HOUSTON & CARY, N.C. -- Continuing the point-counterpoint fencing match between convenience store retailer The Pantry Inc. and Concerned Pantry Shareholders, CPS drew blood with its announcement that Glass, Lewis & Co. LLC, a leading proxy advisory firm, has recommended that The Pantry shareholders vote to elect all three of CPS's nominees at the company's annual meeting on March 13, 2014.
CPS--a group of shareholders led by JCP Investment Management LLC and Lone Star Value Management LLC--believes that the company is being mismanaged, resulting in a strategy that is taking it in the wrong direction, especially compared to other c-store companies, including Susser Holdings, Alimentation Couche-Tard and Casey's General Stores.
The Pantry, meanwhile, parried with a letter saying that the advisory firm's report "contains numerous inaccuracies that illustrate Glass, Lewis' fundamental lack of understanding of our business."
James Pappas of JCP said, "Glass, Lewis has strongly recommended much-needed change to the Pantry board and for shareholders to vote [for CPS' nominees]. Importantly, a leading independent proxy voting advisory firm has recognized the sustained underperformance of Pantry and compelling case for a better plan to build The Pantry into a stronger, more profitable and ultimately more valuable company. … All three of our director nominees … are firmly committed to the future success of The Pantry."
Glass Lewis said it performed an analysis of both sides' positions in the election contest and considered, among other things, "the company's poor total shareholder return and operating performance, unresponsiveness to governance concerns, as well as the strong experience and qualifications of CPS's nominees." It concluded that shareholders should vote for CPS' candidates.
"We believe the dissidents have submitted a clear and cogent case in favor of the benefits prospectively realized through a measured degree of board-level turnover. … We believe JCP and Lone Star fairly highlight the fact that Pantry has lagged its peers by nearly any reasonable standard of value or performance, a straightforward argument management and the board largely sidestep in favor of absolute observations of granular metrics and dubious contest rhetoric. In our view, such a rebuttal speaks very little to the fundamental premise at play here: the company's poor operating metrics, questionable investment program and lack of a cohesive strategy--as underpinned by some fair degree of management continuity--invite a considerable degree of scrutiny and support the notion that all investors would benefit from a fresh perspective at the board level."
Glass Lewis said that while The Pantry asserts CPS has "failed to articulate any plan" as part of its presentation, "we find the 'dissidents' [CPS] have, in fact, compiled a rather extensive and contextual action plan intended to remediate the issues and concerns detailed as part of its larger argument. This plan, which could only be implemented through some measure of buy-in from the remaining board members, includes a potential monetization of Pantry's real estate assets--including those stores in low-growth areas--as a means to more aggressively fund a pay down of the company's debt obligations, formation of more rigorous return on invested capital criteria to reduce investment in low or nil-return projects and a tightened expense structure. Given Pantry's decidedly plain underperformance in these areas, we fail to see how the dissidents' suggestions could be construed as lacking sufficient articulation to be considered viable."
"In addition, Pantry's materials allege the dissidents' solicitation is based on 'vague and undefined concerns,' a position we consider to be objectively and categorically false, based on available disclosure. To the contrary, we believe the dissidents' materials offer considerable detail on the matters most pressing to investors--total returns, profitability, capital allocation and management stability--accompanied, where applicable, by copious relative analyses to contextualize Pantry's market position. … In no case do we find the board offers a substantive and valid deflection of the arguments presented by [CPS] or a meaningful discussion of Pantry's mediocre historical performance."
Glass, Lewis concluded, "We believe the dissidents have submitted a far more compelling case in favor of board-level change than Pantry has submitted in favor of maintaining the status quo."
The Pantry responded to the Glass, Lewis report and CPS press statement: "We are disappointed with the report issued by Glass, Lewis, which contains numerous inaccuracies that illustrate Glass, Lewis' fundamental lack of understanding of our business."
It said that the inaccuracies included repeatedly misidentifying Tad Dickson, the director candidate whom the company nominated in Jan. 2014 to stand for election to the board, as Terry McElroy, who has been a board member since 2006 and is one of the company's longest-serving directors.
Also, wrongly asserting that Dickson's extensive experience in the supermarket industry--including serving most recently as chairman and CEO of Harris Teeter Supermarkets, a leading food retailer in the southeastern United States with 216 stores and $4.1 billion of revenue--does not constitute valid retail experience, despite the fact that Harris Teeter is a renowned leader in the supermarket industry offering fresh and prepared food for immediate consumption.
And suggesting that director nominee Kathleen Guion did not have relevant fuel experience, when in fact, she accumulated significant fuel experience through her service as president and COO of E-Z Serve Convenience Stores, a chain of more than 600 stores with fuel operations in the Houston area, and as vice president and general manager of 7-Eleven c-stores. Guion also demonstrated exceptional retail experience as an executive with Dollar General, which under her leadership significantly expanded its food merchandise offering, The Pantry said.
"We believe these gross inaccuracies indicate that Glass, Lewis did not give careful consideration to our business, strategy and board constitution. Accordingly, we strongly urge stockholders to disregard the information contained in Glass, Lewis' unreliable report."
The Pantry also pointed to errors in the original CPS press release that resulted from copying and pasting paragraphs from an unrelated document.
"The Pantry is concerned that, if elected, the dissident group's nominees, Messrs. Diener, Pappas and Schechter, would exhibit the same carelessness in serving The Pantry stockholders as they do in their public statements," it said.
The Pantry concluded, "The Pantry's board and management team are successfully executing a strategic plan to improve key areas of the business and create meaningful value for stockholders. The board and management's efforts to implement a major store remodeling and quick-service restaurant program as quickly as practicable, to refocus the company's merchandising strategy, to invest in technology to improve fuel pricing and to accelerate growth through selective acquisitions--all while maintaining a prudent and disciplined approach to capital allocation--are clear evidence of the meaningful progress The Pantry has made and continues to make."
Click here to view the full SEC filing of the press statement from The Pantry.
JCP Investment Management is a Houston-based investment firm that engages in value-based investing across the capital structure. It follows an opportunistic approach to investing across different equity, credit and distressed securities. Greenwich, Conn.-based 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.
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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