Analysis: What's Next for The Pantry

Big changes to hit the country's fifth-largest convenience chain

Mitch Morrison, Vice President of Retailer Relations

The Pantry Kangaroo Express Convenience Store

RALEIGH, N.C. -- In the shareholder's private space, euphoria erupted moments after he learned that a dissident faction representing just 2% of The Pantry's stock had won in a landslide--a 6-to-1 ratio--sweeping out the heavy-handed board chairman and two other veteran directors of the convenience store chain.

"There is not a dry eye among the management team," the shareholder told CSP Daily News in an exclusive interview.

The dissident group, Concerned Pantry Shareholders (CPS), was formed in late January by two institutional investors, JCP Investment Management LLC and Lone Star Value Management LLC. Their argument was one of incumbent failure, of protracted underperformance, of failed strategies.

Of a need for change.

"Lone Star and JCP really did their homework," the shareholder said. "I can't tell you how many emails we as shareholders got from them over the past 60 days. They were pretty pointed and factual pieces of information that told you something had to change.

"I wasn't sure what would happen, but I think people said enough is enough."

Inside Cary, N.C.-based The Pantry, many in mid- and upper management were still absorbing the shock yesterday, just hours after the preliminary results were announced. According to some, there is a hopeful spirit that perhaps the company will place more c-store veterans in upper management where today there are none and solicit greater input from a healthy bench of convenience talent among The Pantry's category managers and regional supervisors.

"The heart and soul in the organization wants a direction they can believe in and not rhetoric," one company insider told CSP Daily News. "They are hopeful that new senior leadership who understand the business will be employed and bring a level of respect and open communication. It's a new day at The Pantry Inc."

Such optimism is balanced by sober realities. None of the three new directors comes with a convenience store background. While they all share retail experience and insights, some inside The Pantry had hoped to see at least one c-store operator on the nine-member board of directors.

That said, all evidence suggests dramatic change is on its way to the chain of more than 1,500 c-stores. While no one from CPS would comment Thursday, the faction last month laid out its plan while detailing failures of the current administration.

The plan is somewhat of a hodgepodge--myriad options without necessarily a clear focus. That is understandable as the group was not part of the board or management and will need time to better understand inner operations of a chain built on an aggressive two-decade merger-and-acquisition strategy that has yielded a multitude of platforms and footprints.

CPS' pitch to shareholders in the weeks preceding Thursday's annual meeting included the following:

  • Reassess Capital Expenditures to focus on return on invested capital (ROIC) and pay down excessive leverage. The Pantry, CPS contended, has failed to produce any return to shareholders after 10 years of spending $1.9 billion in capital (capital expenditures plus acquisitions).
  • Explore Real-Estate Monetization in order to continue to deleverage the balance sheet through a full sale, partial sale or master limited partnership (MLP) or real-estate investment trust (REIT) formation. 
  • Strengthen Store Base by repositioning or selling between 300 and 500 stores in weak or non-growth markets and focusing on strong performing stores in core markets.
  • Implement a Successful QSR Plan by tapping the three new board directors' expertise in QSR restaurants and operations.
  • Enhance Corporate Governance through direct shareholder representation on the board, decreased board pay, provisions that allow shareholders to act by written consent and to call special meetings, and a stop to any further shareholder dilution (share count is up almost 30% since 2002).
  • De-Lever the Balance Sheet by slowing capital expenditures, increasing focus on ROIC (increasing EBITDA) and paying down debt with reasonable free cash flow.

According to sources in both the retail and financial communities, The Pantry first and foremost must stabilize its credit terms with key vendors and will only successfully do so by dramatically driving down debt and significantly enhancing both inside and fuel revenues. This is no easy task for even the best-constructed operators, but even more challenging for a company that competes against Sheetz, RaceTrac and QuikTrip in many of its core markets.

These industry sources privately wonder whether the company as constructed can be saved, but say they support CPS' proposal to divest several hundred stores in non-core markets and de-levering the balance sheet by scaling back capital expenditures, which while helpful have not delivered the necessary ROI. Even under the best-case scenario, it will take several years, the sources said, for The Pantry to regain even footing, but that immediate steps are needed to restore confidence in the institutional investment community.

Over the past decade, The Pantry's stock price has declined by 36%, while debt levels have grown.

Thursday's election may not be a panacea, but it is an overdue wakeup call many never thought would come. As shared by the shareholder, who talked on condition of anonymity:

"I don't know if the new board will be any better, but it sure can't be worse."

Mitch Morrison Winsight CSP By Mitch Morrison, Vice President of Retailer Relations
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