The Pantry, 'Dissidents' Get Ready to Rumble

Retailer, dissatisfied investors take board nominee cases, strategies to stockholders

The Pantry

CARY, N.C. -- "RaceTrac is plowing through more of the South, Sheetz and QuikTrip are expanding smartly in the Southeast. Wawa and Thorntons are investing in Florida. New 7-Elevens are springing forth across the region with improved foodservice programs."

This is how the group of investors calling itself Concerned Pantry Shareholders (CPS) describes the competitive landscape that it says shows that "The Pantry has underperformed its peers."

This was the opening salvo the investors group fired as the two parties reached out to all shareholders ahead of The Pantry Inc.'s March 13 annual meeting, when all shareholders will vote on who will make up the company's board.

The Pantry has spent more than $900 million on acquisition-related capital expenditures in the last 10 years buying more than 600 stores, "which has not created any shareholder value," CPS said.

The Pantry spent more than $10 million in 2013 building new stores, and "we have yet to see any tangible evidence that the 'new-store models' are making a difference to EBITDA. Growing three stores a year on 1,500 stores is not an advantageous use of cash, considering the large debt load and significant store base."

CPS said opportunities to create new value include suspending the new-store program until return on invested capital (ROIC) is clearly articulated; considering monetizing at least 150 stores; restructuring the store base (it believes that as many as 500 stores are underperformers and could potentially be a drain on resources); considering a dealer/distributor like RaceTrac executed with Raceway; selling underperforming stores for cash and allowing the company to invest capital in the nearly 1,000 stores that are well-positioned to grow; and implement a better quick-service restaurant (QSR) plan.

And arguing that The Pantry has a history of senior management turnover with too little convenience industry experience, while several of the current board members have served too long without results, CPS also is seeking to seat three new board members as part of its plan to shake up the chain's governance, which it claims will produce greater shareholder value.

CPS, comprised of JCP Investment Management LLC, Lone Star Value Management LLC and others--sent a letter to stockholders and filed U.S. Securities & Exchange Commission (SEC) documents urging shareholder to vote for its three nominees, Todd E. Diener, James C. Pappas and Joshua E. Schechter.

Meanwhile, arguing that its current governance, management and strategy are working and that CPS is only seeking publicity for a new hedge fund, management of The Pantry Inc. is urging stockholders to vote for the company's nine "highly qualified and experienced" director nominees: Robert F. Bernstock, Thomas W. Dickson, Wilfred A. Finnegan, Kathleen Guion, Dennis G. Hatchell, Edwin J. Holman, Terry L. McElroy, Mark D. Miles and Thomas M. Murnane.

As reported in a 21st Century Smoke/CSP Daily News Flash, The Pantry has commenced mailing its proxy materials in connection with the meeting. In a letter to stockholders--and in filings with the SEC--it said:

"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. Since 2012, when your board installed the company's leadership team led by president and CEO Dennis Hatchell, The Pantry has successfully executed plans to improve performance and unlock the potential of our powerful convenience store platform. We have made significant progress and we are confident that The Pantry is well positioned for continued growth and success.

"A dissident stockholder group … is seeking to replace certain members of your board with a few handpicked nominees. Consistent with its fiduciary duty, your board is always open to considering qualified director candidates. In fact, as was clearly communicated to the dissident stockholders, your board is currently seeking an additional director with significant senior management experience in the fuels area to assist the board in its oversight of this important area. After evaluating the individuals that the dissident group has put forth, your board concluded that none of the dissident group's nominees possess the particular experience and expertise required to serve on The Pantry's board at this time or to further the interests of all stockholders."

The Pantry continued, "Since we first became aware of the dissidents' interest in The Pantry, members of your board and management team met and spoke with representatives of the dissident group on several occasions in order to better understand their perspective. Your board also carefully considered the director nominees put forth by the dissident group (and offered to interview one previously put forth) and concluded that the dissident group's nominees lack the skill or experience required to serve on your board and represent the best interests of all stockholders at this time. The dissident group has been unable to demonstrate how their director nominees would do anything to improve the value of your Pantry investment.

"From a strategic perspective, the dissident group has also shown that it would rather create problems than propose solutions. Despite our repeated attempts to engage with the dissident group to better understand their views as to how they might propose to enhance value for all stockholders, to date the dissident group has not provided any constructive suggestions about improvements to the company's strategy.

"Do not be fooled by the dissident group--they have no real plan for The Pantry, and it appears that they are engaging in this proxy contest for the self-serving goal of gaining publicity for themselves and their newly formed hedge funds. Your board and management team are making important and significant progress on our strategic plan and have positioned The Pantry well for sustained and profitable growth."

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.

Click here to view the full press statement from The Pantry. And click here to view The Pantry's investor presentation. Also, click here to view the investor presentation of CPS.