Proxy Advisory Firms Pile on The Pantry

Embattled c-store chain disputes reports as meeting looms next week

Published in CSP Daily News

CARY, N.C. -- Coming just a week before embattled convenience store retailer The Pantry Inc. holds its annual meeting to elect or re-elect its board of directors, Concerned Pantry Shareholders (CPS), a group of shareholder of The Pantry, announced that a third proxy advisory service, Egan-Jones, has recommended that shareholders vote for its three nominees to the convenience store chain's board of directors at the March 13, 2014, annual meeting of shareholders.

As reported in a 21st Century Smoke/CSP Daily News Flash, Egan-Jones concluded, "In our view, the board needs a fresh perspective which will be contributed by Messrs. Diener, Pappas and Schechter which should help reassure shareholders that their interests are properly represented."

Previously, CPS, led by JCP Investment Management LLC and Lone Star Value Management LLC, announced that proxy advisory firms Glass, Lewis & Co. LLC and Institutional Shareholder Services (ISS) also recommended that shareholders vote for the group's nominees rather than those nominated by The Pantry at the March 13 meeting.

In a letter addressed to "Fellow Pantry Shareholders," CPS again laid out its case for change. It said the chain has seen:

  • 10 years of high-growth spending … which has produced negative value.
  • "Incredible" management turnover at all levels including: four CEOs in five years, complete turnover in the senior ranks twice.
  • "Disturbingly" high levels of debt.
  • "Abysmal" operating performance … despite the massive amount of investment spending.
  •  Insignificant quick-service restaurant (QSR) rollout.

CPS' plan is to:

  • Reassess capital expenditure to focus on return on invested capital (ROIC) and pay down excessive leverage.
  • Explore real estate monetization in order to continue to deleverage the balance sheet through a full sale, partial sale or MLP [master limited partnership] or REIT [real-estate investment trust] formation.
  • Strengthen store base by repositioning or selling 300 to 500 stores in weak or nongrowth markets and focusing on great performing stores in growth markets.
  • Implement a successful QSR plan by tapping into our nominees' strong restaurant expertise and operational experience.
  • Enhance corporate governance through direct shareholder representation on the board, decreasing board pay, allowing written consents, calling of special shareholder meetings and stop increasing the share count, up almost 30% since 2002.
  • Delever the balance sheet by slowing capital expenditures, increasing focus on ROIC and paying down debt with free cash flow.

It also said, "We are dismayed that the board has been net sellers of Pantry stock. … The current board … collectively directly owns less than 1% of the outstanding common stock of the company, excluding stock and option awards. In our view, it comes as no surprise that with such minimal investment in the Company, the members of the current Board do not think like owners when it comes to the significant outlays of shareholder wealth under their stewardship."

Responding to the proxy advisor firm reports, The Pantry told shareholders, "We strongly believe that ISS reached the wrong conclusion in failing to recommend that stockholders elect all of The Pantry's highly qualified and experienced director nominees. The board's director nominees are actively engaged and together possess significant retail, convenience store, consumer packaged goods, foodservice, fuel and financial experience--all areas that are highly relevant and critical to The Pantry's business. Furthermore, since the 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."

It added, "In contrast, the company believes that the dissident group brings neither expertise nor insight to the table. None of the nominees has any relevant experience in convenience stores, QSRs or fuel, and only one has any executive experience at a public company. We believe the dissident nominees lack the required skill and experience to serve on The Pantry's board and, if elected, would undermine the significant progress the Board and management team have been making on the company's strategic plan. The dissident group still has not outlined any constructive steps to enhance the company's strategy and has been unable to demonstrate how its director nominees would do anything to improve the value of stockholders' investment in The Pantry beyond what the board and management team have clearly articulated and are successfully executing.

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 for a full presentation of The Pantry's case.

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.

Part for CSP's 2014 Convenience Top 101 retailers