'Dear Shareholder': The Pantry, CPS Lay Out Their Plans

Company leaders, investors group paint radically different pictures of chain's past, future

Published in CSP Daily News

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:

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