Making an Investment Recommendation

Meredith AdlerManaging DirectorLehman BrothersEquity Research(617) 526-7146

madler@lehman.com

smartwomansecurities

2006 Smart Woman Securities. All materials are for SWS

members’ use only

November 29, 2006

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 1-800-2LEHMAN 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.

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

• Read 10K• Find trade publications• Contact industry experts (vendors, consultants)• Speak with colleagues

Research the Industry

Learn the company

• Read financial statements and annual reports

• Listen to conference calls

• Talk to vendors, customers, consultantsMeet with management• Goal is to judge integrity

• Ask about strategy

• Goal is to judge ability to execute

Review of the Process – it is iterative

• 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

Build a model

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 fixedFigure 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

KEY DATES:

Jun 1999: IPO

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¢

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200

400

600

800

Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06

Tra

din

g V

olu

me

(000

s)

$-

$10

$20

$30

$40

$50

$60

$70

Sto

ck P

rice

Volume (000s) Price

KEY DATES (cont):

Oct 2005: Hurricane Katrina causes shortages in fuel; gas margins increase to 21¢ for the quarter

Apr 2006: Company sets guidance for FY06 below expectations due to lower fuel margin

Aug 2006: Company beats earnings expectations, raises guidance

Sept 2006: Company raises FY06 guidance, but below expectations

Source: Baseline

Overview and Valuation Metrics

PTRY Overview

-100

0

100

200

300

Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06

PTRY SPX

0

5

10

15

20

25

30

Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06

Source: Baseline

7-Year Stock Price Performance 7-Year Forward P/E

•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

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 11.8x-23.4x over the last three years. The stock is currently trading at 14.0x our CY07 EPS (14.6x consensus).

•Last 3-yr avg. forward P/E multiple is 17.2x but below the LTM multiple of 18.4x.

Key Drivers

Valuation table

Source: Company Reports, LEH Estimates

Price 3-Yr avgConvenience Stores LB as of Price Market forwardCompany Rating 11/20/06 Target Cap 2007E 2008E 2007E 2008E P/EThe Pantry Inc (PTRY) 1 48.04 $58.00 1,115 3.29 3.85 14.0x 12.1x 17.2xCasey's General Stores (CASY) 2 24.10 26.00 1,221 1.25 1.55 16.6x 14.3x 17.7Average 15.3x 13.2x 17.5x

FY EPS Est. P/E RatioCalanderized

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

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

Sales EBITDA EPS Sales EBITDA EPS Sales EBITDA EPS Sales EBITDA EPSLEH Estimate 5,962$ 278$ 3.84$ 6,797$ 272$ 3.24$ 7,978$ 311$ 3.72$ 9,206$ 345$ 3.99$ Consensus 5,962$ 278$ 3.84$ 5,923$ 256$ 3.07$ 6,219$ 279$ 3.55$

FY09EFY08EFY07EFY06A

Source: Company reports and LEH estimates

LEH Estimates vs Consensus

Pantry Inc (PTRY); 3 buy ratings, 4 neutral ratings, 0 sell ratings LEH EPS estimates are 8% higher than consensus in FY07 and 14% higher in FY08, driven by our optimistic view of the benefits of acquisitions

C-Store is Highly Fragmented and Now Consolidating

C-store industry is highly fragmented & now consolidating1 store

57%

200 - 500 stores

2%

Over 500 stores14%

2 - 10 store 10%

50 - 200 stores

7%

11 - 50 stores 10%

Number of stores

-

50,000

100,000

150,000

1990 1992 1994 1996 1998 2000 2002 2004 2006E 2008E

•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.

Source: NACS: State of the Industry; Retail Forward

C-stores are Highly Dependent on Gasoline

Retail price of gasoline

$-

$0.80

$1.60

$2.40

$3.20

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

Fuel sales as a percentage of total sales

60.4%

62.4%

65.5%66.5%

69.5%

52%

56%

60%

64%

68%

72%

2001 2002 2003 2004 2005

•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.

Source: NACS: State of the Industry; EIA

General Merchandise and Prepared Food Sales are Growing

Total In-Store sales ($m)

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

1998 1999 2000 2001 2002 2003 2004 2005

8% CAGR

•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.

Source: NACS: State of the Industry

39% 36% 34% 35% 34%

12% 12% 13% 12% 13%

10% 11% 11% 12% 12%

11% 12% 13% 12% 12%

28% 29% 29% 29% 29%

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005

Cigarettes Packaged Beverages Beer Foodservice Other instore

Alternative Channels for Gasoline Continue to Expand

# of stores selling gas2001 2002 2003 2004 2005

Wal-Mart (all formats) 606 832 1024 1211 1390Kroger 227 376 466 536 579 Albertson/SVU 203 199 228 234 238 Safeway 152 214 270 311 314 Costco 139 180 201 218 236 Total 1,327 1,801 2,189 2,510 2,757 Growth 35.7% 21.5% 14.7% 9.8%

•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.

Source: Retail Forward, Company reports

Alternative Gas Channels

Number of units

Wal-Mart (all formats) 1390Kroger 579Safeway 314Albertson's 238Costco 236H.E. Butts 161Meijer 158Ahold 106Other 635

3817

Pantry Has Experience and Expertise in Acquisitions

Anncd Date Closing Date Target Stores Location

LTM sales ($m)

Sales / store ($m)

Purchase price ($m)

Price/ sales

Aug-03 Oct-03 Golden Gallon 138 TN, GA 375$ 2.7$ 187.0$ 0.50 Feb-05 Apr-05 Cowboys 53 AL, MI, GA 320$ 6.0$ Jun-05 Aug-05 Sentry Food Mart 23 VA 122$ 5.3$ Dec-05 Feb-06 TruBuy, On the Run 19 NC 66$ 3.5$ Nov-05 Feb-06 Interstate Food Stops 39 MI, LA 100$ 2.6$ Mar-06 May-06 Shop a Snak 38 AL 123$ 3.2$ Jun-06 Aug-06 Fuel Mate 6 NC 24$ 4.0$

Average 3.9$ Median 3.5$

• 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.

Source: Company reports

Recent Acquisitions

2001 2002 2003 2004 2005 2006Stores at beginning of year 1,313 1,324 1,289 1,259 1,361 1,400

Acquired stores 47 - 3 138 96 107 Opened stores - - - - - 8 Closed Stores 36 35 33 36 57 22

Stores at end of year 1,324 1,289 1,259 1,361 1,400 1,493

Sales per store ($m) 2.0 1.9 2.2 2.6 3.2 4.1 EBITDA profit per store ($000) 93.7 82.8 100.5 117.4 153.0 191.5

Merchandise sales per store ($000s) 734.6 765.2 791.3 856.2 897.7 954.3Merchandise GP per store ($000s) 245.4 252.2 265.7 293.8 328.2 356.7

Gallons per store (000s) 866.4 898.0 917.9 1005.9 1096.4 1222.4Gallon per store growth 3.6% 2.2% 9.6% 9.0% 11.5%Gallon comp 3.4% 2.1% 3.4% 5.3% 4.8%

The Pantry is Acquiring More Productive Stores

•Recent acquisitions have been very productive, with 1.5x to 2.0x 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.

Source: Company reports

Pantry Maximizes Gas Gross Profit Dollars Systematically

•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

Source: Company reports and LEH estimates

13.0

10.4

12.4

12.0

14.2

15.8

13.2 13.0 13.012.5

0

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2,000

3,000

2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E

Gal

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Gas gallons sold Gas margin - cents per gallon

Gas Gallons Sold and Margin

Private Labels and QSRs will Drive Sales and Margins

•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

Source: Company reports and LEH estimates

37.9%37.9%

33.6%

37.9%37.6%37.4%

36.6%

34.3%33.6%

33.0%33.4%

$0

$500

$1,000

$1,500

$2,000

$2,500

2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E

Sal

es

($ m

illi

on

s)

30%

35%

40%

Gro

ss M

arg

in

Sales Gross margin

Merchandise Sales and Margin

Historical Earnings Guidance is Conservative

Source: Company reports, LEH Estimates

Guidance for:Date Given/Revised 11/14/2002 1/23/2003 3/24/2003 7/24/2003 Actual

EPS 0.46$ $0.56-$0.63 $0.60-$0.67 $0.68-$0.72 $0.91

Guidance for :Date Given/Revised 11/13/2003 1/15/2004 4/22/2004 7/22/2004 Actual

EPS $1.30-$1.40 $1.30-$1.40 $1.48-$1.58 $1.58-$1.63 $1.63

Guidance for :Date Given/Revised 11/18/2004 1/27/2005 4/28/2005 7/28/2005 Actual

EPS $1.90-$2.00 $1.95-$2.05 $2.05-$2.15 $2.10-$2.15 2.85$

Guidance for :Date Given/Revised 12/1/2005 1/26/2006 4/27/2006 7/27/2006 Actual

EPS $2.80-$2.90 $2.95-$3.05 $3.15-$3.25 $3.20-$3.30 3.84$

Guidance for :Date Given/Revised 11/16/2006 LEH Est,

EPS $2.80-$3.00 3.29$

FY07

FY03

FY04

FY05

FY06

Supplemental Valuation and Comparative Statistics

LeaseConvenience Stores Net Total Gas In-store Oper. Adj.Company 2005 2006 2007E 2008E Store Sales EBITDA EPS GP GP EBITDA Profit ROAThe Pantry Inc (PTRY) 8.1 6.7 6.5 7.8 8.0% 14.6% 10.2% 13.1% 15.8 37.4% 4.7% 3.4% 6.9%Casey's General Market (CASY) 8.5 7.6 6.6 5.8 5.2% 11.8% 12.1% 11.8% 11.5 39.0% 4.2% 2.6% 6.1%Average 8.3x 7.1x 6.6x 6.8x 6.6% 13.2% 11.2% 12.5% 13.7 38.2% 4.5% 3.0% 6.5%

(exc. lease)5-Yr Avg Growth Est. LTM MarginEV to EBITDA

Q&A