Concerned Pantry Shareholders Delivers Open Letter to Shareholders

Highlights prolonged underperformance, negative total shareholder return and poor capital allocation.

Concerned Pantry Shareholders (CPS), a group led by JCP Investment Management, LLC and Lone Star Value Management LLC, together a significant shareholder of The Pantry Inc. announced that it has sent a letter to the shareholders of The Pantry. 

The letter highlights the prolonged underperformance at The Pantry and the critical need for significant change in the company’s Board of Directors. 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.

“Over the last 10 years, The Pantry’s stock price has declined by 36%, debt levels have soared, and Board fees have totaled more than $8.5 million.  In addition, The Pantry compares very poorly to its peers with its stock price underperforming its direct competitors by 474% in total shareholder returns and its debt levels double those of its competitors (4.4x versus 2.2x debt to EBITDA),” the letter noted.

“We, the shareholders of The Pantry, deserve change.  We are seeking to replace the Chairman of the Board, Ed Holman (nine years on the Board), the Chairman of the Corporate Governance and Nominating Committee, Tom Murnane (12 years on the Board) and the Chairman of the Compensation Committee, Robert Bernstock (nine years on the Board), who have overseen this destruction of value while collectively receiving more than $3.9 million in director compensation in the last six years.  We have nominated three highly-qualified director candidates, Todd Diener, James Pappas and Joshua Schechter, who have the right experience, track records and plan to turn around performance at The Pantry,” the letter continued.

The letter went on to note that “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 SVP of Operations having resigned in February 2014.

    Disturbingly high levels of debt and lease obligations with this Board having overseen increased debt load from $500 million to over $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 their 1,568 locations and continues to lack meaningful restaurant experience on the Board.

    Poor Corporate Governance with average Board tenure of +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,” according to the letter.

CPS plans to reassess capital expenditure spend to focus on return on invested capital (ROIC) and pay down excessive leverage. It noted that the company has failed to produce any return to shareholders after 10 years of spending $1.9 billion in capital (capital expenditures plus acquisitions). CPS also plans to explore real estate monetization in order to continue to deleverage the balance sheet through a (1) full sale, (2) partial sale or (3) MLP or REIT formation. CPS plans to strengthen store base by repositioning or selling 300-500 stores in weak or non-growth markets and focusing on great performing stores in core markets. They aim to implement a successful QSR plan by tapping into their nominees’ strong QSR restaurant expertise and operational experience. CPS also wants to 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). Lastly CPS wants to delever the balance sheet by slowing capital expenditures, increasing focus on ROIC (increasing EBITDA) and paying down debt with reasonable free cash flow.

“As we set out to identify the best qualified candidates to serve on The Pantry’s Board and those most likely to successfully oversee a turnaround, we asked ourselves what critical skills are sorely lacking on the current Board.  We determined that the key criteria should be as follows:

    directly relevant experience and knowledge of QSR and Restaurant business

    financial expertise

    a strong track record of prior success

    true independence from the Company’s management and Board and direct investment in The Pantry that secures close alignment with the interests of all stockholders,” the letter said.

The letter went on to outline the qualifications of its nominees, as follows:

Todd Diener is a former executive officer of Brinker International Inc. where he most recently served as the President of Chili’s Grill & Bar and On the Border restaurants.  During this time, Chili’s was one of the largest casual dining restaurant chains in the world with more than 1,200 locations in the U.S. and 200 international locations in 28 countries.  In his role as President of Chili’s,  Diener led all aspects of the brand, including finance, P&L, marketing, operations, real estate, human resources and franchising.  Prior to his role as President of Chili’s and On the Border, Diener served in the roles of executive vice president and chief operating officer of Brinker, where he was responsible for more than 1,500 restaurants. Diener oversaw company-owned and franchised operations for On the Border, Macaroni Grill, Maggiano’s and Corner Bakery Cafe restaurants in the U.S. and 24 other countries. Diener’s over 28 years of experience in a senior capacity at Chili’s provide him with deep strategic and operational expertise in exploring ways to improve financial performance and maximize returns of a public retail company.

James Pappas is a managing member of JCP Investment Management LLC and sole member of JCP Investment Holdings LLC. Pappas is the chairman of the board and chairman of the compensation and Leadership Committee of Morgan’s Foods a public company that operates through wholly-owned subsidiaries KFC restaurants under franchises from KFC Corp., Taco Bell restaurants under franchises from Taco Bell Corp. and Pizza Hut Express restaurants under licenses from Pizza Hut Corp.  Previously, Pappas was with the Investment Banking / Leveraged Finance Division of Goldman Sachs Group Inc. where he advised private equity groups and corporations on appropriate leveraged buyout, recapitalization and refinancing alternatives, and prior to that with Banc of America Securities, where he focused on Consumer and Retail Investment Banking, providing advice on a wide range of transactions including mergers and acquisitions, financings, restructurings and buyside engagements.  As the chairman of the board of Morgan’s Foods, Pappas has deep understanding of the retail operations and effective oversight of a public company. Pappas also has significant experience in the valuation and management of investment securities, investment banking and corporate finance that give him unique ability to identify opportunities to unlock shareholder value.

Joshua Schechter is the director of Aderans Co. Ltd., a multi-national company engaged in hair-related business, and executive chairman of Aderans America Holdings Inc.  Schechter is a former managing director of Steel Partners Ltd., a privately owned hedge fund sponsor and co-President of Steel Partners Japan Asset Management, LP, a private company offering investment services. Schechter served on the Board of Directors of WHX Corp., a diversified manufacturer of engineered niche industrial products with leading market positions in many of the markets it serves and the Board of Directors of Puroflow Inc., a provider of a full range of power industry and telecommunications infrastructure services. Schechter’s diverse experience in a variety of industries, including as a director of public companies creates a deep understanding of the productive avenues to enhance shareholder value and effectively oversee the company.

“We have grown impatient with the years of inaction and strategic mistakes made by the Board. Now it is up to The Pantry’s shareholders to choose the best individuals to lead the company forward.  We ask that each of you review the qualifications of the two respective slates of director nominees and determine for yourself who you believe is most qualified to represent your interests on the Board of The Pantry and grow shareholder value.  As a significant shareholder of The Pantry, we believe the choice is clear,” the letter concluded.




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