This discussion and analysis of our financial condition and results of operations is provided to increase the understanding of, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes appearing elsewhere in this report. Additional discussion and analysis related to our business is contained in our Annual Report on Form 10-K for the fiscal year ended September 25, 2008. References to "the Company," "The Pantry," "Pantry," "we," "us" and "our" mean The Pantry, Inc. and its subsidiaries.

Safe Harbor Discussion

This report, including, without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by the use of phrases such as "believe," "plan," "expect," "anticipate," "intend," "forecast" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs and burdens of environmental remediation, anticipated capital expenditures, expected cost savings and benefits and anticipated synergies from acquisitions, and expectations regarding remodeling, rebranding, re-imaging or otherwise converting our stores are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:

• Competitive pressures from convenience stores, gasoline stations and other non-traditional retailers located in our markets;
• Volatility in crude oil and wholesale petroleum costs;
• Political conditions in crude oil producing regions and global demand;
• Changes in economic conditions generally and in the markets we serve;
• Consumer behavior, travel and tourism trends;
• Wholesale cost increases of, and tax increases on, tobacco products;
• Unfavorable weather conditions or other trends or developments in the southeastern United States;
• Inability to identify, acquire and integrate new stores;
• Financial leverage and debt covenants;
• Changes in state and federal environmental and other laws and regulations;
• Dependence on one principal supplier for merchandise and two principal suppliers for gasoline;
• Dependence on senior management;
• Litigation risks, including with respect to food quality, health and other related issues;
• Inability to maintain an effective system of internal control over financial reporting; and
• Other unforeseen factors.

For a discussion of these and other risks and uncertainties, please refer to "Part II.-Item 1A. Risk Factors." The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. 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 February 3, 2009. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available.

Executive Overview

We are the leading independently operated convenience store chain in the southeastern United States with 1,648 stores in 11 states as of December 25, 2008. Our stores operate under a number of select banners, with 1,529 of our stores operating under Kangaroo and Kangaroo Express, our primary operating banners. We derive our revenue from the sale of merchandise, gasoline and other ancillary products and services designed to appeal to the convenience needs of our customers. Our strategy is to continue to improve upon our position as the leading independently operated convenience store chain in the southeastern United States in the following ways:

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

Our record quarterly results, in terms of earnings per share for the first quarter of fiscal 2009, primarily reflected a favorable environment in the energy markets, as oil prices fell almost continuously throughout the quarter The resulting declines in gasoline prices led to a strong retail gasoline margin of 25.8 cents per gallon, compared with 10.6 cents per gallon in the corresponding period a year ago. Our net income for the first quarter of fiscal 2009 was $39.4 million, or $1.77 per share on a fully diluted basis, compared to net income of $3.2 million, or $0.15 per share on a fully diluted basis, for the first quarter of fiscal 2008. Decreased gasoline demand coupled with reduced speculation in energy markets primarily caused the 16.8 percent decrease in gasoline prices.

These results were achieved despite continued declines in comparable store gasoline and merchandise volumes and a challenging merchandise gross margin environment. These trends primarily reflect the continuing slowdown in U.S. consumer spending. More specifically, the latest statistics on miles driven across the United States continue to show significant declines despite the dramatic decrease in gasoline prices, with the southeastern United States down more than the national average. With fewer miles driven, demand for gasoline is reduced, which also impacts traffic in our stores and merchandise sales.

Comparable store gasoline gallons sold and merchandise sales for the first quarter decreased 7.2% and 3.0%, respectively, from a year ago. We believe these results were affected by the extreme gasoline shortages in some of our markets during the first three weeks of the quarter. Another factor weighing on our gasoline volume is reduced demand for diesel. With the slowing economy, truck traffic was down significantly, and our comparable store diesel gallons for the quarter declined 18.3 percent from a year ago.

Our merchandise gross margin for the quarter was 35.5%, compared with 37.0% in last year's first quarter. We believe the decline in our merchandise margin was driven primarily by three factors: an increase in costs in certain categories, a slightly unfavorable mix shift away from higher margin categories, and increased promotional activity, primarily in cigarettes. The softening economy has adversely impacted sales in higher margin discretionary areas such as candy, general merchandise and coffee, and in our service category, especially car washes. In response, we have taken action in some areas to adjust prices to enhance our margins, and continue to explore other opportunities to improve margins without impacting sales. In view of the current retail environment, we also are examining a variety of opportunities to further increase our efficiency through reductions in store operating and general and administrative expenses.

As a result of our strong net income and cash generation in the first quarter, we were able to further improve our liquidity position. Cash and cash equivalents totaled $254.8 million as of December 25, 2008, compared with $217.2 million at the end of fiscal 2008. This increase was achieved despite a required $22.8 million principal repayment under our senior credit facility.

Market and Industry Trends

A weakening U.S. and global economy, a slumping housing market and increased unemployment, continued to reduce consumer disposable income throughout the southeastern United States. Lower disposable income resulted in decreased recreational travel and consumer discretionary spending, which resulted in lower demand for our gasoline and merchandise.

During the first quarter of fiscal 2009, crude oil prices decreased from $107 per barrel to a low of less than $34 per barrel, which decreased our wholesale gasoline costs. We attempt to pass along wholesale gasoline cost changes to our customers through retail price changes;

however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower gasoline margins in periods of rising wholesale costs and higher margins in periods of decreasing wholesale costs.

Results of Operations

The table below provides a summary of our selected financial data for the three months ended December 25, 2008 and December 27, 2007 (dollars and gallons, except per gallon data, in thousands, except per gallon data):

                                                           Three Months Ended
                                                 December 25,            December 27,
                                                     2008                    2007
  Selected financial data:
  Merchandise gross profit [1]                   $     138,681         $         146,363
  Merchandise margin                                      35.5 %                    37.0 %
  Retail gasoline data:
  Gallons                                              499,673                   526,183
  Margin per gallon                              $      0.2583         $          0.1056
  Retail price per gallon                        $        2.43         $            2.92
  Total gasoline gross profit [1]                $     130,141         $          56,157

  Comparable store data:
  Merchandise sales (decrease) increase (%)               (3.0 %)                    0.8 %
  Merchandise sales (decrease) increase          $     (11,671 )       $           2,599
  Gasoline gallons decrease (%)                           (7.2 %)                   (2.8 %)
  Gasoline gallons decrease                            (37,857 )                 (12,843 )
  Number of stores:
  End of period                                          1,648                     1,644
  Weighted-average store count                           1,652                     1,643

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

Three Months Ended December 25, 2008 Compared to the Three Months Ended December 27, 2007

Merchandise Revenue and Gross Profit. Merchandise revenue for the first quarter of fiscal 2009 decreased $5.3 million, or 1.3%, from the first quarter of fiscal 2008. This decrease is primarily attributable to a decrease in comparable store merchandise revenue of 3.0%, or $11.7 million, partially offset by merchandise revenue from stores acquired since the beginning of the first quarter of fiscal 2008 of $4.9 million. Merchandise gross profit for the first quarter of 2009 decreased $7.7 million, or 5.2%, from the first quarter of fiscal 2008. This decrease is primarily attributable to lower merchandise revenue during the first quarter of fiscal 2009 and a 150 basis point decrease in merchandise gross margin to 35.5% for the first quarter of fiscal 2009 compared to 37.0% for the first quarter of fiscal 2008. The decrease in merchandise gross margin was primarily due to an unfavorable mix shift away from higher margin categories, increased costs in certain categories and lower cigarette margins as a result of increased promotional activity.

Gasoline Revenue, Gallons and Gross Profit. Total gasoline revenue for the first quarter of fiscal 2009 decreased $340.6 million, or 21.5%, from the first quarter of fiscal 2008. This decrease is primarily attributable to the 16.8% decrease in the average retail price per gallon to $2.43 and a decrease in gasoline gallons sold. Retail gasoline gallons sold for the first quarter of fiscal 2009 decreased 26.5 million gallons, or 5.0%, from the first quarter of fiscal 2008. The decrease is primarily attributable to a decrease in comparable store gasoline gallons sold of 37.8 million gallons, or 7.2%. The decrease in comparable store gasoline gallons sold was primarily due to decreased consumer demand for gasoline due to increasingly weak economic conditions, which reduced consumer disposable income, leading to decreased recreational travel and consumer discretionary spending.

Gasoline gross profit for the first quarter of fiscal 2009 increased $74.0 million, or 131.8%, from the first quarter of fiscal 2008. The increase is primarily attributable to the 15.3 cent increase in retail gross profit per gallon to 25.8 cents for the first quarter of fiscal 2009 from 10.6 cents in the first quarter of fiscal 2008. The increase in retail gross profit per gallon is primarily due to declining wholesale fuel costs during the first quarter of fiscal 2009 and decreased credit card fees resulting from lower average retail price per gallon. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present gasoline gross profit per gallon inclusive of credit card processing fees and cost of repairs and maintenance on gasoline equipment. These fees totaled 4.5 cents per gallon and 4.6 cents per gallon for the three months ended December 25, 2008 and December 27, 2007, respectively.

Store Operating and General and Administrative. Store operating and general and administrative expenses for the first quarter of fiscal 2009 increased $8.0 million, or 5.4%, from the first quarter of fiscal 2008. This increase is a result of higher utilities costs, repairs and maintenance expense, store lease expense and stock-based compensation expense. Average per store operating expenses for the first quarter of fiscal 2009 increased 3.0% from the first quarter of fiscal 2008 primarily due to increased utilities, telecommunications and repairs and maintenance expenses.

Depreciation and Amortization. Depreciation and amortization expenses for the first quarter of fiscal 2009 increased $240 thousand, or 0.9%, from the first quarter of fiscal 2008.

Income from Operations. Income from operations for the first quarter of fiscal 2009 increased $58.1 million, or 217.0%, from the first quarter of fiscal 2008. This increase is primarily attributable to the increase in gasoline gross profit, partially offset by increases in store operating and general and administrative expenses, each of which are discussed above.

EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, loss on extinguishment of debt, income taxes and depreciation and amortization. Adjusted EBITDA includes the lease payments we make under our lease finance obligations as a reduction to EBITDA. EBITDA for the first quarter of fiscal 2009 increased $58.3 million, or 108.8%, from the first quarter of fiscal 2008. Adjusted EBITDA for the first quarter of fiscal 2009 increased $57.9 million, or 136.7%, from the first quarter of fiscal 2008. These increases are primarily attributable to the variances discussed above.

EBITDA and Adjusted EBITDA are not measures of operating performance or liquidity under GAAP and should not be considered as substitutes for net income, cash flows from operating activities or other income or cash flow statement data. We have included information concerning EBITDA and Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses EBITDA and Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting and field operations compensation targets.

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

Any measure that excludes interest expense, loss on extinguishment of debt, depreciation and amortization or income taxes has material limitations because we use debt and lease financing in order to finance our operations and acquisitions, we use capital and intangible assets in our business and the payment of income taxes is a necessary element of our operations. Due to these limitations, we use EBITDA and Adjusted EBITDA only in addition to and in conjunction with results and cash flows presented in accordance with GAAP. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

Because non-GAAP financial measures are not standardized, EBITDA and Adjusted EBITDA, each as defined by us, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare our use of EBITDA and Adjusted EBITDA with non-GAAP financial measures having the same or similar names used by other companies.

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

                                                        Three Months Ended
                                                  December 25,       December 27,
                                                      2008               2007
   Adjusted EBITDA                               $      100,180     $       42,326
   Payments made for lease finance obligations           11,711             11,272
   EBITDA                                               111,891             53,598
   Interest expense, net                                (21,042 )          (21,607 )
   Depreciation and amortization                        (26,882 )          (26,642 )
   Income tax expense                                   (24,529 )           (2,100 )
   Net income                                    $       39,438     $        3,249

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

                                                              Three Months Ended
                                                       December 25,         December 27,
                                                           2008                 2007
Adjusted EBITDA                                       $      100,180       $       42,326
Payments made for lease finance obligations                   11,711               11,272
EBITDA                                                       111,891               53,598
Interest expense, net                                        (21,042 )            (21,607 )
Income tax expense                                           (24,529 )             (2,100 )
Stock-based compensation expense                               2,771                  877
Changes in operating assets and liabilities                   17,162               (6,085 )
Other                                                          2,700                1,687
Net cash provided by operating activities             $       88,953       $       26,370
Net cash used in investing activities                 $      (25,391 )     $      (38,802 )
Net cash provided by (used in) financing activities   $      (25,972 )     $       (1,541 )

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 quarter of fiscal 2009 was $21.0 million compared to $21.6 million for the first quarter of fiscal 2008. This decrease is primarily due to the reduction in the principal outstanding on our debt and changes in the interest rates on our variable rate debt.

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 our debt and fund capital expenditures. Our working capital as of December 25, 2008 was $206.9 million. Cash provided by operating activities increased to $89.0 million for the first quarter of fiscal 2009 compared to $26.4 million for the first quarter of fiscal 2008. The increase in cash flow from operations is primarily due to net income of $39.4 million and certain changes in working capital. We had $254.8 million of cash and cash equivalents on hand at December 25, 2008.

Capital Expenditures. Capital expenditures (excluding accrued purchases) for the first quarter of fiscal 2009 were $26.0 million. In the first quarter of fiscal 2009, we had proceeds of $579 thousand from asset dispositions and $3.7 million from vendor reimbursements. As a result, our net capital expenditures for the first quarter of fiscal 2009 were $21.7 million, compared to $34.2 million in the first quarter of fiscal 2008. The decrease is primarily due to a continued focus on reducing non-essential capital expenditures while continuing our new store development and technology improvement strategies. We anticipate that net capital expenditures for fiscal 2009 will be approximately $110.0 million.

Our capital expenditures are primarily expenditures for 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.

Cash Flows from Financing Activities. For the first quarter of fiscal 2009, net cash used in financing activities was $26.0 million, of which $24.6 million was used to repay long-term debt and $1.4 million was used to repay lease finance obligations. As of December 25, 2008, our debt consisted primarily of $442.3 million in loans under our senior credit facility, $250.0 million of outstanding 7.75% senior subordinated notes and $149.0 million of outstanding 3.0% convertible notes. As of December 25, 2008, we also had outstanding $463.9 million of lease finance obligations.

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.

As of December 25, 2008, we had no outstanding borrowings under our revolving credit facility and approximately $88.6 million of standby letters of credit had been issued. As of December 25, 2008, we had approximately $136.4 million in available borrowing capacity under the revolving credit facility (approximately $31.4 million of which was available for issuances of letters of credit). On March 31, 2008 and May 5, 2008, we borrowed delayed draw term loans in aggregate principal amounts of $30.0 million and $70.0 million, respectively, under our senior credit facility. Our delayed draw term loans are subject to the same terms and conditions, including interest rate and maturity date, as our initial $350.0 million term loan under our credit agreement. The total principal amount of the delayed draw term loans will be repaid in quarterly installments of $250 thousand, and the remaining outstanding principal amount of our delayed draw term loans will be due and payable on May 15, 2014, unless such payments are accelerated in the event of a default under our credit agreement. The proceeds from our delayed draw term loan were used to pay off amounts outstanding under our revolving credit facility, to provide working capital and for general corporate purposes.

Senior Subordinated Notes. We have outstanding $250.0 million of 7.75% senior subordinated notes due February 15, 2014. Interest on the senior subordinated notes is due on February 15 and August 15 of each year.

Senior Subordinated Convertible Notes. We have outstanding $149.0 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 . . .