A Coup at 'Roo'

"We are bleeding, we are bleeding profusely," Pantry official confides

Mitch Morrison, Vice President of Retailer Relations

Dennis Hatchell The Pantry Kangaroo Express

Dennis Hatchell

CARY, N.C. -- A block of frustrated shareholders is shaking things up at The Pantry.

Charging that the country's largest independent convenience store chain lacks a coherent strategy and continues to underperform when matched against other publicly traded c-store chains, a dissident group representing 1.9% of The Pantry's outstanding shares is pushing a new slate of three members to the board of directors at next month's annual meeting.

While the group, calling itself Concerned Pantry Shareholders (CPS), cites frequent leadership changes and lack of a "strategically coherent plan," a senior official at The Pantry told CSP Daily News that CEO Dennis Hatchell, who is entering the final year of a three-year contract, has been unable to turn around the company's sluggish fortunes despite a remodeling plan and increased investments in foodservice.

"We are bleeding, we are bleeding profusely," the official said, speaking on condition of anonymity.

With the company's quarterly earnings call scheduled for next Thursday, the official confirmed that inside sales are up between 2.5% and 3% over the same period a year ago. Undercutting the modest in-store gains, fuel gallons are down 3%. Most significantly, the official said, EBIDTA is down 13% over the prior year.

"Plodding along is basically all we're doing," the official shared. "We've remodeled about 10% of our total store stock, but it's more cosmetic than a real retail strategy."

Dissident Group

Concerned Pantry Shareholders, the dissident group, is being powered by JCP Investment Management LLC and Lone Star Value Management LLC, which collectively represent nearly 2% of The Pantry's stock.

Click here for additional CSP Daily News coverage of The Pantry's board battle. And click here for more coverage of CPS' position and strategy.

In launching its offensive, the group has nominated three candidates for the board. CSP Daily News has confirmed that two longtime members, including Paul Brunswick, are stepping down.

"The current board has presided over a prolonged underperformance," the dissenters said in a prepared statement. "[The] Pantry has had four CEOs in the past five years and continues to lack a strategically coherent plan to stop the value destruction. Pantry's Total Shareholder Returns over the last one-, three-, five- and 10-year periods on an absolute basis and relative to its peers and the S&P 500 Index have been abysmal. The company has delivered negative returns to shareholders over many consecutive years."

The group submitted a comparison with three other publicly traded convenience chains: Alimentation Couche-Tard, Casey's General Stores and Susser Holdings Corp.--all of whom are enjoying performances superior to that of The Pantry.

The information is not new. A cover feature in the May issue of CSP magazine showed Cary, N.C.-based The Pantry lagging behind its publicly traded counterparts. For example, The Pantry’s market value at the time was 5.7x EBITDA. In comparison, Couche-Tard boasted a 13.25 EBITDA, Casey's enjoyed 9x EBITDA and Susser's came in at 7.5x EBITDA.

Also undercutting The Pantry was a nearly three-to-one debt-to-equity ratio and a market cap far below that of its public rivals.

According to Benjamin Brownlow of Raymond James, The Pantry's financial picture looks basically the same today. While market cap has improved to $370 million, the company's market value is forecasted to remain flat at 5.8x based on FactSet consensus EBITDA projections for the fiscal year ending Sept. 2014.

New Leadership

In recent years, The Pantry has undergone many facelifts.

Pete Sodini built The Pantry as a merger-and-acquisition entity bent on rapid growth with the intention to be flipped; however, in the early 2000s, as the economy slumped and similarly constructed retail companies were declaring bankruptcy, Sodini and the chain's core of loyal investors realized a new strategy, aware that "flipping" the chain would not be financially advantageous.

The result was a hodgepodge retail concept with over two-dozen brand names, multiple software systems, several fuel brands and a portfolio low on company-owned real estate.

When Coca-Cola Enterprises exec Terry Marks arrived in 2009, he and his retail team centered The Pantry's retail strategy on a primary brand--Kangaroo--and invested millions of dollars to streamline the disparate point-of-sale (POS) systems and backoffice suites.

Despite solid improvements in merchandising and necessary upgrades at the store level, the company's mounting debt put a stranglehold on growth and Marks' stint concluded after just two years, succeeded temporarily by board chairman Edwin Holman, who brought in grocery exec Dennis Hatchell.

"What we haven't had in all these years is a c-store person," The Pantry official speaking on condition of anonymity shared. "We've never had someone who understands convenience and general feeling today is that the senior leadership does not respect the opinions from the c-store people.

"Several of us believe we would be better off to be acquired by a convenience store chain that understands c-stores."

Toward that end, the dissident shareholder group is putting pressure to shake up a board that has been criticized in the past as being complacent and ruled with a heavy fist by Holman.

While the shareholder faction has not spelled out a specific strategy, they asserted that, "change on the board is critical to ensure renewed focus and commitment on delivering shareholder value. We believe Pantry's board is stale with only one addition (Kathleen Guion) in the past eight years. All other directors have at least seven-year tenures and some have served on the board for over 10 years."

While this minority faction may represent not quite 2%, its criticism has spurred leadership to take notice.

According to a source, top executives at The Pantry in the past week flew to meet with officials at New York City-based Eagle Asset Management Inc., which according to U.S. Securities & Exchange (SEC) filings, holds more than 2.5 million shares or nearly 11% as of Dec. 31, 2013.

Said the source, "I don't think the meeting was to say what a great job you're doing. Management wants to make sure they still have their biggest investors behind them."

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