Thursday, January 29, 2009

Steak 'N Shake Q1 2009 results

[Note to Andy and everyone else that's reading this: Based on Andy's comment, I fixed the section that describes the adjustments needed to arrive at operational cash flows that are attributable to owner earnings and the corresponding errors in calculation. I figured it'd be easier to fix it here rather than have people drill down the comments section to see the errors. Thanks Andy! I'll leave the original section in as a comment, as an example of how not to describe the required adjustments.]
The 10-Q is here:

SNS reported an operational loss, before taxes, of $5.981 million. This number includes depreciation charges of $7.392 million. The actual maintenance capex for this quarter: $1.974 million. This discrepancy implies that GAAP earnings will understate the economic earnings of this business.

Adjustments to reported net income to arrive at operational cash flows that are attributable to owner earnings:
Net income: -($3.44 million) 
Add back depreciation: +$7.392 million
Add back increased provision for income taxes: +$.733 million
Add back asset impairments and provision for restaurant closings: +$.176 million
Subtract gain on sale of property: -($.59 million). Correction(thanks to Andy again!): -($.059 million)
Subtract cash that resulted from changes in other assets: -($1.104 million)

Items that weren't included in the adjustment to net income: Stock compensation expense and changes in working capital. Adjusted cash flow from operations amounts to $3.698 million. With maintenance capex at $1.974 million, we get an owner earnings estimate of $1.724 million.

The sharp-eyed reader will note that we are ignoring one other cash outflow that should lower this estimate. Remember that in our evaluation of SNS' balance sheet, we only considered interest-bearing debt as long-term debt. The capital lease obligations, while still a liability, wasn't really considered as debt. From our discussion on accounting for capital leases, remember that we agreed to postpone implications of capital lease accounting on classification of cash flows. Not any longer. When a company has debt on it's books, the cash flows relating to that debt are classified as follows:

Interest payments are considered part of operations and are classified as cash flows from operations.
Principal repayments are classified as cash flows from financing activities.

Since the capital leases are accounted for as debt, the principal repayments on this debt are accounted for as financing cash outflows. If we don't consider the capital lease obligations as debt, consistency demands that we factor in the principal repayments on the lease obligations as a recurring claim against owner earnings. The principal repayments, on the long-term debt and the capital lease obligations, are broken out under the section titled 'Financing Activities' in the statement of cash flows. The payments for the lease obligations for this quarter amounted to $1.066 million. This reduces our owner's earnings estimate for this quarter to $.658 million. 

There's another reason that we ought to account for the principal payments on the lease obligations as operational cash flows. The success of SNS as an investment is dependent on Sardar Biglari fixing two things: operations and capital allocation, with much of the value creation likely to be derived from capital allocation. To determine the effect of capital allocation, we'd need a realistic estimate of the capital that will be available for Sardar to allocate. Based on the numbers above, it's clear that there isn't much capital left at present to allocate outside of business operations. This is likely to change as Sardar and co. continue the business turnaround.

With that detour into accounting issues complete, we'll turn our focus onto the balance sheet at the end of Q1. Cash amounting to $11.351 million was received as tax refunds. There was a prepayment on the Prudential Senior Note in the amount of $4.476 million. The borrowings at the end of the quarter were:

Line of credit in the amount of $19.84 million @ 4.1%
Long-term debt in the amount of $11.957 million @ 9%

Against this, we have assets held for sale on the books at $23.24 million and cash and equivalents of $25.636 million. It's reasonable to expect, based on the above, that SNS is a fair chance to be debt-free by the end of the fiscal year.

On to earnings. These were skewed by a couple of items. The prepayment of a portion of the long-term debt resulted in a penalty of $506,000. Assuming that the prepayment happened at the start of the quarter, the interest savings would've amounted to $100,710. So, interest expense is likely overstated by around $405,000, at the very least. Marketing expenses were higher by $1.542 million this quarter compared to the same quarter in fiscal 2008. Management indicates that this was by design although I'd doubt that this is a permanent increase. I suspect we'll see this expense, as a percentage of sales, trend down once sales stabilize.

All things considered, this was a pretty good quarter. Based on Sardar's estimates on Investor Day, I expect that we haven't seen the full benefits of the envisioned cost savings. There's still a lot of work to do with reversing the guest traffic and same store sales trends, but the signs from this quarter are encouraging.

Often wrong but seldom in doubt,

Tuesday, January 13, 2009

Premier's shareholders need to act now

3rd quarter results at Premier were dismal, and that's putting it mildly. Attendances were down big, revenues suffered and Premier reported a net loss of $1.8 million for this quarter. All of this after recognizing $4 million in revenue from an option pickup by a third party to co-host the Bodies exhibitions. As Sellers pointed out in a press release once the results came out, taking out this non-recurring revenue and focusing exclusively on ticket sales would cause gross margins to come in at 9.1%. This compares with gross margins of 47.3% from the same quarter last year. Terrible by any measure. The accounting is also very aggressive, too aggressive for my own comfort. I'd have expected the revenue to be recognized over the period for which the option to co-host the exhibitions is effective(between 12-18 months, I believe).

The balance sheet continues to deteriorate as well. We are down to $4.709 million in cash. The $4 million payment from the option pickup is reflected in Accounts Receivable at the time of the end of the 3rd quarter($8.212 million). This is essentially a wash with what's owed as reflected by Accounts Payable at the end of the 3rd quarter($8.38 million). It also looks like we'll be getting back about $3.271 million in taxes previously paid. The $10 million line of credit that was available at the start of the quarter through Bank of America has now been cut to $7.1 million based on the deterioration in the operating results. At this rate of cash burn, we are looking at a quarter or two more of operations before capital needs to be raised. All of this cheerful news is available in the latest 10-Q:

On the salvage award trial, things have progressed some with both Premier and the U.S. Govt submitting their changes to the revised covenants. As of Nov. 18, it looks like it's in the Court's hands to decide. I ran across this interesting article with respect to the case:

Looks like Sellers' fairly outspoken plan to monetize the Titanic assets have caused the judge some serious reservations. Sellers was rebuked by Premier as well. I suspect that this, as well as Premier's deteriorating financial condition, may play a part in the timing of the judge's decision. We'll see.  

If the 3rd quarter results don't cheer you enough, the conference call to discuss them ought to. After what was essentially a regurgitation of the details in the press release, Geller talked about how Sellers didn't have a specific plan for turning the company around and why shareholders should vote for incumbent management instead(no good reason). He then ended the call without allowing for questions. If not for anything else, he needs to go just for this blatant disregard for corporate governance. 

Post this conference call, Sellers Capital made this filing that pretty much destroys(not that this needed much destroying) any little credibility that management might have had remaining:

Quoting the relevant section:

"We also question how the Special Committee can allow serious and unfounded allegations to be made against Sellers Capital and our representatives, particularly after having offered to give us control of the company’s board as part of a settlement, which the Special Committee offered us in return for little more than full releases from liability for its members. " (emphasis mine)

This is no good and a serious indication that Geller and co.'s biggest troubles might begin once the proxy contest is over.

If you are a shareholder, I'd recommend that you call your brokerage or the Altman Group at 1-866-828-6934 and vote your shares in favour of Sellers Capital's slate of nominated directors now. Risk has been ratcheted up in my opinion, given what's come out in the public domain re. management's character and intentions. Shareholders need to act urgently to give themselves every chance of preserving, let alone enhancing, their original investment. 

Often wrong but seldom in doubt,

Sunday, January 4, 2009

Getting uglier at Premier

Incumbent management filed a consent revocation statement on Dec 29:

As expected, this inspires no confidence in management at all. The section below, in particular, is galling:

Sellers’ Solicitation, If Successful, Could Trigger The Company’s Change of Control Severance Agreements. The employment contracts of Messrs. Geller and Thomas Zaller, Vice President of Operations, contain a “Change in Control” provision, whereby if during the term of their employment, three of the four members of the Board of Directors, a majority as of the effective date of the Agreement (February 4, 2002 as amended), no longer comprise a majority of the Board, a “Change of Control” will occur. In the event that Mr. Geller’s or Mr. Zaller’s employment is subsequently terminated, each would be entitled to a lump-sum cash payment of 299% of his current salary. Messrs. Geller and Zaller’s compensation is currently $705,737 and $273,000, respectively. This would result in a combined payment of approximately $2.9 million in the event that the employment of both of them is terminated. According to the terms of Mr. Geller’s agreement, he can elect to receive compensation in the form of the Company’s common stock at a price equal to 50% of the closing bid price as quoted on the NASDAQ Stock Market as of the date of election. If he should so elect, based on the closing price of the Company’s common stock on December 22, 2008, he could receive up to 2,827,000 shares of common stock, thereby diluting the interests of the Company’s shareholders. These agreements have been in place for several years. As a result, if Mr. Geller or Mr. Zaller were to successfully assert that a change of control preceded his termination, the Company would become obligated to pay him the foregoing compensation.

The argument for Geller and co. keeping their jobs is that their dismissal would cost the company money. Clearly, shareholders ought to let them keep their jobs and save the $2.9 million in payments while they continue to mismanage the company and cause erosion in value. No kidding.

One other interesting nugget from that filing:

The Company is also aware that there have been discussions between Mr. Geller and his counsel and representatives of Sellers Capital and its counsel in regard to a settlement of this matter, but no resolution has been reached as of the date hereof. (emphasis mine)

Maybe, just maybe, Geller will see that Sellers is odds on to get his slate of directors nominated and go away on his own.

Couple of days later, Sellers Capital filed their response to the Consent Revocation Statement:

Clearly, incumbent management is not only lacking in competence, but is also bereft of rectitude. Geller's settlement with the SEC in response to potential violation of securities laws in 2004 is particularly disturbing. At this point, the sooner the CEO and his cronies go, the better off all other shareholders will be.

Often wrong but seldom in doubt,

Thursday, January 1, 2009

Steak 'N Shake fiscal 2009 Q1 owner earnings: A guesstimate

From the most recently filed 8-K, same store sales were off 1.4% as compared to fiscal 2008 Q1. Assuming this translates to a similar decline in overall sales, we can project revenues of $134.4865 million for Q1.

G&A expenses for fiscal 2007 were $57.525 million. Sardar had mentioned in his first letter to shareholders as CEO of SNS that G&A would likely be $20 million lower than fiscal 2007 levels. This implies G&A expenses for fiscal 2009 of $37.525 million, giving us a quarterly estimate of $9.3813 million.

I will assume that other expenses remain at 2008 levels (except that there will be no pre-opening costs given the moratorium on new store openings by the company). This might overstate expenses as my understanding is that commodity costs have eased up a bit from 2008 levels. I also expect restaurant operating costs to be lower than 2008 levels given the initiatives there, but since I don't have an estimate we'll stick to using 2008 numbers.

Excluding depreciation, other costs and expenses(cost of sales, restaurant operating costs, marketing, interest and rent) add up to 90% of sales. Given that there will be no new store openings, all capex will be maintenance. 

To get an estimate of maintenance capex in 2008: Total capex was $31.443 million. 9 new stores were opened at an estimated cost of $2-2.5 million per store. If we assumed an average of $2.25 million per new store opened, growth capex works out to $20.25 million. This gives us a maintenance capex estimate of $11.193 million. The quarterly number works out to $2.7983 million.

So, total costs and expenses work out to: G&A expenses + 90% of sales + maintenance capex

= $9.3813 million + 90% of $134.4865 million + $2.7983 million
= $133.2175 million

There's also this pesky little line item, Other Income, net that has shown a loss of .3% of sales for the last couple of years. Assuming this continues to be the case, we'll see a loss of about $.4035 million for this quarter. There is no explanation of what this line item represents(as far as I can tell). I hope the forthcoming 10-Q contains an explanation.

So, owner earnings estimate for Q1 2009 comes in at $1.2691 million. There's one other adjustment we'd need to consider. Remember that SNS essentially swapped one type of debt(line of credit) for another with the sale-leaseback of 11 properties for $14.817 million with the interest rate going from 4.94% to 8.27%. This causes an additional expense of $.7198 million compared to fiscal 2008(roughly). Revised owner earnings estimate is now $.5493 million. 

Given that this calculation doesn't include the effects of easing commodity costs and the effects of cost cutting initiatives in restaurant operations, I'd suggest that there is a reasonable possibility of SNS being in the black on an owner earnings basis for Q1. 

Often wrong but seldom in doubt,