes its fair value assessments. We do not expect any adjustments to the fair values of the assets and liabilities disclosed in the table below to have a significant impact on our consolidated financial statements. The purchase price allocations were based on the estimated fair values on the dates of the acquisitions (amounts in thousands):

Assets acquired:
Inventories	$	3,536
Property and equipment		20,693
Other noncurrent assets		66
Total assets		24,295
Liabilities assumed:
Deferred vendor rebates		1,009
Other noncurrent liabilities		2,728
Total liabilities		3,737
Net tangible assets acquired, net of cash		20,558
Trademark		2,180
Non-compete agreement		100
Goodwill		24,726
Total consideration paid, net of cash acquired	$	47,564

7

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Acquisition related costs incurred and expensed:
Professional, consulting and legal fees	$	752
Other		506
Total	$	1,258

We expect that goodwill associated with these transactions totaling $24.7 million will be deductible for income tax purposes over 15 years.

The following unaudited pro forma information presents a summary of our consolidated results of operations as if the transactions occurred at the beginning of the fiscal year for each of the periods presented (amounts in thousands, except per share data):

	Six Months Ended
	March  31,  2011		March 25,  2010
Total revenues	$	3,733,025	$	3,510,911
Net loss		(11,928)		(190,592)
Loss per share:
Basic	$	(0.53)	$	(8.55)
Diluted	$	(0.53)	$	(8.55)

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

Our chief operating decision maker regularly reviews our results on a consolidated basis, and therefore we have concluded that we have one operating and reporting segment.  We test goodwill for possible impairment in the second quarter of each fiscal year and more frequently if impairment indicators arise. 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. We conduct our annual assessment of indefinite-lived intangibles in the fourth quarter of each fiscal year. Indefinite-lived intangibles are also reviewed for impairment more frequently if impairment indicators arise.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Management monitors events and changes in circumstances in between annual testing dates to determine if such events or changes in circumstances are impairment indicators. Such indicators may include the following, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of our goodwill and could have a material impact on our consolidated financial statements.

The goodwill impairment test is a two-step process.  The first step of the impairment test is a comparison of our fair value to our book value. If our book value is higher than fair value there is an indication that impairment exists and the second step must be performed to measure the impairment, if any. The second step compares the implied fair value of our goodwill with its carrying amount. The implied fair value of our goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination. 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.

We conducted our annual impairment testing of goodwill in the second quarter of fiscal 2011, and determined in step one of the test that fair value exceeded book value by a significant amount.  As a result, no impairment charges related to goodwill or other intangible assets were recognized during the first six months of fiscal 2011.

8

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table reflects goodwill and other intangible asset balances as of September 30, 2010 and the activity thereafter through March 31, 2011 (amounts in thousands, except weighted-average life data):

	Unamortized	Amortized
	Goodwill	Trade Names	Customer Agreements	Non-compete Agreements
Weighted-average useful life in years	N/A	2.0	11.8	31.2
Gross balance at September 30, 2010	$403,193	$5,650	$1,928	$12,728
Acquisitions	24,726	2,180	—	100
Purchase accounting adjustment (1)	3,844	—	—	—
Gross balance at March 31, 2011	$431,763	$7,830	$1,928	$12,828
Accumulated amortization at September 30, 2010		$(4,956)	$(1,195)	$(7,433)
Amortization		(747)	(67)	(185)
Accumulated amortization at March 31, 2011		$(5,703)	$(1,262)	$(7,618)
Net book value	$431,763	$2,127	$666	$5,210

(1) Amounts are purchase accounting adjustments related to the finalization of real property valuations for the prior year acquisitions.

The estimated future amortization expense for tradenames, customer agreements and non-compete agreements as of March 31, 2011 is as follows (amounts in thousands):

Fiscal Year Ending September:
2011	$1,019
2012	1,496
2013	637
2014	353
2015	326
Thereafter	4,172
Total estimated amortization expense	$8,003

NOTE 4— ASSET IMPAIRMENTS

During the first six months of fiscal 2011 and 2010, we recorded the following asset impairments:

Goodwill.  As a result of our annual goodwill impairment testing conducted in the second quarter of fiscal 2010, we determined that our book value exceeded our fair value under step one of the impairment test and that the carrying value of our goodwill exceeded its implied fair value under step two of the impairment test. Accordingly, we recorded a non-cash pre-tax impairment charge of approximately $230.8 million. The impairment was due to a combination of a decline in our market capitalization as of January 21, 2010 and a decline in the estimated forecasted discounted cash flows since the prior goodwill impairment test.

Tradenames.  In December 2009, management made a decision to discontinue the use of the Petro Express® tradename at existing and future store locations. In reaching this conclusion, management considered, among other things, the impact of the December 2009 announcement by Chevron® that it was withdrawing its motor fuels operations in select areas of the East Coast and that the vast majority of the stores were de-branded by the end of fiscal 2010. We determined fair value using a discounted cash flow model that incorporates the relief from royalty method and compared the fair value to the carrying amount to test for impairment.  As a result of the impairment test we recorded an impairment charge of approximately $21.3 million during the six months ended March 25, 2010.

9

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Land parcels.  In December 2009, management made a strategic decision not to develop stores on certain land parcels that we own.  As a result, we determined that the carrying values of these land parcels would not be recoverable through estimated undiscounted future cash flows.  We estimated the fair value of these land parcels, and, based on these estimates, we recorded impairment charges related to land parcels of approximately $7.8 million during the six months ended March 25, 2010.

Operating stores.  In the six months ended March 31, 2011 and March 25, 2010, we tested our operating stores for impairment.  For each operating store where events or changes in circumstances indicated that the carrying amount of the assets might not be recoverable, we compared the carrying amount to its 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.  As a result of this testing, we recorded impairment charges related to operating stores of approximately $797 thousand and $1.7 million during the three months ended March 31, 2011 and March 25, 2010, respectively, and $797 thousand and $5.3 million for the six months ended March 31, 2011 and March 25, 2010, 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.  The impairment charges recorded during the three and six months ended March 31, 2011 and March 25, 2010 are presented in the table below (amounts in thousands):

	Three Months Ended		Six Months Ended
	March 31, 2011	March 25, 2010	March 31, 2011	March 25, 2010
Goodwill	$       —	$       227,414	$       —	$       227,414
Tradenames	—	—	—	21,250
Land	—	—	—	7,769
Operating stores	797	1,681	797	5,299
Impairment charges	$       797	$       229,095	$       797	$       261,732

NOTE 5—LONG-TERM DEBT

Long-term debt consisted of the following (amounts in thousands):

	March 31, 2011	September 30, 2010
Senior credit facility; interest payable monthly at LIBOR plus 1.75%; principal  due in quarterly installments through May 15, 2014	$407,578	$413,740
Senior subordinated notes payable; due February 15, 2014; interest payable  semi-annually at 7.75%	247,000	247,000
Senior subordinated convertible notes payable; due November 15, 2012; interest payable semi-  annually at 3.0%	109,768	109,768
Other notes payable; various interest rates and maturity dates	132	158
Total long-term debt	764,478	770,666
Less—current maturities	(4,281)	(6,321)
Less—unamortized debt discount	(8,781)	(11,325)
Long-term debt, net of current maturities and unamortized debt discount	$751,416	$753,020

10

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

We are party to a Third Amended and Restated Credit Agreement (“credit agreement”), which defines the terms of our existing senior credit facility. Our senior credit facility includes a $225.0 million six-year revolving credit facility and $407.6 million in outstanding term loan facilities.  In addition, we may at any time incur up to $200.0 million in incremental facilities in the form of additional revolving or term loans so long as (i) such incremental facilities would not result in a default as defined in our credit agreement and (ii) we would be able to satisfy certain other conditions set forth in our credit agreement. The revolving credit facility matures in May 2013, and the term loan facilities mature in May 2014.

If our consolidated total leverage ratio (as defined in our credit agreement) is greater than 3.50 to 1.0 at the end of any fiscal year, the terms of our credit agreement require us to prepay our term loans using up to 50% of our excess cash flow (as defined in our credit agreement). We were required to make a principal payment of approximately $4.0 million as a result of excess cash flow generated for the fiscal year ended September 30, 2010.  We made this payment in the second quarter of fiscal 2011.

Our borrowings under the term loans bear interest at our option, at either the base rate (generally the applicable prime lending rate of Wachovia Bank, as announced from time to time) plus 0.50% or LIBOR plus 1.75%. If our consolidated total leverage ratio (as defined in our credit agreement) is less than 4.00 to 1.00, the applicable margins on the borrowings under the term loans are decreased by 0.25%. Changes, if any, to the applicable margins are effective five business days after we deliver to our lenders the financial information for the previous fiscal quarter that is required under the terms of our credit agreement.  Our consolidated total leverage ratio was greater than 4.00 to 1.00 for the first quarter of fiscal 2011, so the applicable margins on our term loans during the second quarter of fiscal 2011 were 0.50% for base rate term loans and 1.75% for LIBOR rate term loans.

As of March 31, 2011, there were no outstanding borrowings under our revolving credit facility and we had approximately $109.1 million of standby letters of credit issued under the facility. As a result, we had approximately $115.9 million in available borrowing capacity under our revolving credit facility (approximately $10.9 million of which was available for issuance of letters of credit). The letters of credit primarily related to several self-insurance programs, vendor contracts and regulatory requirements. The LIBOR associated with our senior credit facility resets periodically, and was reset to 0.25% on March 31, 2011.

Our senior 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 (of which we currently have none). In addition, our credit agreement 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 each is defined in our credit agreement. Additionally, our credit agreement 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. As of March 31, 2011, we were in compliance with these covenants and restrictions.

Provided that we are in compliance with the senior secured leverage incurrence test (as defined in our credit agreement) and no default under our credit agreement is continuing or would result therefrom, the covenant in our credit agreement that limits our ability to pay dividends or make other distributions with respect to our common stock permits us to pay dividends or make such distributions in an aggregate amount not to exceed $35.0 million per fiscal year, plus either annual excess cash flow for the previous fiscal year (if our consolidated total leverage ratio was less than or equal to 3.50 to 1.0 at the end of such previous fiscal year) or the portion of annual excess cash flow for the previous fiscal year that we are not required to utilize to prepay outstanding amounts under our senior credit facility (if our consolidated total leverage ratio was greater than 3.50 to 1.0 at the end of the previous fiscal year).

We have outstanding $247.0 million of our 7.75% senior subordinated notes due 2014. Interest on the senior subordinated notes is payable semi-annually on February 15th and August 15th.

11

THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of March 31, 2011, we had outstanding $109.8 million of convertible notes. During fiscal 2010, we repurchased approximately $16.2 million in principal amount of our convertible notes on the open market resulting in a loss on the extinguishment of debt, net of deferred loan costs, of approximately $791 thousand. Our convertible notes bear interest at an annual rate of 3.0%, payable semi-annually on May 15th and November 15th of each year. The convertible notes are convertible into our common stock at an initial conversion price of $50.09 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 120% of the conversion price per share for 20 of the last 30 trading days of any calendar quarter. The stock price at which the notes would be convertible is $60.11, and as of March 31, 2011, our closing stock price was $14.83. If, upon the occurrence of certain events, the holders of the convertible notes exercise the conversion provisions of the convertible notes, we may need to remit the principal balance of the convertible notes to them in cash (see below). As such, we would be required to classify the entire amount of the outstanding convertible notes as a current liability. This evaluation of the classification of amounts outstanding associated with the convertible notes will occur every calendar quarter. Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the convertible note, or (ii) the conversion value, determined in the manner set forth in the indenture governing the convertible notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the convertible note on the conversion date, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the additional conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the convertible notes is 2,793,782.

The fair value of our indebtedness approximated $760.9 million at March 31, 2011. Substantially all of our net assets are restricted as to payment of dividends and other distributions.

NOTE 6—STOCK COMPENSATION PLANS

During the first six months of fiscal 2011, we granted options to purchase 82 thousand shares of our common stock at purchase prices equal to the fair market value of the underlying common stock on the date the options were granted. These options had an aggregate fair value of $602 thousand, which will be amortized to expense over the options’ requisite service periods. During the first six months of fiscal 2011, we granted 134 thousand shares of restricted stock subject to time-based vesting conditions with an aggregate fair value of $2.3 million, which will be amortized over the requisite service period. During the first six months of fiscal 2011, we granted 187 thousand shares of restricted stock subject to performance-based vesting conditions, with an aggregate fair value of $3.6 million, which will be amortized over the requisite service period. We recognized $979 thousand (of which $560 thousand related to time-based restricted stock and $261 thousand related to performance-based restricted stock) and $864 thousand (of which $529 thousand  related to time-based restricted stock and no expense related to performance-based restricted stock) in stock-based compensation expense in general and administrative expenses during the three months ended March 31, 2011 and March 25, 2010, respectively. We recognized $1.7 million (of which $1.0 million related to time-based restricted stock and $304 thousand related to performance-based restricted stock) and $1.7 million (of which $1.0 million related to time-based restricted stock and no expense related to performance-based restricted stock) in stock-based compensation expense in general and administrative expenses during the six months ended March 31, 2011 and March 25, 2010, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 7—COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss), net of deferred income taxes, for the periods presented are as follows (amounts in thousands):

	Three Months Ended		Six Months Ended
	March 31, 2011	March 25, 2010	March 31, 2011	March 25, 2010
Net loss	$(269)	$(166,082)	$(12,466)	$(192,151)
Other comprehensive income:
Net unrealized gains on qualifying cash flow hedges (net of deferred income taxes of $295, $241, $683 and $687, respectively)	464	379	1,075	1,081
Comprehensive income (loss)	$195	$(165,703)	$(11,391)	$(191,070)

The components of unrealized gains on qualifying cash flow hedges, net of deferred income taxes, for the periods presented are as follows (amounts in thousands):

	Three Months Ended		Six Months Ended
	March 31, 2011	March 25, 2010	March 25, 2010	March 31, 2011
Unrealized losses on qualifying cash flow hedges	$(39)	$(516)	$(47)	$(814)
Reclassification adjustment recorded as an increase in interest expense	503	895	1,122	1,895
Net unrealized gains on qualifying cash flow hedges	$464	$379	$1,075	$1,081

NOTE 8—INTEREST EXPENSE, NET

The components of interest expense, net are as follows (amounts in thousands):

	Three Months Ended		Six Months Ended
	March 31, 2011	March 25, 2010	March 31, 2011	March 25, 2010
Interest on long-term debt, including amortization of deferred financing costs	$8,769	$8,594	$17,658	$17,114
Interest on lease finance obligations	10,946	10,931	21,632	21,747
Interest rate swap settlements	823	1,464	1,836	3,100
Amortization of convertible note discount	1,272	1,344	2,544	2,689
Miscellaneous	10	16	15	10
Subtotal: Interest expense	21,820	22,349	43,685	44,660
Interest income	(19)	(26)	(147)	(74)
Interest expense, net	21,801	22,323	43,538	44,586

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 9—EARNINGS PER SHARE AND COMMON STOCK

Basic earnings per share is computed on the basis of the weighted-average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted-average number of common shares outstanding, plus the effect of outstanding warrants, unvested restricted stock, stock options and convertible notes using the “treasury stock” method.

The following table reflects the calculation of basic and diluted earnings per share for the periods presented (amounts in thousands, except per share data):

	Three Months Ended		Six Months Ended
	March 31, 2011	March 25, 2010	March 31, 2011	March 25, 2010
Net loss	$(269)	$(166,082)	$(12,466)	$(192,151)
Loss per share—basic:
Weighted-average shares outstanding	22,455	22,324	22,429	22,301
Loss per share—basic	$(0.01)	$(7.44)	$(0.56)	$(8.62)
Loss per share—diluted:
Weighted-average shares outstanding	22,455	22,324	22,429	22,301
Dilutive impact of options	—	—	—	—
Weighted-average shares and potential dilutive shares outstanding	22,455	22,324	22,429	22,301
Loss per share—diluted	$(0.01)	$(7.44)	$(0.56)	$(8.62)

Options to purchase shares of common stock that were not included in the computation of diluted earnings per share, because their inclusion would have been antidilutive, were 1.1 million and 1.3 million for the three months ended March 31, 2011 and March 25, 2010, respectively, and 921 thousand and 1.3 million for the six months ended March 31, 2011 and March 25, 2010, respectively.

NOTE 10—COMMITMENTS AND CONTINGENCIES

As of March 31, 2011, we were contingently liable for outstanding letters of credit in the amount of approximately $109.1 million primarily related to several self-insurance programs, vendor contracts 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

Since the beginning of fiscal 2007, over 45 class action lawsuits have been filed in federal courts across the country against numerous companies in the petroleum industry. Major petroleum companies and significant retailers in the industry have been named as defendants in these lawsuits. To date, we have been named as a defendant in seven cases: one in Florida (Cozza, et al. v. Murphy Oil USA, Inc. et al., S.D. Fla., No. 9:07-cv-80156-DMM, filed 2/16/07); one in Delaware (Becker, et al. v. Marathon Petroleum Company LLC, et al., D. Del., No. 1:07-cv-00136, filed 3/7/07); one in North Carolina (Neese, et al. v. Abercrombie Oil Company, Inc., et al., E.D.N.C., No. 5:07-cv-00091-FL, filed 3/7/07); one in Alabama (Snable, et al. v. Murphy Oil USA, Inc., et al., N.D. Ala., No. 7:07-cv-00535-LSC, filed 3/26/07); one in Georgia (Rutherford, et al. v. Murphy Oil USA, Inc., et al., No. 4:07-cv-00113-HLM, filed 6/5/07); one in Tennessee (Shields, et al. v. RaceTrac Petroleum, Inc., et al., No. 1:07-cv-00169, filed 7/13/07); and one in South Carolina (Korleski v. BP Corporation North America, Inc., et al., D.S.C., No 6:07-cv-03218-MDL, filed 9/24/07). Pursuant to an Order entered by the Joint Panel on Multi-District Litigation, all of the cases, including the seven in which we are named, have been transferred to the United States District Court for the District of Kansas and consolidated for all pre-trial proceedings. The plaintiffs in the lawsuits generally allege that they are retail purchasers who received less motor fuel than the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

defendants agreed to deliver because the defendants measured the amount of motor fuel they delivered in non- temperature adjusted gallons which, at higher temperatures, contain less energy. These cases seek, among other relief, an order requiring the defendants to install temperature adjusting equipment on their retail motor fuel dispensing devices. In certain of the cases, including some of the cases in which we are named, plaintiffs also have alleged that because defendants pay fuel taxes based on temperature adjusted 60 degree gallons, but allegedly collect taxes from consumers on non-temperature adjusted gallons, defendants receive a greater amount of tax from consumers than they paid on the same gallon of fuel. The plaintiffs in these cases seek, among other relief, recovery of excess taxes paid and punitive damages. Both types of cases seek compensatory damages, injunctive relief, attorneys’ fees and costs, and prejudgment interest. The defendants filed motions to dismiss all cases for failure to state a claim, which were denied by the court on February 21, 2008.  A number of the defendants, including the Company, subsequently moved to dismiss for lack of subject matter jurisdiction or, in the alternative, for summary judgment on the grounds that plaintiffs’ claims constitute non-justiciable “political questions.”  The Court denied the defendants’ motion to dismiss on political question grounds on December 3, 2009. Defendants filed a request to appeal that decision to the United States Court of Appeals for the Tenth Circuit in June 2010.  That request was denied on August 31, 2010.  In May 2010, the Court granted class certification to Kansas fuel purchasers seeking implementation of automated temperature controls and/or certain disclosures, but deferred ruling on any class for damages.  Defendants sought permission to appeal that decision to the Tenth Circuit in June 2010, and that request was denied on August 31, 2010.  We continue to believe that there are substantial factual and legal defenses to the theories alleged in these lawsuits, and intend to vigorously defend against the claims. At this stage of proceedings, we cannot estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.

On October 19, 2009, Patrick Amason, on behalf of himself and a putative class of similarly situated individuals, filed suit against The Pantry in the United States District Court for the Northern District of Alabama, Western Division (Patrick Amason v. Kangaroo Express and The Pantry, Inc. No. CV-09-P-2117-W).  On September 9, 2010, a first amended complaint was filed adding Enger McConnell on behalf of herself and a putative class of similarly situated individuals.  The plaintiffs seek class action status and allege that The Pantry included more information than is permitted on electronically printed credit and debit card receipts in willful violation of the Fair and Accurate Credit Transactions Act, codified at 15 U.S.C. § 1681c(g).  Plaintiff Patrick Amason seeks to represent a subclass of those class members as to whom The Pantry printed receipts containing the first four and last four digits of their credit and/or debit card numbers.  Plaintiff Enger McConnell seeks to represent a subclass of those class members as to whom The Pantry printed receipts containing all digits of their credit and/or debit card numbers.  The plaintiffs seek an award of statutory damages 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.  This case is set for a hearing on plaintiffs’ motion for class certification on May 25, 2011.  We believe that there are substantial factual and legal defenses to class certification and to the theories alleged in the lawsuit, and intend to vigorously defend against the claims.  At this stage of the proceedings, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to this lawsuit.

We are party to these and various other legal actions in the ordinary course of our business. We believe these 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 ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. 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, cash flows and prospects could be materially adversely affected.

On July 28, 2005, we announced that we would restate earnings for the period from fiscal 2000 to fiscal 2005 arising from sale-leaseback accounting for certain transactions. Beginning in September 2005, we received requests from the SEC that we voluntarily provide certain information to the SEC Staff in connection with our sale-leaseback accounting, our decision to restate our financial statements with respect to sale-leaseback accounting and other lease accounting matters. In November 2006, the SEC informed us that in connection with the inquiry it had issued a formal order of private investigation. We are cooperating with the SEC in this ongoing investigation.

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

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THE PANTRY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 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 March 31, 2011, 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, Kansas 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 March 31, 2011, environmental reserves of approximately $5.8 million and $18.8 million are included in other accrued liabilities and other noncurrent liabilities, respectively. As of September 30, 2010, environmental reserves of approximately $5.4 million and $18.0 million are included in other accrued liabilities and other noncurrent liabilities, respectively. These environmental reserves represent our estimates for future expenditures for remediation and related litigation associated with 271 and 277 known contaminated sites as of March 31, 2011 and September 30, 2010, 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 $17.3 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 $7.3 million for remediation and related litigation. Also, as of March 31, 2011 and September 30, 2010, there were an additional 518 and 510 sites, respectively, that are known to be contaminated sites that are being remediated by third parties, and therefore, the costs to remediate such sites are not included in our environmental reserve. Remediation costs for known sites are expected to be incurred over the next one to ten years. Environmental reserves have been established with remediation costs based on internal and external estimates for each site. Future remediation for which the timing of payments can be reasonably estimated is discounted at 8.0% 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. As of March 31, 2011, anticipated reimbursements of $17.3 million are recorded as other noncurrent assets and $7.8 million are recorded as current receivables related to all sites. 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 independent contractor firms engaged by us. For certain sites, the 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.

Several of the locations identified as contaminated are being remediated by third parties who have indemnified us as to responsibility for cleanup matters. 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 included in our environmental reserve until a final closure notice is received.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 March 31, 2011, deferred vendor rebates included unamortized liabilities associated with these payments of $14.7 million. As of September 30, 2010, deferred vendor rebates included unamortized liabilities associated with these payments of $10.2 million.

We purchase approximately 60% of our general merchandise from a single wholesaler, McLane Company, Inc.  Our arrangement with McLane is governed by a distribution service agreement which expires in December 2014. We receive annual service allowances based on the number of stores operating on each contract anniversary date. The distribution service agreement requires us to reimburse McLane the unearned, unamortized portion, if any, of all service allowance payments received to date if the agreement is terminated under certain conditions. We amortize service allowances received as a reduction to merchandise cost of goods sold using the straight-line method over the life of the agreement.

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 2012 to 2017. 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 sold.

Fuel Contractual Contingencies

Our Branded Jobber Contract with BP® sets forth minimum volume requirements per year and a minimum volume guarantee if such minimum volume requirements are not met. Our obligation to purchase a minimum volume of BP® branded fuel is subject to increase each year during the remaining term of the agreement and is measured over a one-year period. Subject to certain adjustments, in any one-year period 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. We did not meet the requirement for either of the one year periods ending September 30, 2010 and September 30, 2009, however we consider the shortfall amount for each of these years to have been immaterial. Based on current forecasts, we anticipate any shortfall to the minimum volume requirements to be immaterial for the one year period ended September 30, 2011.

NOTE 11—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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Our assets and liabilities that are measured at fair value on a recurring basis are our derivative instruments. We are exposed to various market risks, including changes in interest rates.  We periodically enter into certain interest rate swap agreements to effectively convert floating rate debt to a fixed rate basis and to hedge anticipated future financings.

The valuation of our financial instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves.

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:

		Fair Value Measurements at Reporting Date Using (in thousands)
		Quoted prices
		in active markets	Significant other	Significant
		for identical assets	observable inputs	unobservable inputs
	March 31, 2011	Level 1	Level 2	Level 3
Liabilities:
Derivative financial instrument (1)	$(1,656)	—	$(1,656)	—
(1) Included in “Other accrued liabilities” and “Other noncurrent liabilities” in the accompanying condensed consolidated balance sheet.

		Fair Value Measurements at Reporting Date Using (in thousands)
		Quoted prices
		in active markets	Significant other	Significant
		for identical assets	observable inputs	unobservable inputs
	September 30, 2010	Level 1	Level 2	Level 3
Liabilities:
Derivative financial instruments (1)	$(3,414)	—	$(3,414)	—
(1) Included in “Other accrued liabilities” and “Other noncurrent liabilities” in the accompanying condensed consolidated balance sheet.

Our only financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable, accrued liabilities and long-term debt and are reflected in the 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. Estimated fair values for long-term debt have been determined using available market information, including reported trades and benchmark yields. The carrying amounts and the related estimated fair value of our long-term debt is disclosed in Note 5—Long-Term Debt.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In determining the impairment of operating stores, 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. While some of these inputs are observable, significant judgment was required to select certain inputs from observed market data.  We classify these measurements as Level 3.

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 may reflect values at earlier measurement dates and may no longer represent their fair values at March 31, 2011.

	Fair Value Measurements – Non-recurring Basis
		Operating stores
For the three months ended March 31, 2011:
Fair value measurement		$2,727
Carrying amount		3,524
Realized loss		$(797)
For the six months ended March 31, 2011:
Fair value measurement		$2,727
Carrying amount		3,524
Realized loss		$(797)

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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 30, 2010. 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 MD&A, contains statements that we believe are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by the use of phrases such as “believe,” “plan,” “expect,” “anticipate,” “intend,” “forecast” 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 re-modeling, re-branding, 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, fuel 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 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;

• financial leverage and debt covenants;

• federal and state environmental, tobacco and other laws and regulations;

• dependence on one principal supplier for merchandise and three principal suppliers for fuel;

• dependence on senior management;

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

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

• disruption of our IT systems; and

• other unforeseen factors.

20

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. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of May 10, 2011. 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

Despite the challenges presented by a rising fuel market in the second quarter of fiscal 2011, we delivered an increase in total gross profit from the first quarter of fiscal 2011 and improved store productivity to grow adjusted EBITDA from the second quarter of fiscal 2010.  Our net loss for the second quarter of fiscal 2011was $269 thousand, or $0.01 per share, compared to a net loss of $166.1 million, or $7.44 per share for the second quarter of fiscal 2010, which included the non-cash after-tax impact of impairment charges of $164.2 million, or $7.35 per share.

Comparable store merchandise sales increased 2.0%, or 1.8% excluding the impact of cigarettes, compared to the second quarter of fiscal 2010.  This represents our fourth consecutive quarter of comparable store merchandise sales increases excluding the impact of cigarettes. Merchandise margin for the quarter of 34.3% represented a 50 basis point improvement from the second quarter fiscal 2010 and an 80 basis point improvement sequentially from the first quarter fiscal 2011.

Retail fuel gallons sold in the second quarter decreased 4.0% overall or 6.9% on a comparable store basis. Our average retail price per gallon in the second quarter of fiscal 2011 was $3.24 compared to $2.69 per gallon in the second quarter of fiscal 2010 and $2.81 per gallon in the first quarter of fiscal 2011.  We believe the significant increase in the average retail price per gallon negatively impacted our retail fuel gallon volume.  Also, lower fuel margins in January caused us to heighten our focus on fuel margin improvement over the remainder of the quarter which added pressure to our retail fuel volumes.  Our retail margin per gallon in the second quarter of fiscal 2011 was $0.137 which was consistent with the second quarter of fiscal 2010 but represented an increase from the $0.104 in the first quarter of 2011.

During the second quarter of fiscal 2011, we refined our Fresh initiative more broadly to include the cold dispensed beverage category.  We have incorporated this change into our store design process and anticipate having approximately 400 locations converted by the end of calendar 2011.

In addition to our Fresh initiative, during the remainder of fiscal 2011 we intend to focus on managing our cost structure, leveraging our store operating and general and administrative expenses and our net working capital.  In the second quarter of fiscal 2011 our store operating and general administrative expenses as a percentage of merchandise sales were 37.0% compared to 38.1% in the second quarter of fiscal 2010 and 37.9% in the first quarter of fiscal 2011.

Market and Industry Trends

There is currently a trend in the convenience store industry of companies concentrating on increasing and improving in-store food service offerings, including fresh foods, quick service restaurants or proprietary food offerings.  Should this trend continue, we believe consumers may become more likely to patronize convenience stores that include such offerings, which may also lead to increased inside merchandise sales or gasoline sales for such stores. We are attempting to capitalize on this trend by improving our in-store food offerings.  Currently, 235 of our convenience stores offer quick service restaurants, and we have launched a company-wide initiative to improve breakfast, lunch and snack experiences in our stores, with coffee as the anchor product.  We launched the program in fiscal 2010 and approximately 100 of our stores had the program implemented by the end of calendar year 2010. We plan to have the program implemented in approximately 30% of our stores by the end of fiscal year 2011.

While the U.S. and global economies have shown signs of recovery, unemployment, underemployment and declining home prices remain above normal in the markets where a vast majority of our stores are located. Our business has been proven to be highly congruent with the economic well being of the construction business, and new housing permits in our markets have continued to decline. We believe high consumer credit levels, a continued unstable housing market and depressed consumer confidence levels, especially in our markets, have resulted in decreased recreational travel and consumer spending, which resulted in lower demand for our fuel and merchandise. We believe that in challenging economic conditions our success will depend on our ability to anticipate and respond in a timely manner to changing consumer demands and preferences while continuing to sell products and services that will positively impact overall merchandise gross profit.

Oil and fuel prices will in all probability remain volatile and unpredictable.  During the second quarter of fiscal 2011, crude oil prices traded from a low of $84 per barrel to a high of $107 per barrel on March 31, 2011. January and most of February saw minimal volatility. Prices began to rise the last week of February and have continued upward.  We attempt to pass along wholesale fuel cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower fuel margins in periods of rising wholesale costs and higher margins in periods of decreasing wholesale costs.

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Results of Operations

The table below provides a summary of our selected financial data for the three and six months ended March 31, 2011 and March 25, 2010 (dollars and gallons, except per gallon data, in thousands):

	Three Months Ended		Six Months Ended
	March 31, 2011	March 25, 2010	March 31, 2011	March 25, 2010
Selected financial data:
Merchandise gross profit[1]	$144,963	$138,223	$285,512	$274,511
Merchandise margin	34.3%	33.8%	33.9%	33.2%
Retail fuel data:
Gallons (in millions)	448.6	467.5	935.7	985.6
Margin per gallon	$0.137	$0.139	$0.120	$0.124
Retail price per gallon	$3.24	$2.69	$3.02	$2.60
Total fuel gross profit (1)	$61,831	$65,385	$112,580	$122,373
Comparable store data:
Merchandise sales increase  (%)	2.0%	3.6%	1.7%	4.4%
Merchandise sales increase	$8,116	$13,682	$13,569	$33,718
Fuel gallons decrease (%)	(6.9%)	(7.5%)	(6.0%)	(3.3%)
Fuel gallons decrease	(32,121)	(36,717)	(58,037)	(32,649)
Number of stores:
End of period	1,660	1,649	1,660	1,649
Weighted-average store count	1,663	1,655	1,654	1,661

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

Three Months Ended March 31, 2011 Compared to the Three Months Ended March 25, 2010

Merchandise Revenue and Gross Profit. The increase in merchandise revenue is primarily attributable to an increase in comparable store merchandise revenue of 2.0%, or $8.1 million, and merchandise revenue from acquired stores since the beginning of the second quarter of fiscal 2010 of $8.6 million, partially offset by lost revenue from closed stores of $4.3 million. The increase in merchandise gross profit is primarily attributable to improved margins in the grocery category and increased services revenue.

Fuel Revenue, Gallons and Gross Profit. The increase in fuel revenue is primarily attributable to the 20.8% increase in the average retail price per gallon to $3.24, partially offset by a decrease in fuel gallons sold.  Retail fuel gallons sold for the second quarter of fiscal 2011 decreased 18.9 million gallons, or 4.0%, from the second quarter of fiscal 2010.  The decrease is primarily attributable to a decrease in comparable store fuel gallons sold of 32.1 million gallons, or 6.9% and 2.2 million gallons lost from closed stores, offset by the increase of 13.4 million gallons sold by stores acquired since the beginning of the second quarter of fiscal 2010.  The decrease in comparable store fuel gallons sold was primarily due to the significant year-over-year increase in retail prices and our efforts to optimize fuel margin dollars which added pressure to our retail fuel volumes.

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The decrease in fuel gross profit is primarily attributable to a decrease in total retail gallons sold and the 0.2 cent decrease in retail gross profit per gallon to 13.7 cents for the second quarter of fiscal 2011 from 13.9 cents in the second quarter of fiscal 2010. Our retail gross profit per gallon improved from the 10.4 cents in the first quarter of fiscal 2011 despite a continued increase in wholesale fuel costs.  This was the result of our continued focus on fuel margin dollar improvement over the quarter.  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 6.2 cents per retail gallon and 5.2 cents per retail gallon for the three months ended March 31, 2011 and March 25, 2010, respectively.

Store Operating. Store operating expenses for the second quarter of fiscal 2011 decreased $2.6 million, or 2.0%, from the second quarter of fiscal 2010.  The improvement was driven by lower labor costs, utilities and repairs and maintenance expenses.  The reduction in labor was driven by our continued efforts to better match employee staffing with expected customer traffic.

General and Administrative. General and administrative expenses for the second quarter of fiscal 2011 increased $2.7 million, or 10.4%. The increase was primarily due to additional personnel investments in areas such as marketing and information technology where we expect a longer term return.

Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, net, gain/loss on extinguishment of debt, income taxes, impairment charges and depreciation and amortization.  Adjusted EBITDA for the second quarter of fiscal 2011 increased $3.0 million, or 6.4%, from the second quarter of fiscal 2010. This increase is primarily attributable to the variances discussed 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 cash flow statement data. Historically, we have included lease payments we make under lease finance obligations as a reduction to EBITDA.  We are no longer adjusting EBITDA for payments made for lease finance obligations in order to provide a measure that management believes is more comparable to similarly titled measures used by other companies. We have included information concerning Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting and field operations 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, 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 loss (amounts in thousands):

	Three Months Ended
	March 31, 2011	March 25, 2010
Adjusted EBITDA	$50,547	$47,528
Impairment charges	(797)	(229,095)
Interest expense, net	(21,801)	(22,323)
Depreciation and amortization	(29,356)	(30,614)
Income tax benefit	1,138	68,422
Net loss	$(269)	$(166,082)

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

	Three Months Ended
	March 31, 2011	March 25, 2010
Adjusted EBITDA	$50,547	$47,528
Interest expense, net	(21,801)	(22,323)
Income tax benefit	1,138	68,422
Stock-based compensation expense	979	864
Changes in operating assets and liabilities	(23,636)	(13,118)
Benefit for deferred income taxes	(668)	(62,553)
Other	2,142	2,741
Net cash provided by operating activities	$8,701	$21,561
Net cash used in investing activities	$(26,080)	$(20,036)
Net cash used in financing activities	$(8,233)	$(2,538)

Depreciation and Amortization. Depreciation and amortization expenses for the second quarter of fiscal 2011 decreased $1.3 million, or 4.1%, from the second quarter of fiscal 2010. The second quarter of fiscal 2010 included depreciation charges of approximately $1.7 million associated with accelerating the depreciable lives of certain assets related to the re-imaging of several of our Chevron branded locations and assets that were part of our new in-store initiative projects.

Impairment Charges.  In accordance with accounting guidance and consistent with prior years, we conducted our annual impairment testing of goodwill in the second quarter of fiscal 2011 and fiscal 2010.  Based on the impairment testing, there were no goodwill impairment charges during the quarter ended March 31, 2011.  During the quarter ended March 25, 2010, we concluded that our book value was greater than our fair value and that the carrying value of our goodwill exceeded its implied fair value and therefore recorded a non-cash pre-tax impairment charge of $227.4 million.  See Note 3—Goodwill and Other Intangible Assets and Note4—Asset Impairments in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements” above.

We recorded impairment charges related to operating stores of approximately $797 thousand and $1.7 million for the quarter ended March 31, 2011and March 25, 2010, respectively.  See Note4—Asset Impairments and Note11—Fair Value Measurements in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements” above.

Interest Expense, Net. Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for the second quarter of fiscal 2011 was $21.8 million compared to $22.3 million for the second quarter of fiscal 2010. This decrease is primarily due to lower weighted average outstanding borrowings.

Effective Tax Rate.  Our effective tax rate for the second quarter of fiscal 2011 was 80.9% compared to 29.2% in the second quarter of fiscal 2010.  The increase in the rate is due to the impact of tax credits on a relatively small pre-tax loss.

Six Months Ended March 31, 2011 Compared to the Six Months Ended March 25, 2010

Merchandise Revenue and Gross Profit. The increase in merchandise revenue is primarily attributable to an increase in comparable store merchandise revenue of 1.7%, or $13.6 million, and merchandise revenue from acquired stores since the beginning of fiscal 2010 of $11.2 million, partially offset by lost revenue from closed stores of $9.8 million. The increase in merchandise gross profit is primarily attributable to a 70 basis point increase in merchandise gross margin to 33.9% for the first six months of fiscal 2011 compared to 33.2% for the first six months of fiscal 2010.

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Fuel Revenue, Gallons and Gross Profit. The increase in fuel revenue is primarily attributable to the 16.1% increase in the average retail price per gallon to $3.02, partially offset by a decrease in fuel gallons sold.  Retail fuel gallons sold for the first six months of fiscal 2011 decreased 49.9 million gallons, or 5.1%, from the first six months of fiscal 2010.  The decrease is primarily attributable to a decrease in comparable store fuel gallons sold of 58.0 million gallons, or 6.0%, offset by the increase of 17.9 million gallons sold by stores acquired since the beginning of fiscal 2010.  Closed stores accounted for lost gallons sold of 5.3 million.  We believe the decrease in comparable store fuel gallons sold was primarily due to the significant year-over-year increase in the average retail price per gallon and our efforts to optimize gross profit dollars during the second quarter of fiscal 2011 which added pressure to our retail fuel volume.

The decrease in fuel gross profit is primarily attributable to the decrease in retail gross profit per gallon to 12.0 cents for the first six months of fiscal 2011 from 12.4 cents in the first six months of fiscal 2010.  The decrease in retail gross profit per gallon is primarily due to steadily increasing wholesale fuel costs during the first and second quarter of fiscal 2011. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.  We present fuel gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on fuel equipment.  These fees totaled 5.8 cents per retail gallon and 4.8 cents per retail gallon for the six months ended March 31, 2011 and March 25, 2010, respectively.

Store Operating. Store operating expenses for the first six months of fiscal 2011 decreased $1.5 million, or 0.6%, from the first six months of fiscal 2010.  The improvement was driven by lower labor costs, utilities and repairs and maintenance expenses.  The reduction in labor was driven by our continued efforts to better match employee staffing with expected customer traffic.

General and Administrative. General and administrative expenses for the first six months of fiscal 2011 increased $8.5 million or 17.7%. The increase was due primarily to additional personnel investments in marketing and information technology, increased advertising expenses and expenses associated with the acquisition of 47 stores from Presto in the first quarter of fiscal 2011.

Adjusted EBITDA. Adjusted EBITDA for the first six months of fiscal 2011 decreased $5.7 million, or 6.5%, from the first six months of fiscal 2010.  This decrease is primarily attributable to the variances discussed above.

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

	Six Months Ended
	March 31, 2011	March 25, 2010
Adjusted EBITDA	$82,611	$88,359
Impairment charges	(797)	(261,732)
Interest expense, net	(43,538)	(44,586)
Depreciation and amortization	(58,187)	(59,583)
Income tax benefit	7,445	85,391
Net loss	$(12,466)	$(192,151)

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

	Six Months Ended
	March 31, 2011	March 25, 2010
Adjusted EBITDA	$82,611	$88,359
Interest expense, net	(43,538)	(44,586)
Income tax benefit	7,445	85,391
Stock-based compensation expense	1,686	1,737
Changes in operating assets and liabilities	(54,094)	(24,038)
Provision (benefit) for deferred income taxes	12,214	(69,186)
Other	4,176	5,414
Net cash provided by operating activities	$10,500	$43,091
Net cash used in investing activities	$(94,896)	$(29,106)
Net cash used in financing activities	$(9,600)	$(5,361)

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Depreciation and Amortization. Depreciation and amortization expenses for the first six months of fiscal 2011 decreased $1.4 million, or 2.3%, from the first six months of fiscal 2010. The decrease is primarily due to accelerating depreciable lives of certain assets in our first quarter of fiscal 2010 related to the re-imaging of several of our Chevron branded locations and assets that were part of our new in-store initiative projects.

Impairment Charges.  There were no tradename impairments during the six months ended March 31, 2011. During the six months ended March 25, 2010, we performed interim impairment testing of our Petro Express® tradename due to events and changes in circumstances that resulted in a change to the estimate of the remaining useful life from indefinite to finite-lived. As a result of the impairment test, we recorded an impairment charge to write off the carrying value of the tradename of approximately $21.3 million.. See Note4—Asset Impairments and Note11—Fair Value Measurements in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements” above.

There were no land parcels impaired during the six months ended March 31, 2011. In December 2009, management made a strategic decision not to develop stores on certain land parcels owned by the Company.  As a result, we recorded impairment charges related to land parcels of approximately $7.8 million during the six months ended March 25, 2010. See Note4—Asset Impairments and Note11—Fair Value Measurements in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements” above.

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. For each operating store where events or changes in circumstances indicated that the carrying amount of the assets might not be recoverable, we compared the carrying amount to its estimated future undiscounted cash flows to determine recoverability. As a result, we recorded impairment charges related to operating stores of approximately $797 thousand and $5.3 million during the six months ended March 31, 2011 and March 25, 2010, respectively. See Note4—Asset Impairments and Note11—Fair Value Measurements in “Part I.—Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements” above.

In accordance with accounting guidance and consistent with prior years, we conducted our annual impairment testing of goodwill in the second quarter of fiscal 2011 and fiscal 2010.  Based on this testing, there were no goodwill impairment charges during the six months ended March 31, 2011.  During the six months ended March 25, 2010, we concluded that the carrying value of our goodwill exceeded its implied fair value and therefore recorded a non-cash pre-tax impairment charge of $227.4 million. See Note 3—Goodwill and Other Intangible Assets and Note4—Asset Impairments in “Part I Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements” above.

Interest Expense, Net. Interest expense, net is primarily comprised of interest on our long-term debt and lease finance obligations, net of interest income. Interest expense, net for the first six months of fiscal 2011 was $43.5 million compared to $44.6 million for the first six months of fiscal 2010. This decline is primarily due to lower weighted average outstanding borrowings.

Effective Tax Rate.  Our effective tax rate for the first six months of fiscal 2011 was 37.4% compared to 30.8% in the first six months of fiscal 2010.  The change is due to the impact of goodwill and other impairment charges on our effective rate in the first six months of fiscal 2010.

Liquidity and Capital Resources

Cash Flows from Operations. Due to the nature of our business, substantially all sales are for cash and 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 and lease finance transactions to finance our operations, pay principal and interest on our debt and fund capital expenditures. We had no borrowings under our revolving credit facility during the first six months of fiscal 2011.  Our working capital as of March 31, 2011 was $163.0 million. Changes in working capital represented a use of cash of approximately $56.8 million in the first six months of fiscal 2011 compared to a use of cash of $19.6 million in the first six months of fiscal 2010.  The change in working capital was primarily due to increases in receivables and inventories as a result of rising fuel prices.  We did not realize a corresponding increase in gasoline payables due to a decline in our days payables outstanding as a result of a shift in our current suppliers.  Cash provided by operating activities decreased to $10.5 million for the first six months of fiscal 2011 compared to $43.1 million for the first six months of fiscal 2010. The decrease in cash flow from operations is primarily due to the change in working capital discussed above. We had $106.6 million of cash and cash equivalents on hand at March 31, 2011.

Capital Expenditures. Capital expenditures (excluding accrued purchases and acquisitions) for the first six months of fiscal 2011 were $52.9 million.  Our capital expenditures are primarily expenditures relating to store improvements, store equipment, new store development, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. We finance substantially all capital expenditures and new store development through cash flows from operations, proceeds from lease financing transactions, asset dispositions and vendor reimbursements. We anticipate that capital expenditures for fiscal 2011 will be approximately $100.0 million to $110.0 million.

Cash Flows from Financing Activities. For the first six months of fiscal 2011, net cash used in financing activities was $9.6 million, of which $6.2 million was used to repay long-term debt and $3.5 million was used to repay lease finance obligations.  As of March 31, 2011, our debt consisted primarily of $407.6 million in loans under our senior credit facility, $247.0 million of outstanding senior subordinated notes and $109.8 million of outstanding convertible notes. As of March 31, 2011, we also had outstanding $456.0 million of lease finance obligations.

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Senior Credit Facility. We are party to a Third Amended and Restated Credit Agreement (“credit agreement”), which defines the terms of our senior credit facility, which includes (i) a $225.0 million revolving credit facility, (ii) a $350.0 million initial term loan facility and (iii) a $100.0 million delayed draw term loan facility. In addition, we may at any time incur up to $200.0 million in incremental facilities in the form of additional revolving or term loans so long as (i) such incremental facilities would not result in a default as defined in our credit agreement and (ii) we would be able to satisfy certain other conditions set forth in our credit agreement. The revolving credit facility has been, and will continue to be, used for our working capital and general corporate requirements and is also available for refinancing or repurchasing certain of our existing indebtedness and issuing commercial and standby letters of credit. A maximum of $120.0 million of the revolving credit facility is available as a letter of credit sub-facility.

During the first six months, we had no borrowings under our revolving credit facility and as of March 31, 2011 we had approximately $109.1 million of standby letters of credit had been issued. As of March 31, 2011, we had approximately $115.9 million in available borrowing capacity under the revolving credit facility (approximately $10.9 million of which was available for issuances of letters of credit).  As of March 31, 2011 we were in compliance with all covenants and restrictions under the senior credit facility.

Senior Subordinated Notes. We have outstanding $247.0 million of our senior subordinated notes due February 15, 2014. The senior subordinated notes bear interest at an annual rate of 7.75%, payable semi-annually on February 15th and August 15th of each year.

Senior Subordinated Convertible Notes. We have outstanding $109.8 million of our convertible notes which bear interest at an annual rate of 3.0%, payable semi-annually on May 15th and November 15th of each year. The convertible notes are convertible into our common stock at an initial conversion price of $50.09 per share, upon the occurrence of certain events, including the closing price of our common stock exceeding 120% of the conversion price per share for 20 of the last 30 trading days of any calendar quarter. If, upon the occurrence of certain events, the holders of the convertible notes exercise the conversion provisions of the convertible notes, we may need to remit the principal balance of the convertible notes to them in cash (see below). As such, we would be required to classify the entire amount outstanding of the convertible notes as a current liability upon occurrence of these events. This evaluation of the classification of amounts outstanding associated with the convertible notes will occur every calendar quarter. Upon conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the lesser of (i) the principal amount of the convertible note, or (ii) the conversion value, determined in the manner set forth in the indenture governing the convertible notes, of a number of shares equal to the conversion rate. If the conversion value exceeds the principal amount of the convertible note on the conversion date, we will also deliver, at our election, cash or common stock or a combination of cash and common stock with respect to the conversion value upon conversion. If conversion occurs in connection with a change of control, we may be required to deliver additional shares of our common stock by increasing the conversion rate with respect to such notes. The maximum aggregate number of shares that we would be obligated to issue upon conversion of the convertible notes is 2,793,782.

Shareholders’ Equity. As of March 31, 2011, our shareholders’ equity totaled $298.8 million. The $9.3 million decrease from September 30, 2010 is primarily attributable to the net loss in the first six months of fiscal 2011 of $12.5 million, partially offset by the $2.1 million increase in additional paid-in capital and $1.1 million increase in unrealized gains on cash flow hedges. The increase in additional paid-in capital is primarily due to stock-based compensation expense and related tax benefits.

Long Term Liquidity. We believe that anticipated cash flows from operations, funds available from our existing revolving credit facility, cash on hand and vendor reimbursements will provide sufficient funds to finance our operations at least for the next 12 months. As of March 31, 2011, we had approximately $115.9 million in available borrowing capacity under our revolving credit facility, approximately $10.9 million of which was available for issuances of letters of credit. Changes in our operating plans, lower than anticipated sales, increased expenses, additional acquisitions or other events may cause us to need to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Additional equity financing could be dilutive to the holders of our common stock, and additional debt financing, if available, could impose greater cash payment obligations and more covenants and operating restrictions.

We may from time to time seek to purchase or otherwise retire some or all of our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved may have a material effect on our liquidity, financial condition and results of operations. During fiscal 2010, we purchased approximately $16.2 million in principal amount of our convertible notes on the open market.

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 30, 2010, we consider our policies on insurance liabilities, long-lived assets and closed stores, goodwill, asset retirement obligations, vendor allowances and rebates, and environmental liabilities and related receivables to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no changes in our critical accounting policies during the six months ended March 31, 2011.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Quantitative Disclosures. 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 subordinated notes and our convertible notes, 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. We hold derivative instruments primarily to manage our exposure to these risks and all such derivative instruments are matched against specific debt obligations. Our debt and interest rate swap instruments outstanding at March 31, 2011, including applicable interest rates, are discussed in “Part I. —Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

The following table presents the future principal cash flows and weighted-average interest rates on our existing long-term debt instruments based on rates in effect at March 31, 2011. Fair values have been determined based on quoted market prices as of March 31, 2011.

Expected Maturity Date
as of March 31, 2011
(Dollars in thousands)
	Fiscal 2011	Fiscal 2012	Fiscal 2013	Fiscal 2014	Fiscal 2015	Total	Fair Value
Long-term debt (fixed rate)	$26	$56	$109,818	$247,000	$   —	$356,900	$358,410
Weighted-average interest rate	6.29%	6.29%	7.50%	7.75%	—	6.80%
Long-term debt (variable rate)	$1,057	$4,227	$4,227	$398,067	$   —	$407,578	$402,483
Weighted-average interest rate	2.70%	2.06%	2.00%	2.00%	—	2.14%

In order to reduce our exposure to interest rate fluctuations on our variable-rate debt, we have entered into interest rate swap arrangements in which we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional amount. The interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. Fixed rate swaps are used to reduce our risk of increased interest costs during periods of rising interest rates. At March 31, 2011 and September 30, 2010, the interest rate on approximately 60.0% of our debt was fixed by either the nature of the obligation or through interest rate swap arrangements. The annualized effect of a one percentage point change in floating interest rates on our interest rate swap agreements and other floating rate debt obligations at March 31, 2011 would be to change interest expense by approximately $3.1 million.

The following table presents the notional principal amount, weighted-average fixed pay rate, weighted-average variable receive rate and weighted-average years to maturity on our interest rate swap contracts:

Interest Rate Swap Contracts
(Dollars in thousands)
	March 31, 2011	September 30, 2010
Notional principal amount	$100,000	$140,000
Weighted-average fixed pay rate	3.09%	3.12%
Weighted-average variable receive rate	0.40%	0.47%
Weighted-average years to maturity	0.59	0.87

As of March 31, 2011, the fair value of our swap agreements represented a net liability of $1.7 million.

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Qualitative Disclosures. 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 acquisitions.

We manage interest rate risk on our outstanding long-term and short-term debt through our use of fixed and variable rate debt. We expect that the interest rate swaps mentioned above will reduce our exposure to short-term interest rate fluctuations. 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 second quarter of fiscal 2011 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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THE PANTRY, INC.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Since the beginning of fiscal 2007, over 45 class action lawsuits have been filed in federal courts across the country against numerous companies in the petroleum industry. Major petroleum companies and significant retailers in the industry have been named as defendants in these lawsuits. To date, we have been named as a defendant in seven cases: one in Florida (Cozza, et al. v. Murphy Oil USA, Inc. et al., S.D. Fla., No. 9:07-cv-80156-DMM, filed 2/16/07); one in Delaware (Becker, et al. v. Marathon Petroleum Company LLC, et al., D. Del., No. 1:07-cv-00136, filed 3/7/07); one in North Carolina (Neese, et al. v. Abercrombie Oil Company, Inc., et al., E.D.N.C., No. 5:07-cv-00091-FL, filed 3/7/07); one in Alabama (Snable, et al. v. Murphy Oil USA, Inc., et al., N.D. Ala., No. 7:07-cv-00535-LSC, filed 3/26/07); one in Georgia (Rutherford, et al. v. Murphy Oil USA, Inc., et al., No. 4:07-cv-00113-HLM, filed 6/5/07); one in Tennessee (Shields, et al. v. RaceTrac Petroleum, Inc., et al., No. 1:07-cv-00169, filed 7/13/07); and one in South Carolina (Korleski v. BP Corporation North America, Inc., et al., D.S.C., No 6:07-cv-03218-MDL, filed 9/24/07). Pursuant to an Order entered by the Joint Panel on Multi-District Litigation, all of the cases, including the seven in which we are named, have been transferred to the United States District Court for the District of Kansas and consolidated for all pre-trial proceedings. The plaintiffs in the lawsuits generally allege that they are retail purchasers who received less motor fuel than the defendants agreed to deliver because the defendants measured the amount of motor fuel they delivered in non-temperature adjusted gallons which, at higher temperatures, contain less energy. These cases seek, among other relief, an order requiring the defendants to install temperature adjusting equipment on their retail motor fuel dispensing devices. In certain of the cases, including some of the cases in which we are named, plaintiffs also have alleged that because defendants pay fuel taxes based on temperature adjusted 60 degree gallons, but allegedly collect taxes from consumers on non-temperature adjusted gallons, defendants receive a greater amount of tax from consumers than they paid on the same gallon of fuel. The plaintiffs in these cases seek, among other relief, recovery of excess taxes paid and punitive damages. Both types of cases seek compensatory damages, injunctive relief, attorneys’ fees and costs, and prejudgment interest. The defendants filed motions to dismiss all cases for failure to state a claim, which were denied by the court on February 21, 2008.  A number of the defendants, including the Company, subsequently moved to dismiss for lack of subject matter jurisdiction or, in the alternative, for summary judgment on the grounds that plaintiffs’ claims constitute non-justiciable “political questions.”  The Court denied the defendants’ motion to dismiss on political question grounds on December 3, 2009. Defendants filed a request to appeal that decision to the United States Court of Appeals for the Tenth Circuit in June 2010.  That request was denied on  August 31, 2010 .  In May 2010, the Court granted class certification to Kansas fuel purchasers seeking implementation of automated temperature controls and/or certain disclosures, but deferred ruling on any class for damages.  Defendants sought permission to appeal that decision to the Tenth Circuit in June 2010, and that request was denied on August 31, 2010.  We continue to believe that there are substantial factual and legal defenses to the theories alleged in these lawsuits, and intend to vigorously defend against the claims. At this stage of proceedings, we cannot estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.

On October 19, 2009, Patrick Amason, on behalf of himself and a putative class of similarly situated individuals, filed suit against The Pantry in the United States District Court for the Northern District of Alabama, Western Division (Patrick Amason v. Kangaroo Express and The Pantry, Inc. No. CV-09-P-2117-W).  On September 9, 2010, a first amended complaint was filed adding Enger McConnell on behalf of herself and a putative class of similarly situated individuals.  The plaintiffs seek class action status and allege that The Pantry included more information than is permitted on electronically printed credit and debit card receipts in willful violation of the Fair and Accurate Credit Transactions Act, codified at 15 U.S.C. § 1681c(g).  Plaintiff Patrick Amason seeks to represent a subclass of those class members as to whom The  Pantry printed receipts containing the first four and last four digits of their credit and/or debit card numbers.  Plaintiff Enger McConnell seeks to represent a subclass of those class members as to whom The Pantry printed receipts containing all digits of their credit and/or debit card numbers.  The plaintiffs seek an award of statutory damages 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.  This case is set for a hearing on plaintiffs’ motion for class certification on May 25, 2011.  We believe that there are substantial factual and legal defenses to class certification and to the theories alleged in the lawsuit, and intend to vigorously defend against the claims.  At this stage of the proceedings, we cannot at this time estimate our ultimate exposure to loss or liability, if any, related to this lawsuit.

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 ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. 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, cash flows and prospects could be materially adversely affected.

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Item 1A. Risk Factors.

You should carefully consider the risks described below and under “Part I.—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” before making a decision to invest in our securities. The risks and uncertainties described below and elsewhere in this report are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our business, financial condition or results of operations in the future. If any such risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to Our Industry

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

The convenience store and retail fuel industries in the geographic areas in which we operate are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering the products and services found in our stores. We compete with numerous other convenience store chains, independent convenience stores, supermarkets, drugstores, discount clubs, fuel service stations, mass merchants, fast food operations and other similar retail outlets.  In recent years, several non-traditional retailers, including supermarkets, club stores and mass merchants, have begun to compete directly with convenience stores.  These non-traditional fuel retailers have obtained a significant share of the fuel market and their market share is expected to grow, and these retailers may use promotional pricing or discounts, both at the fuel pump and in the store, to encourage in-store merchandise sales and fuel sales. Increased value consciousness among consumers has accelerated sales declines as consumers turn to dollar stores and big box stores to fulfill needs that were traditionally fulfilled by convenience stores. Additionally, in some of our markets, our competitors have been in existence longer and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry.

To remain competitive, we must constantly analyze consumer preferences and competitors’ offerings and prices to ensure we offer a selection of convenience products and services at competitive prices to meet consumer demand. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and drive customer traffic to our stores. Principal competitive factors include, among others, location, ease of access, fuel brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. In a number of our markets, our competitors that sell ethanol-blended fuel may have a competitive advantage over us because, in certain regions of the country, the wholesale cost of ethanol-blended fuel may, at times, be less than pure fuel. Competitive pressures could materially impact our fuel and merchandise volume, sales and gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

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

Over the past three fiscal years, our fuel revenue accounted for approximately 77.5% of total revenues and our fuel gross profit accounted for approximately 31.9% of total gross profit. Crude oil and domestic wholesale petroleum markets are volatile. General political conditions, acts of war or terrorism, instability in oil producing regions, particularly in the Middle East and South America, and the value of the U.S. dollar could significantly impact crude oil supplies and wholesale petroleum costs. In addition, the supply of fuel and our wholesale purchase costs could be adversely impacted in the event of a shortage, which could result from, among other things, lack of capacity at United States oil refineries, sustained increase in global demand, or the fact that our fuel contracts do not guarantee an uninterrupted, unlimited supply of fuel. Significant increases and volatility in wholesale petroleum costs have resulted, and could in the future result, in significant increases in the retail price of petroleum products and in lower fuel gross margin per gallon. During fiscal 2009 and the first six months of fiscal 2011, increases in the retail price of petroleum products impacted consumer demand for fuel, and we expect that future increases would have the same effect. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will have on our operating results and financial condition. Dramatic increases in crude oil prices squeeze retail fuel margin because fuel costs typically increase faster than retailers are able to pass them along to customers. A significant change in any of these factors could materially impact our fuel and merchandise volume, fuel gross profit and overall customer traffic, which in turn could have a material adverse effect on our business, financial condition and results of operations.

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

A significant portion of our fuel sales involve payment using credit cards.  We are assessed credit card fees as a percentage of transaction amounts and not as a fixed dollar amount or percentage of our margins.  Higher fuel prices trigger higher credit card expenses, and an increase in credit card use or an increase in credit card fees would have a similar effect.  Therefore, credit card fees charged on fuel purchases that are more

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expensive as a result of higher fuel prices are not necessarily accompanied by higher profit margins.  In fact, such fees may cause lower profit margins.  Lower profit margins on fuel sales caused by higher credit card fees may decrease our overall profit margin and could have a material adverse effect on our business, financial condition and results of operations.

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

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

Approximately 34% of our stores are located in coastal/resort or tourist destinations.  Historically, travel and consumer behavior in such markets is more severely impacted by weak economic conditions, such as those currently impacting the United States. If the number of visitors to coastal/resort or tourist locations decreases due to economic conditions, changes in consumer preferences, changes in discretionary consumer spending or otherwise, our sales could decline, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Market turmoil and uncertain economic conditions, including increases in food and fuel prices, changes in the credit and housing markets leading to the financial and credit crisis, actual and potential job losses among many sectors of the economy, significant declines in the stock market resulting in large losses in consumer retirement and investment accounts and uncertainty regarding future federal tax and economic policies have resulted in reduced consumer confidence, curtailed retail spending and decreases in miles driven. There can be no assurances that government responses to the disruptions in the financial markets will restore consumer confidence.  During fiscal 2009 and fiscal 2010, we have experienced periodic per store sales declines in both fuel and merchandise as a result of these economic conditions. If these economic conditions persist or deteriorate further, we may continue to experience sales declines in both fuel and merchandise, which could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

Sales of tobacco products accounted for approximately 6.8% of total revenues over the past three fiscal years, and our tobacco gross profit accounted for approximately 12.7% of total gross profit for the same period. Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as national and local campaigns to discourage the use of tobacco products, may have an adverse effect on demand for cigarettes and other tobacco products. Although the states in which we operate have historically imposed relatively low taxes on tobacco products, each year one or more of these states consider increasing the tax rate for tobacco products, either to raise revenues or deter the use of tobacco. In fiscal 2010, South Carolina increased the tax rate for certain tobacco products, and in fiscal 2009, four states in which we operate (Florida, Kentucky, Mississippi and North Carolina) each increased the tax rate for certain tobacco products.  Additionally, a federal excise tax is imposed on the sale of cigarettes, and an increase of $0.62 per pack in the federal excise tax on cigarettes became effective in fiscal 2009.  Any increase in federal or state taxes on our tobacco products could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business, financial condition and results of operations.

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

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

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

• sets national performance standards for tobacco products;

• requires manufacturers, with certain exceptions, to obtain FDA clearance or approval for cigarette and smokeless tobacco products commercially launched, or to be launched, after February 15, 2007;

• requires new and larger warning labels on tobacco products; and

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

Under the FSPTCA, the FDA has passed regulations that:

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

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

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

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

• prohibits free samples of cigarettes and limits distribution of smokeless tobacco products;

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

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

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

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

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Risks Related to Our Business

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

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

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

Approximately 34% of our stores are located in coastal/resort or tourist destinations.  Our coastal locations may be particularly susceptible to natural disasters or adverse localized effects of climate change, such as sea-level rise and increased storm frequency or intensity. To the extent broad environmental factors, triggered by climate change or otherwise, lead to localized physical effects, disruption in our business or unexpected relocation costs, the performance of stores in these locations could be adversely impacted.

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

Inability to identify, acquire and integrate new stores could adversely affect our business.

An important part of our historical growth strategy has been to acquire other convenience stores that complement our existing stores or broaden our geographic presence.  Acquisitions involve risks that could cause our actual growth or operating results to differ significantly from our expectations or the expectations of securities analysts. For example:

• We may not be able to identify suitable acquisition candidates or acquire additional convenience stores on favorable terms. We compete with others to acquire convenience stores. We believe that this competition may increase and could result in decreased availability or increased prices for suitable acquisition candidates. It may be difficult to anticipate the timing and availability of acquisition candidates.

• During the acquisition process, we may fail or be unable to discover some of the liabilities of companies or businesses that we acquire. These liabilities may result from a prior owner’s noncompliance with applicable federal, state or local laws or regulations.

• We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions.

• We may fail to successfully integrate or manage acquired convenience stores.

• Acquired convenience stores may not perform as we expect or we may not be able to obtain the cost savings and financial improvements we anticipate.

• We face the risk that our existing financial controls, information systems, management resources and human resources will need to grow to support future growth.

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Our indebtedness could negatively impact our financial health.

As of March 31, 2011, we had consolidated debt, including lease finance obligations, of approximately $1.2 billion. As of March 31, 2011, the availability under our revolving credit facility for borrowing was approximately $115.9 million (approximately $10.9 million of which was available for issuance of letters of credit).

Our substantial indebtedness could have important consequences. For example, it could:

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

• increase our vulnerability to general adverse economic and industry conditions;

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

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

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

• limit our ability to borrow additional funds in the future.

We are vulnerable to increases in interest rates because the debt under our senior credit facility is subject to a variable interest rate. Although we have entered into certain hedging instruments in an effort to manage our interest rate risk, we may not be able to continue to do so, on favorable terms or at all, in the future.

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

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

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

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

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

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

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For example, upon the occurrence of a “fundamental change” (as such term is defined in the indenture governing our convertible notes), holders of our convertible notes have the right to require us to purchase for cash all outstanding convertible notes at 100% of their principal amount plus accrued and unpaid interest, including additional interest (if any), up to but not including the date of purchase. We also may be required to make substantial cash payments upon other conversion events related to the convertible notes. We may not have enough available cash or be able to obtain third-party financing to satisfy these obligations at the time we are required to make purchases of tendered notes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our business is subject to various other state and federal regulations, including, without limitation, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate, income or overtime pay, or adoption of mandated healthcare benefits would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could have a material adverse effect on our business, financial condition and results of operations.  For example, the federal minimum wage increased from $6.55 per hour to $7.25 per hour in fiscal 2009.

Further, the federal government, including the U.S. Congress, has focused extensively on health care reform legislation and has begun efforts to reform the U.S. health care system.  A comprehensive health care reform law was recently enacted.  At this point, we are still evaluating what effect, if any, the reform may have on our business, but a requirement to provide additional health insurance benefits to our employees, or health insurance coverage to additional employees, would likely increase our costs and expenses, and such increases could be significant enough to materially impact our business, financial position, results of operations and cash flows.

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Legislative and regulatory initiatives regarding climate change and greenhouse gas (“GHG”) emissions have accelerated recently in the United States. GHGs are certain gases, including carbon dioxide, that may be contributing to global warming and other climatic changes. For example, in June 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 (“ACESA”), which would control and reduce GHG emissions in the United States by establishing an economy-wide “cap and trade” program. If enacted, the ACESA would impose increasing costs on the combustion of carbon-based fuels such as oil and refined petroleum products. The U.S. Senate has not passed the ACESA yet and is working on other GHG-reduction legislative options. Further, in December 2009, the Environmental Protection Agency (“EPA”) issued an endangerment finding that GHGs endanger public health and welfare and that GHG emissions from motor vehicles contribute to the threat of climate change. Although EPA’s endangerment finding does not itself impose any requirements, it does allow EPA to proceed with, among other things, proposed rules regulating GHG emissions from motor vehicles. The EPA’s endangerment finding is being challenged in federal court. If these or other governmental climate change or GHG reduction initiatives are enacted, they could have a material adverse impact on our business, financial condition and results of operations by increasing our regulatory compliance expenses, increasing our fuel costs and/or decreasing customer demand for fuel sold at our locations.

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

We purchase approximately 60% of our general merchandise, including most tobacco products and grocery items, from a single wholesale grocer, McLane. We have a contract with McLane through December 31, 2014, but we may not be able to renew the contract when it expires, or on similar terms. A change of merchandise suppliers, a disruption in supply or a significant change in our relationship with our principal merchandise suppliers could have a material adverse effect on our business, cost of goods sold, financial condition and results of operations.

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

As of September 30, 2010, Marathon®, BP® and CITGO® supplied approximately 68% of our fuel purchases. On July 26, 2010, we entered into a new fuel supply agreement with Marathon®. Our contract with Marathon® for unbranded fuel and distillate expires on December 31, 2017, and our contract with Marathon® for branded fuel and distillate expires on June 30, 2013, with an option for the Company to renew until December 31, 2017. As a result of this new fuel agreement with Marathon®, we now have three principal suppliers for the majority of our fuel.  On September 1, 2010 we entered into a Marketer Franchise Agreement, including an Addendum to Marketer Franchise Agreement, with CITGO®.   Our contract with CITGO® expires August 31, 2013 and our contract with BP® expires September 30, 2012.

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

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

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

We are dependent on the continued efforts of our senior management team.  At the end of fiscal 2009, we hired Terrance M. Marks as our new President and Chief Executive Officer. In addition, at the end of fiscal 2010, Frank G. Paci resigned as our Chief Financial Officer, and we hired Mark R. Bierley as our new Chief Financial Officer.  If, for any reason, our senior executives do not continue to be active in the management of our company, our business, financial condition and results of operations could be adversely affected. We may not be able to attract and retain additional qualified senior personnel as needed in the future. In addition, we do not maintain key personnel life insurance on our senior executives and other key employees. We also rely on our ability to recruit qualified store and field managers. If we fail to continue to attract these individuals at reasonable compensation levels, our operating results may be adversely affected.

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

We are party to various legal actions in the ordinary course of our business. We believe these 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 ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition and results of operations could be adversely affected.

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

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

Pending SEC matters could adversely affect us.

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

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

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

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

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

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

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

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

Other Risks

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

If we or our existing stockholders sell shares of our common stock in the public market, including shares issued upon the exercise of outstanding options, or if the market perceives such sales or issuances could occur, the market price of our common stock could decline. As of May 6, 2011, there were 22,986,792 shares of our common stock outstanding, most of which are freely tradable (unless held by one of our affiliates). Pursuant to Rule 144 under the Securities Act of 1933, as amended, during any three-month period our affiliates can resell up to the greater of (a) 1.0% of our aggregate outstanding common stock or (b) the average weekly trading volume for the four weeks prior to the sale. Sales by our existing stockholders also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate or to use equity as consideration for future acquisitions.

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

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

We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for capital at that time. In other circumstances, we may issue shares of our common stock pursuant to existing agreements or arrangements. For example, upon conversion of our outstanding convertible notes, we may, at our option, issue shares of our common stock. In addition, if our convertible notes are converted in connection with a change of control, we may be required to deliver additional shares by increasing the conversion rate with respect to such notes. Notwithstanding the requirement to issue additional shares if convertible notes are converted on a change of control, the maximum conversion rate for our outstanding convertible notes is 25.4517 per $1,000 principal amount of convertible notes.

We have also issued warrants to purchase up to 2,993,000 shares of our common stock to an affiliate of Merrill Lynch in connection with the note hedge and warrant transactions entered into at the time of our offering of convertible notes. Raising funds by issuing securities dilutes the ownership of our existing stockholders. Additionally, certain types of equity securities that we may issue in the future could have rights, preferences or privileges senior to your rights as a holder of our common stock. We could choose to issue additional shares for a variety of reasons including for investment or acquisitive purposes. Such issuances may have a dilutive impact on your investment.

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

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

• a deviation in our results from the expectations of public market analysts and investors;

• statements by research analysts about our common stock, our company or our industry;

• changes in market valuations of companies in our industry and market evaluations of our industry generally;

• additions or departures of key personnel;

• actions taken by our competitors;

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

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

The market price of our common stock will also be impacted by our quarterly operating results and quarterly comparable store sales growth, which may fluctuate from quarter to quarter. Factors that may impact our quarterly results and comparable store sales include, among others, general regional and national economic conditions, competition, unexpected costs and changes in pricing, consumer trends, the number of stores we open and/or close during any given period, costs of compliance with corporate governance and Sarbanes-Oxley requirements and other factors discussed in this Item 1A and throughout “Part I.—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. You may not be able to resell your shares of our common stock at or above the price you pay.

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

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

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

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

• limit who may call special meetings;

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

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

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

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

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

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

There were no sales of unregistered securities during the second quarter of fiscal 2011.

The following table lists all repurchases during the second quarter of fiscal 2011 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
December 31, 2010 – January 27,2011	-	$	-	-	$	-
January 28, 2011 – March 3, 2011	-	$	-	-	$	-
March 4, 2011 – March 31, 2011	411	$	14.38	-	$	-
Total	411	$	14.38	-	$	-

(1)	Represents shares repurchased in connection with tax withholding obligations under the 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
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 Chief 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 Chief 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.]

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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/ Mark R. Bierley
	Mark R. Bierley
	Senior Vice President, Chief Financial Officer and Secretary (Authorized Officer and Principal Financial Officer)
Date:	May 10, 2011

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EXHIBIT INDEX

Exhibit Number	Description of Document
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 Chief 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 Chief 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.]

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EX-31.1

Exhibit 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

I, Terrance M. Marks, certify that:
	1.	I have reviewed this Quarterly Report on Form 10-Q of The Pantry, Inc.;
	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 10, 2011

/s/    Terrance M. Marks

Terrance M. Marks

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification by Chief 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

I, Mark R. Bierley, certify that:
	1.	I have reviewed this Quarterly Report on Form 10-Q of The Pantry, Inc.;
	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:  May 10, 2011

/s/    Mark R. Bierley      

Mark R. Bierley

Senior Vice President,

Chief Financial Officer and Secretary

EX-32.1

Exhibit 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

In connection with the Quarterly Report of The Pantry, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Terrance M. Marks, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    Terrance M. Marks     

Terrance M. Marks

President and Chief Executive Officer

Date: May 10, 2011

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906, or other documents authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification by Chief Financial Officer pursuant to

18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of The Pantry, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark R. Bierley, Senior Vice President, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    Mark R. Bierley        

Mark R. Bierley

SeniorVice President, 

Chief Financial Officer and Secretary

Date: May 10, 2011

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906, or other documents authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.