Investors in Steak N’ Shake have not had much to look forward to lately. The company reported a loss last quarter as expenses climbed and same store sales fell. And since the start of the year, shares have tanked roughly 35%. How did things get into such a mess? According to a recent activist group led by Sardar Biglari, the crumbling performance stems from the company’s “failed vision, failed strategy, failed execution, and failed board.” More specifically, management can be blamed for two faults: wasteful use of shareholder’s capital and poor expense management.
The motto of management lately has been “bigger, bigger, bigger”. Over the last six years, the company has spent $330 million building almost one-hundred new stores. Over that same period, operating profit has actually been reduced in half. Shareholder’s have nothing to show for management’s empire building, which has resulted in poorly performing new locations and unnecessary store improvements.
You want to talk expenses? They are up sharply, too. Since 2002, store operating costs (labor, utilities) per store has increased from an average of $638,000 to $775,000. General and administrative (corporate) expenses per store have increased from $95,000 to 133,000. Together they account for $76 million in incremental costs for the company. Yikes!
Right People, Right Equipment, Right
During World War II, Admiral Earnest J. King was asked whether he worried about the war’s final outcome. He replied, “I have supplied the best men with the best equipment we have and have given them what seems to be the wisest mission. This is all I can do.” Investors may find comfort in similar reasoning for Steak N’ Shake.
Activist shareholder Sardar Biglari has recently gained the position of Chairman of the Board. He has over 10% of the shares and has elected to take no pay, meaning if you aren't left stuffed, he'll be definitely left hungry. He's also a restaurant veteran and has experience in similar restaurant turnaround situations. He will have help from a nice collection of assets to work with. There is the “Steak N’ Shake” brand, a solid franchise with high value. It is a
And the price? Over the last three years, the company has generated an average net income of $23 million. It also has $32 million in annual Depreciation expenses, which is much higher than the amount needed to maintain their stores and business. This is cash flow that can and will be thrown back to the shareholders under Biglari. And, if Sardar is successful in merely reversing half of the rise in “per-store expenses” over the last six years, he will add $38 million to the bottom-line. For a total price tag of $170 million, there seems to be many reasons for Steak N’ Shakers to think the price is right.
Disclosure: I own shares of SNS.
Also, I'm currently in South America and I won't be coming home for a week, so posts may be fairly scarce.