HOUSTON -- Laying outwidely divergent sets of facts, as well as differing plans to move forward, Concerned Pantry Shareholders (CPS)--a group of investors led by JCP Investment Management LLC and Lone Star Value Management LLC--and The Pantry continued their appeals to stockholders in anticipation of the March 13 annual meeting to elect new board members.
CPS announced Tuesday that it has sent a letter to the shareholders of the public convenience store company. CPS said the letter highlights what it calls the "prolonged underperformance" at The Pantry and the critical need for significant change in the company's board of directors.
As reported in a 21st Century Smoke/CSP Daily News Flash, CPS is urging shareholders to elect its three "highly qualified and independent" nominees, Todd Diener, James Pappas and Joshua Schechter, to serve on the board at the upcoming 2014 Annual Meeting.
According to the letter, under the stewardship of chairman Ed Holman, Tom Murnane and Robert Bernstock, The Pantry has seen:
- 10 years of significant negative total stockholder return (TSR).
- 10 years of high-growth spending ($1.9 billion in acquisitions and capital expenditures) which has produced "negative value."
- High management turnover at all levels including four CEOs in five years, complete turnover in the senior ranks twice and a continuing senior management "exodus" with the senior vice president of operations having resigned in February.
- "Disturbingly high" levels of debt and lease obligations with this board having overseen increased debt load from $500 million to more than $900 million in the last 10 years. The Pantry has 4.4x debt / FY 2014E EBITDA while its peers have 2.2x debt / FY 2014E EBITDA or less.
- "Abysmal" operating performance relative to direct competitors and on an absolute basis. Adjusted EBITDA has declined from $280 million in FY 2009 to $202 million in FY 2013 despite the massive amount of investment spending.
- Minimal quick-service restaurant (QSR) roll out while competitors have thrived with the QSR portion of their business, in 11 years The Pantry has increased its QSR count by a "paltry" 28 restaurants in its 1,568 locations and continues to lack meaningful restaurant experience on the board.
- Poor corporate governance with average board tenure of about seven years and current directors who are net sellers of stock since 2010. During the last six years, directors have been paid an aggregate of $8.5 million in compensation.
CPS's plan:
- Reassess capital expenditure spend to focus on return on invested capital (ROIC) and pay down excessive leverage. The company 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 (1) full sale, (2) partial sale or (3) master limited partnership (MLP) or real-estate investment trust (REIT) formation.
- Strengthen store base by repositioning or selling 300 to 500 stores in weak or non-growth markets and focusing on great performing stores in core markets.
- Implement a successful QSR plan by tapping into CPS's nominees' strong QSR restaurant expertise and operational experience.
- 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).
- Deliver the balance sheet by slowing capital expenditures, increasing focus on ROIC (increasing EBITDA) and paying down debt with reasonable free cash flow.
Click here to view the full CPS letter.
The Pantry sent a letter to shareholders last week. In it, the company anticipated many of CPS's arguments:
Attracted leading talent to The Pantry to further strengthen our operational management. Beginning with the appointment of our current CEO, we have taken decisive action to ensure we have a best-in-class management team with the insights and experience to grow the company and create stockholder value.
- In March 2012 we appointed Dennis Hatchell, an industry veteran with more than 40 years of retail and distribution experience, as president and CEO.
- Since Hatchell's appointment, we have significantly strengthened our bench of executive talent with the addition of a new CFO, chief merchandising officer and vice president of real estate and business development.
- Most recently, we appointed a chief information officer in January 2014 to ensure that The Pantry operates at the forefront of technological innovation in its industry.
Increased same-store sales through an enhanced merchandise mix and effectiveness. The Pantry has refocused its merchandising strategy to emphasize localization and targeted advertising and promotions:
- We have implemented local merchandising programs in more than 900 stores across our footprint.
- We are driving sales increases through the use of more consistent and competitive fuel and cigarette pricing, localized product offerings and initiatives designed to increase traffic from the pump to the store.
Invested in technology to support pricing optimization. The Pantry has made strategic investments in technology and cost management tools in order to improve fuel pricing and minimize the impact of volatility.
- We have implemented state-of-the-art fuel pricing software and have installed electronic fuel price signs in nearly 1,000 stores, with plans to add 150 more in fiscal 2014.
- We continue to make investments to support price optimization throughout the company's footprint.
Prudently managed expenses and reduced debt. The Pantry's board and management team have steadily reduced costs throughout the organization, giving us a stronger balance sheet and providing additional liquidity to reinvest in our business.
- We reduced OSG&A costs by $23 million since 2010, a reduction of 1.4% of OSG&A as a percentage of merchandise sales, and successfully renegotiated fuel hauling agreements to reduce costs.
- Our balance sheet has also benefited from the reduction of nearly $368 million of debt since 2008, including $72 million in fiscal 2013 alone.
As of Dec. 2013, The Pantry had substantial liquidity (cash and available credit lines) amounting to $174 million, with no near-term debt maturities.
Significant store remodeling program, enhanced proprietary foodservice and added quick-service restaurants in existing stores. The Company has a significant remodel program underway and is rapidly increasing its number of quick-service restaurants (QSRs).
- The remodels support our plans to grow proprietary foodservice revenue and, when combined with the QSR additions, to expand our overall mix in the high-growth, high-margin foodservice category.
- In fiscal 2013 the company completed 72 store remodels and opened eight new QSRs. The company intends to build on this momentum into 2014 with additional remodels and more than 20 QSR buildouts.
Used new store opportunities and acquisitions to accelerate growth and strengthen The Pantry's competitive position in key markets. Consistent with the company's disciplined capital deployment strategy, the board and management team are pursuing selective growth opportunities that will enhance the company's presence within its primary footprint, enhance free cash flow and produce valuable operating synergies.
Over the last two years, the company has invested approximately $38 million, representing nearly 92% of total growth capital (i.e., remodel, new store and QSR capital), in strengthening its position in leader markets.
- Since Feb. 2013, the company has opened four new stores and is actively seeking additional high-potential sites for growth.
The company's recent performance clearly demonstrates that this strategy is working and delivering results. Among other things, the company's achievements include:
- Positive growth in same-store merchandise sales for eight of the last nine quarters, as average revenue per customer has steadily improved.
- Rapid growth in proprietary foodservice revenue.
- Implementation of management disciplines and technology to aggressively address our fuel market share underperformance.
- Steady reduction of total debt.
The Pantry's leadership has the right vision for a successful future, and is pursuing the right opportunities for growth through a thoughtful balance of investment and cost management. Under the direction of an outstanding management team and the oversight of an engaged and knowledgeable board, the company is solidly positioned to continue delivering results and creating value for all stockholders.
Click here to view The Pantry's full letter.
JCP Investment Management is an investment firm headquartered in Houston that engages in value-based investing across the capital structure. JCP follows an opportunistic approach to investing across different equity, credit and distressed securities largely in North America.
Lone Star Value Management is an investment firm that invests in undervalued securities and engages with its portfolio companies in a constructive way to help maximize value for all shareholders. Lone Star Value was founded by Jeff Eberwein who was formerly a Portfolio Manager at Soros Fund Management and Viking Global Investors. Lone Star Value is based in Old Greenwich, Conn.
As of Jan. 30, 2014, The Pantry, based in Cary, N.C., operated 1,537 stores in 13 states under select banners, including its primary operating banner Kangaroo Express.
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