Morning Call. The Pantry, Inc. (PTRY, Hold, $17.36) Semiconductors & Related Technology

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1 The Pantry, Inc. (PTRY, Hold, $17.36) Downgrade to Hold, from Buy, On Valuation We are downgrading our rating to Hold, from Buy, based on valuation. Given the 57.8% rally in the share price since October 8 at $11.00, to yesterday s close of $17.36, and its 43.1% year to date increase, we believe the shares are close to fully valued. While the merchandise comps continue to improve, driven by company specific initiatives, such as localized merchandising, enhanced food service, and store remodels, the fuel comp remains negative, and we believe consumer spending could be under pressure in 2014 due to increased healthcare costs. For 2014, our EPS estimate is $0.60 EPS estimate, based on a 3% merchandise comp, a continued negative fuel comp, and controlled SG&A. For 2015, our EPS estimate is $0.90. We increased our price target to $18, from $16, based on 6x our 2014 EBITDA estimate, but believe that further multiple expansion maybe difficult given the Company s past history of inconsistent execution and management turnover. Given the limited upside to our price target, we lowered our rating to Hold, from Buy. Ronald Bookbinder rbookbinder@benchmarkcompany.com Consumer Price Target: $18.00 Market Cap $397 Sector Wt. Overweight EPS 2013FYA $ FYE $ FYE $0.90 Semiconductors & Related Technology Semiconductor, Semiconductor IP & Flash Storage Industry Weekly Report Events of the Four Weeks Ahead (December 27 January 24) Relating to Our Coverage Universe, Semiconductor Devices and Broader Tech Space Monday, January 6-9 Publicly traded Taiwanese electronics companies release December (and hence, 4Q13) sales data Monday, January 6-9 CES 2014 Tuesday, January 7 MU reported earnings results Wednesday, January 8 Benchmark-hosted dinner with CEOs from ARMH & CEVA Tuesday, January 14-Wednesday, January 15 - Needham Growth Conference (POWI, SIMO, CDNS, CEVA, ENTR & More) Tuesday, January 14 LLTC reports results Thursday, January 16 INTC reports earnings results Tuesday, January 21 TXN, AMD, XLNX report results Wednesday, January 22 SNDK reports results Thursday, January 23 NOK, WDC, AAPL, ALTR report results Friday, January 24 LSCC reports results Gary Mobley gmobley@benchmarkcompany.com For important disclosures, see Page 5

2 Calendar of Events Management Meetings Date Location Analyst Company January 8 CES (Dinner) Gary Mobley ARMH / CEVA Analyst Marketing Date Location Analyst Industry Conferences Date Location Topic Page 2

3 Consumer The Pantry, Inc. (PTRY) Downgrade to Hold, from Buy, On Valuation We are downgrading our rating to Hold, from Buy, based on valuation. Given the 57.8% rally in the share price since October 8 at $11.00, to yesterday s close of $17.36, and its 43.1% year to date increase, we believe the shares are close to fully valued. While the merchandise comps continue to improve, driven by company specific initiatives, such as localized merchandising, enhanced food service, and store remodels, the fuel comp remains negative, and we believe consumer spending could be under pressure in 2014 due to increased healthcare costs. For 2014, our EPS estimate is $0.60 EPS estimate, based on a 3% merchandise comp, a continued negative fuel comp, and controlled SG&A. For 2015, our EPS estimate is $0.90. We increased our price target to $18, from $16, based on 6x our 2014 EBITDA estimate, but believe that further multiple expansion maybe difficult given the Company s past history of inconsistent execution and management turnover. Given the limited upside to our price target, we lowered our rating to Hold, from Buy. Enhancing foodservice offering. Higher margin foodservice segment represents a significant opportunity for the company, whose foodservice sales represent 9% of its merchandise sales vs. 17% for the industry, and 25%-30% for other publicly traded convenience stores. With QSRs having a 50%-60% gross margin and only about 220 of the Company s approximately 1,500 stores having a QSR, we believe there is an opportunity to triple the amount of QSRs over the next couple years, driving traffic, revenue and margin. QSR can lead also to add on sales from other parts of the store. Management is focused on Subway, Little Caesar s, Hardees, and Dairy Queen concepts. The Company continues to roll out its localized merchandising, focusing on the complete product offering in the stores in order to increase the rate of merchandise sales growth. The company has implemented JDA systems for better merchandise and space planning. The stores have revised merchandise offerings tailored to the local market and lifestyle, such as Hispanic, college, beach among others, to increase traffic and grow sales and profits. Management is also identifying impulse items to sell in order to increase sales per customer. Management is pleased with the initial results of the lifestyle merchandising, and we believe it is helping to drive comps, as the average ticket has increased, while store traffic has been negative. Implementing new information systems. On the fuel side, management completed the roll-out of the fuel pricing system, which should drive more consistent fuel volume and profitability per gallon. In the past, the Company has been inconsistent as to whether it was focused on fuel margin or fuel volume, which led to a confused customer and below market comps. With the use of information systems, such as KSS gas pricing systems, to help the company analyze its store and competitive data we believe it should have a more consistent offering, bringing fuel comps in line with the market. Rating: Lowering Recommendation Hold Current Price $17.36 Price Target $ Wk Range $ $17.57 Shares Outstanding 23 Market Cap $397 Enterprise Value $1,286 Average Volume (30 day) 245,536 Cash per share ($38.84) Stockholders Equity $324 Sector Weight Overweight FY Sep Q1 Q2 Q3 Q4 Total P/E EV/EBITDA EPS 2013A $(0.08)A $(0.28)A $0.26A $0.06A $(0.04)A x 2014E $(0.29)E $(0.04)E $0.73E $0.20E $0.60E 28.7x 2015E $0.90E 19.2x EBITDA 2013A $46.6A $38.2A $64.6A $48.3A $197.7A 6.5x 2014E $39.0E $47.0E $75.3E $56.1E $217.3E 5.9x 2015E $227.4E 5.7x Ronald Bookbinder rbookbinder@benchmarkcompany.com For important disclosures, see Page 5

4 Semiconductors & Related Technology Semiconductor, Semiconductor IP & Flash Storage Industry Weekly Report Events of the Four Weeks Ahead (December 27 January 24) Relating to Our Coverage Universe, Semiconductor Devices and Broader Tech Space Monday, January 6-9 Publicly traded Taiwanese electronics companies release December (and hence, 4Q13) sales data Monday, January 6-9 CES 2014 Tuesday, January 7 MU reported earnings results Wednesday, January 8 Benchmark-hosted dinner with CEOs from ARMH & CEVA Tuesday, January 14-Wednesday, January 15 - Needham Growth Conference (POWI, SIMO, CDNS, CEVA, ENTR & More) Tuesday, January 14 LLTC reports results Thursday, January 16 INTC reports earnings results Tuesday, January 21 TXN, AMD, XLNX report results Wednesday, January 22 SNDK reports results Thursday, January 23 NOK, WDC, AAPL, ALTR report results Friday, January 24 LSCC reports results Recent Topics Related to the Broader Semiconductor-Tech Space Intel Seeks Big Slice of Microservers Calxeda Ends Server Bid Is Intel s Broadwell-Y processor a threat to ARM (article source: Android Source)? U.S. Durable Goods: Tech Ticked Up In November Gary Mobley gmobley@benchmarkcompany.com For important disclosures, see Page 5

5 Important Disclosures Analyst Certification The Benchmark Co., LLC analyst(s) whose name(s) appears on the front page of this research report certifies that the recommendations and opinions expressed herein accurately reflect the research analyst's personal views about any and all of the subject securities or issues discussed herein. Furthermore, no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this research report. Equity Research Ratings System Firm-Wide Stock Ratings Distribution As of September 30, 2013 All Covered Companies Investment Banking Clients Buy 70 65% 4 5.7% Hold 37 35% 0 0.0% Sell 0 0% 0 0.0% EZchip Semiconductor, Ltd. Entropic Communications, Inc. FUSION-IO, INC. Integrated Silicon Solutions, Inc. LSI Corporation MOSYS, Inc. 7, 10 Marvell Technology Group, Ltd. Maxlinear, Inc. Semiconductors & Related Technology Company Ratings Buy: Stock is expected to outperform the analyst s defined Sector/Industry Index* over the following 6 to 12 months. Hold: Stock is expected to perform in-line with the analyst s defined Sector/Industry Index* over the following 6 to 12 months. Sell: Stock is expected to underperform the analyst s defined Sector/Industry Index* over the following 6 to 12 months. Industry Ratings Overweight: Analyst s defined Sector/Industry Index* is expected to outperform the S&P 500 over the following 6 to 12 months. Market Weight: Analyst s defined Sector/Industry Index* is expected to perform in-line with the S&P 500 over the following 6 to 12 months. Underweight: Analyst s defined Sector/Industry Index* is expected to underperform the S&P 500 over the following 6 to 12 months. The Benchmark Company Disclosures as of December 27, 2013 Company ARM Holdings Audience, Inc. Disclosure The Pantry, Inc. Research Disclosure Legend In the past 12 months, Benchmark or its affiliates have received compensation for investment banking services from the subject company. In the past 12 months, Benchmark or its affiliates have managed or co-managed a public offering of securities for the subject company. Benchmark and/or its affiliates expect to receive or intend to seek compensation for investment banking services from the subject company in the next three months. The research analyst, a member of the research analyst s household, any associate of the research analyst, or any individual directly involved in the preparation of this report has a long position in the shares or derivatives of the subject company. The research analyst, a member of the research analyst s household, any associate of the research analyst, or any individual directly involved in preparation of this report has a short position in the shares or derivatives of this subject company. A member of the research analyst s household serves as an officer, director or advisory board member of the subject company. As of the month end immediately preceding the date of publication of this report, or the prior month end if publication is within 10 days following a month end, Benchmark and its affiliates, in the aggregate, beneficially owned 1% or more of any class of equity securities of the subject company. A partner, director, officer, employee or agent of Benchmark, or a member of his/her household, is an officer, director or advisor, board member of the subject company and/or one of its subsidiaries. Benchmark makes a market in the securities of the subject company. Broadcom Corporation Cavium Networks Inc. Ceva Inc. Diodes, Inc. 10. In the past 12 months, Benchmark, its partners, affiliates, officers or directors, or any analyst involved in the preparation of this report has provided services to the subject company for remuneration other than normal course investment advisory or trade execution services. Page 5

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