COUNTDOWN to Pantry Board Meeting (2 Days)

Analysis: How important is this week's vote for chain directors?

Mitch Morrison, Vice President of Retailer Relations

The Pantry CPS

CARY, N.C. -- Whichever way the vote goes this week at the annual shareholders meeting, management will still control the board of directors at convenience store retailer The Pantry Inc.

The best-case scenario for the dissenting faction, known as Concerned Pantry Shareholders (CPS), is to capture three seats, or one-third of the board. On the surface, this new group would be a distinct minority and face prohibitive challenges to either oust Edwin Holman as chairman or pivot The Pantry's current strategy.

So why is this shareholders meeting so important?

The answer can be defined in a single word: Momentum.

Currently, The Pantry has none. Its forecast calls for more of the same: modest capital investment in its portfolio, moderate investment in its foodservice program and gradual paring down of its onerous debt.

The dissidents--a group led by JCP Investment Management and Lone Star Value Management--may only represent approximately 2% of The Pantry's shares. But there is a growing sense among analysts and industry observers that enough institutional investors are fed up with the company's prolonged underperformance and are prepared to embrace a dramatic change.

In this proxy battle, management has portrayed The Pantry as a company on the upswing, as it recently stated in a filing to the U.S. Securities & Exchange Commission (SEC). "Your board of directors and management team are focused on creating value for all stockholders of The Pantry through the continued implementation of our strategy, which balances prudent cost management with targeted initiatives to strengthen The Pantry's presence in high-value, high-demand markets."

It has cited key hires on the executive team, reinvestment in the company's portfolio and, more recently, has accused CPS of undertaking "an aggressive campaign of misinformation, and put forward an empty plan that illustrates a fundamental lack of understanding of our business."

Management has defined its strategy as measured, balanced and prudent, speaking with the voice of a comforting grandparent, calmly aware of the challenges ahead and confident of the steps to overcome them.

The dissidents, on the other hand, portray management as incompetent and beholden to failed strategies, a team lacking vision and drowning in the seas of debt and intense competition.

Furthering their argument, CPS has won support from several proxy advisory service like Egan-Jones, which last week concluded, "In our view, the board needs a fresh perspective … which should help reassure shareholders that their interests are properly represented."

What's at stake, in short, is not literally control of the board, but rather the voice of the board. If the dissident slate wins out, it will represent an emphatic rejection of the leadership team led by chairman Holman and CEO Dennis Hatchell. It will represent a clarion call to change direction akin to when the Democrats retook both Houses two years after George W. Bush won a second term in office. It will, at the least, guarantee a vocal minority to counter-balance the majority.

It means something will have to change--and fast.

As we have stated in our coverage, which has included more than a dozen stories over the past month concerning the industry's fifth-largest c-store chain, The Pantry right now is highly vulnerable.

From 2011 to 2013, the company's adjusted EBITDA has fallen from $231.7 million to $202.4 million. Its core base in the Southeast is facing intensified competition from superior operators, including RaceTrac, Sheetz and QuikTrip. And according to at least one report, its biggest vendors, including primary wholesaler McLane and fuel brands BP and Marathon, are requiring that The Pantry post "significant letters of credit" in order to do business.

If management wins, it will mean an endorsement of current strategy, a realization that a moderate, yet steady advancement is the best course in light of existing hurdles. It will deliver an endorsement to Holman and perhaps encourage Hatchell to stay after his three-year deal expires.

It will mean a vote for the status quo.

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