Shareholder vote comes at critical time for The Pantry

dbracken@newsobserver.comMarch 13, 2014 

— When The Pantry holds its annual shareholder meeting Thursday in Raleigh, it will include an unusual amount of suspense for a convenience store chain whose mascot is a cute and cuddly kangaroo.

Unhappy with the Cary company’s financial performance in recent years, a group of dissident shareholders has submitted three independent candidates for The Pantry’s nine-member board of directors. The company is opposing the candidates, and the two sides have spent recent weeks lobbying shareholders and issuing press releases touting their positions.

The shareholder vote comes at a critical time for The Pantry, which has 1,538 stores in the Southeast, primarily under the Kangaroo Express brand. The two main drivers of traffic to its stores – sales of fuel and cigarettes – are stagnating and The Pantry, like other convenience store chains, is seeking other ways to lure in consumers.

“My joke is we need a doughnut that’s as addictive as cigarettes and we’ll have it made,” CEO Dennis Hatchell said in an interview last week. “ ... We’re looking for categories that can grow, that will keep traffic coming through the door and be appealing to folks.”

The dissident shareholder group, which includes JCP Investment Management and Lone Star Value Management, says it is not interested in removing Hatchell, who was named CEO in March 2012, or his executive team. Rather, the group is seeking more accountability from the board, said James Pappas, who runs JCP and is one of the three candidates being put forward.

The average tenure of The Pantry’s current board is seven years. Pappas said the board has overseen $1.8 billion in spending on acquisitions and capital improvements over the past decade that resulted in little if any increase in earnings.

“Looking at the board composition today and their record of value creation, I can’t get comfortable having those guys represent me,” he said. “ ... They’ve just done a really poor job.”

Pappas said the performance has been particularly troubling given that a number of competitors have had considerable success over that same period instituting strategies that The Pantry is now adopting.

“We’re very focused on the board and getting new perspectives in there,” said Pappas, who is also chairman of the board of Morgan’s Foods, which operates more than 70 fast food restaurants.

Two shareholder advisory firms have recommended that shareholders back the independent candidates put forward by JCP and Lone Star, which collectively own about 1.9 percent of The Pantry’s outstanding shares.

Continuity vs. change

The Pantry employs 14,431 people, including 3,519 in North Carolina. The company has reported net losses the past two years and its stock has declined nearly 6 percent over the past five years. Over that same period, the S&P 500 has risen 46 percent.

“The performance of the company has not been such that it would drive confidence in the share price,” Hatchell acknowledges. “So it hasn’t moved.”

But Hatchell said he opposes the three independent candidates because they would disrupt the turnaround strategy already being implemented.

“We think we have a good plan, and we want to implement that plan,” he said. “ ... To change out board members, for me, that’s disruption and it slows the process up in terms of how fast we want to go.”

Pappas dismisses the idea that adding new voices will somehow disrupt the company’s momentum.

“I’m not worried at all about the continuity of the board,” he said. “I’m more worried about not having some change.”

The Pantry’s turnaround plan involves both remodeling its aging stores as well as adding quick-service restaurants, such as Subway or Taco Bell, to complement its convenience stores in some locations.

The stores with restaurants are among the best performing, Hatchell said, and the company plans to add 20 this year and 50 next year. He estimates about 700 of the company’s stores are suitable for quick-service restaurants.

The company is also moving to offer more proprietary food within its stores, such as salads, yogurts and other fresh snacks. The Pantry’s strategy is to tailor some of its offerings to the local market, whether it be college students or Hispanics.

The Pantry acquired many of its stores through acquisitions, some of which have proven in hindsight to be bad deals. Pappas argues that the company needs to divest itself of those assets.

“They have some stores that are under performers and sometimes it’s about getting smaller to get better,” he said.

Growing by acquisitions has also left The Pantry with a lack of continuity among its stores. That has made it harder to establish the Kangaroo Express brand, which is key to replacing the traffic losses that result from more fuel-efficient vehicles and fewer smokers.

“I think it’s fair to say we didn’t know before,” Hatchell said of the brand’s identity.

New competitors

The Pantry has been hurt in recent years by sluggish fuel sales in the Southeast. Hatchell said the rural areas of the region were hit particularly hard by the recession, with unemployment skyrocketing in industries where many of its customers work.

“In a lot of our stores, our bread and butter are the construction workers, the landscapers – those folks are very valuable to us,” he said.

The Pantry also faces competition from new operators such as QuickTrip and Sheetz that are aggressively building new stores in the region.

“These guys that are coming to town are terrific; they’re really, really good,” Hatchell said.

But he said fixating on them is a waste of time, because 75 percent of the convenience stores in the Southeast are owned by independent operators with three or fewer stores.

“If the team can fix that store to compete effectively against the other 75  percent of the market – the new guy will do well, we’ll do well, somebody will suffer in the marketplace. It just won’t be us,” he said.

Hatchell says the stock price is already beginning to reflect the progress the company is making. The company’s shares are up 38 percent since hitting a low of $11 in early October. The stock closed Wednesday at $15.40, up 59 cents.

And if the company’s candidates end up on the losing end of Thursday’s vote?

“If they get on the board, we’ll welcome them and we’ll all go to work together,” Hatchell said. “If they don’t, we’ll keep truckin’.”

Bracken: 919-829-4548; Twitter: @brackendavid

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