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    Concerned Pantry Shareholders Make Their Case for Change

    Group delivers an open letter to shareholders ahead of annual meeting.

    HOUSTON – A group known as Concerned Pantry Shareholders (CPS) delivered an open letter to all shareholders of The Pantry Inc. today, highlighting what it believes is the prolonged underperformance of the company and stressing the "critical" need for a significant change to the retailer's board of directors.

    CPS is led by JCP Investment Management LLC and Lone Star Value Management LLC, which together constitute a significant shareholder of The Pantry. The group is urging shareholders to elect its three candidates -- Todd Diener, James Pappas and Joshua Schechter -- to the board during the upcoming 2014 annual meeting.

    The letter states that over the past 10 years, The Pantry's stock price has declined by 36 percent as debt levels soared and board fees totaled more than $8.5 million. It also states that the company is underperforming its direct competitors by 474 percent in shareholder returns; has debt levels that are double those of its peers and competitors; and has failed to provide more than minimal quick-service restaurant (QSR) growth even as competitors have thrived in this area.

    During the March 13 annual meeting, CPS specifically seeks to replace Chairman of the Board Ed Holman, Chairman of the Corporate Governance and Nominating Committee Tom Murnane and Chairman of the Compensation Committee Robert Bernstock, all of whom have served on the board for nine years or longer.

    The letter also expresses concern over high senior management turnover, which CPS says is leading to a lack of continuity in The Pantry's strategic direction and execution. The group pointed to the company's four CEOs in the last five years, with Dennis Hatchell most recently appointed to the position in 2012.

    "Continued high management turnover demonstrates that this board has not found a solution to the problem with revolving senior management," the letter reads. "We are further concerned there are significant internal issues with executive turnover at the lower ranks, such as store managers, district managers and area managers."

    Other grievances listed in the letter include "abysmal" operating performance compared to competitors; poor corporate governance, with directors who have sold much more company stock than they have purchased; and shareholders' lack of ability to seek effective change due to being prohibited from calling special meetings and other shareholder-unfriendly provisions.

    "The board has also failed to seek proactive change in its composition and introduce fresh perspective in the boardroom, with average incumbent tenure of seven-plus years on the board," the letter states. "The board has also failed to add any meaningful restaurant experience at the board level or the fuel experience it now claims is so needed on the board."

    The CPS letter includes a list of quoted statements from The Pantry and specific rebuttals by CPS as well.

    If CPS' candidates are elected to the board of directors, they will seek to enact multiple initiatives:

    • Reassess capital expenditure spend;
       
    • Explore real estate monetization;
       
    • Restructure the store base by repositioning or selling 300 to 500 stores in weak or non-growth markets, and strengthening the store base by focusing resources and energy on well-performing stores in core markets;
       
    • Implement a better QSR plan;
       
    • Enhance corporate governance; and
       
    • Delever the balance sheet through slowing capital expenditures.

    The full CPS letter is available here.

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