smartwomansecurities November 29 2006 Making an Investment Recommendation

smartwomansecurities November 29, 2006 Making an Investment Recommendation Meredith Adler Managing Director Lehman Brothers Equity Research (617) 526 -7146 madler@lehman. com Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this email communication. Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www. lehmanlive. com or can call 1 -800 -2 LEHMAN to request a copy of this research. Investors should consider this communication as only a single factor in making their investment decision. Please see Analyst Certification and Important Disclosures beginning on page 30. 2006 Smart Woman Securities. All materials are for SWS members’ use only

Getting a Recommendation The process is methodical but not straightforward • Research the industry dynamics: what are drivers, who competes, what is necessary for success? • Learn the company: is it well-positioned, does its strategy make sense, can it control its future? • Meet with management: can they be trusted, can they execute the strategy? • Develop a financial outlook: most important for us are P&L, cashflow, DCF. If company is leveraged, understand sources of liquidity. • Look at valuation: compare it to peers, historical ranges, M&A multiples, underlying asset values, DCF • What is the market’s view: earnings potential, strategy, management, risks, external drivers, potential for a buyout • Make a recommendation: be able to articulate the view concisely and clearly.

Review of the Process – it is iterative Research the Industry • Read 10 K • Find trade publications • Contact industry experts (vendors, consultants) • Speak with colleagues Learn the company • Read financial statements and annual reports • Listen to conference calls • Talk to vendors, customers, consultants Meet with management • Goal is to judge integrity • Ask about strategy • Goal is to judge ability to execute

Review of the Process – it is iterative Build a model • Based on historical relationships • Use external data points when appropriate (e. g. oil prices) • Make assumptions – should match your point of view • Look at street estimates Look at valuation • Appropriate metric will vary • Sometimes you use more than one methodology History does not always repeat itself, though its amazing how often the market’s view is fixed Figure out the market’s view • Very challenging to accomplish, especially with a new stock • • Views can be contradictory Views can be just plain wrong, but important to know that anyone •

Case Study: The Pantry Inc (PTRY)

Historical Stock Price and Key Dates Source: Baseline KEY DATES: KEY DATES (cont): Jun 1999: IPO Oct 2005: Hurricane Katrina causes shortages in fuel; gas margins increase to 21¢ for the quarter 2001 -2002: Downturn in the economy; gas margin falls to 10¢ vs past 5 year average of 13¢ Oct 2002: JPMorgan Chase sells off 12% stake into the market place Sep 2003: Announced Golden Gallons acquisition and reported a 900% increase in annual earnings Oct 2004: Hurricane’s in FL drive gas margin to 14. 6¢ Apr 2006: Company sets guidance for FY 06 below expectations due to lower fuel margin Aug 2006: Company beats earnings expectations, raises guidance Sept 2006: Company raises FY 06 guidance, but below expectations

Overview and Valuation Metrics PTRY Overview • Leading c-store in the fast growing Southeast. Majority of the 1600 stores are in FL, GA, SC and NC • Store growth is focused on interstate & coastal locations • Growth historically through acquisitions; beginning to develop new stores as well • 77% of sales from gas, 23% from merchandise. 35% of gross profit from gas, 65% from merchandise 7 -Year Stock Price Performance Source: Baseline PTRY Valuation • Gas margin volatility creates large swings in stock price • Using long-term avg gas margin of 13¢ our 10 -year DCF gives a value of $58; price at close 11/27 -- $47 • PTRY’s 1 -year forward P/E has ranged from 11. 8 x-23. 4 x over the last three years. The stock is currently trading at 14. 0 x our CY 07 EPS (14. 6 x consensus). • Last 3 -yr avg. forward P/E multiple is 17. 2 x but below the LTM multiple of 18. 4 x. 7 -Year Forward P/E

Key Drivers Valuation table Source: Company Reports, LEH Estimates Key drivers: • Gas prices • Consolidation in a highly fragmented industry • Expansion of non gas portion of the business, including QSR and car washes

Earnings Outlook Pantry Inc (PTRY); 3 buy ratings, 4 neutral ratings, 0 sell ratings LEH EPS estimates are 8% higher than consensus in FY 07 and 14% higher in FY 08, driven by our optimistic view of the benefits of acquisitions LEH Estimates Consensus vs Source: Company reports and LEH estimates DCF Valuation: $58 Assumptions: • Same-store gallons & merchandise growth of 3. 0%-3. 5% • Stable gas margin at 13¢; in-store margins improve by 50 bp, to 37. 9%, by 2009 • Annual net new store growth of 7. 5%-8. 0% • Capex of $1. 2 million to build a store, $1. 0 million to buy a store, and $70, 000 of maintenance capex • WACC of 8. 6% with 1. 09 beta, 5. 0% risk premium and 2. 0% terminal growth rate

C-Store is Highly Fragmented and Now Consolidating C-store industry is highly fragmented & now consolidating Source: NACS: State of the Industry; Retail Forward • Almost 60% of the c-stores are one-store operations. • Big oil companies have been selling off their operations to both independents and chains. • Total store growth is expected to be stagnant over the next several years, as consolidation increases.

C-stores are Highly Dependent on Gasoline Source: NACS: State of the Industry; EIA • Gas continues to be the main driver to the stores and accounts for over 70% of the industry sales, but just 35% of the industry gross profit. • 75% of all gasoline is bought at convenience stores • Retail gas margins depend on both the wholesale price and the local competitive environment • C-stores have traditionally had difficulty dealing with the rising cost of inventory, as customers will shift to a lower price store.

General Merchandise and Prepared Food Sales are Growing Source: NACS: State of the Industry • Industry in-store sales have grown at an 8% CAGR over the past seven years, with only 3. 0% increase in unit growth • In 2005, in-store sales grew 14. 4%, faster than most other retail channels • In-store sales continue to be dominated by traditional c-store products, like cigarettes, packaged beverages and beer, which combined made up almost 60% of in-store sales in 2005 • Food prepared on site has seen strong growth, 11% CAGR over the past seven years; this business has almost a 50% margin -- almost double the rest of the in-store margin.

Alternative Channels for Gasoline Continue to Expand Source: Retail Forward, Company reports • Mass merchants and supermarkets have been adding gasoline islands to their parking lots to get the additional traffic and drive customers to the inside of the store. • Alternative channels can offer incentives to buy their gas and have developed some exciting cross-marketing programs.

Pantry Has Experience and Expertise in Acquisitions Recent Acquisitions Source: Company reports Pantry has grown through acquisition – increasing its store base from 379 stores in 1996 to over 1600 today; focused on adjacent markets • Can improve acquired stores margin by ~700 bp; company targets mid-teen return on an acquisition in yr-1, above the company’s 8. 5% cost of capital • Prices of acquisitions have been increasing somewhat as competition for well-run stores increases. •

The Pantry is Acquiring More Productive Stores Source: Company reports • Recent acquisitions have been very productive, with 1. 5 x to 2. 0 x cash flow of existing Kangaroo stores. • Additional potential to increase in-store sales by adding Pantry’s proprietary products. • Also adding 20 -25 new stores annually.

Pantry Maximizes Gas Gross Profit Dollars Systematically Gas Gallons Sold and Margin Source: Company reports and LEH estimates • Long-term agreements with large oil companies provide stable supply of gasoline • Proprietary Gas Pricing System (GPS) helps optimize gas gross profit dollars • Gas margin averages 13¢, but has ranged from 7¢ to 22¢, creating earnings and stock volatility

Private Labels and QSRs will Drive Sales and Margins Merchandise Sales and Margin Source: Company reports and LEH estimates • Rebranding effort almost complete • Remodeling interior of store and adding proprietary products will benefit sales and margin • Private label now 3% of in-store sales and 6% of in-store margin. • Adding QSRs to the stores, where possible

Historical Earnings Guidance is Conservative Source: Company reports, LEH Estimates

Supplemental Valuation and Comparative Statistics

Q&A