Sunday, April 26, 2009

Steak 'N Shake on the mend

Steak ‘N Shake reported fiscal 2009 2nd quarter earnings on Friday. Guest traffic increased by 7.8%. However, the discounting in effect meant that guests were, on average, paying 5.4% less for a meal leading to a same store sales increase of 2.4%.

First 2 quarters of fiscal 2009:
Cash flows from operations before changes in working capital and other assets and excluding gain on sale of property = $18.239 million (1) Note: Corrected amount now ignores the change in other assets of $2.098 million. Thanks Larry.
Maintenance capital expenditures = $2.612 million (2)

Owner earnings = (1) – (2) – Non-cash stock compensation expense – principal payments on capital lease obligations = $11.278 million (a)
Therefore, owner earnings estimate for the second quarter (16 weeks) = $10.62 million.

The dramatic improvement in owner earnings this quarter has been driven by the improved sales, the significant cost control measures in effect and the closure/refranchising of stores through fiscal 2008 and the first quarter of fiscal 2009. As a percentage of sales, these are some expense numbers for this quarter:
Cost of sales: 24.1% compared to 24.9% in fiscal 2008
Restaurant operating costs: 53.7% compared to 55.7% in fiscal 2008
G&A expenses: 5.7% compared to 8.3% in fiscal 2008(the 2008 numbers are skewed by one-time severance expenses though)
Marketing expenses: 5.2% compared to 4.7% in fiscal 2008 as the company continues to spend money to get guest traffic moving in the right direction.

Looking at the balance sheet, long-term debt stands at $12.034 million ($11.957 million at the end of the last quarter). Borrowings against the line of credit stand at $17 million ($19.84 million at the end of the last quarter). Cash and equivalents of about $35 million have to be balanced against the obligation of $31.5 million of (mostly cash) accrued expenses. Still, with the assets held for sale and the potential cash generation from the business for the rest of the year, the balance sheet looks in very good shape such that the odds on further expensive sale-leaseback transactions, like the ones of last year, or distress sales of owned properties, ought to be fairly low.

A couple of properties were sold during the quarter for proceeds of $1.534 million and a gain of $47,000. This leaves 31 properties available for sale, currently carried on the books for $21.055 million.

It’s hard not to be impressed with these results. Granted that a quarter does not an investment thesis make, but given how precipitous the decline has been in owner earnings over the past few quarters, this is an extremely impressive turn-around. And in such short order too. I have fairly high expectations of Sardar Biglari but it’s reasonable to say that my expectations have been easily surpassed and then some. In my opinion, this is more than likely just the beginning of what could be a very special turn-around. While the price has run up recently, the risk/reward equation is still pretty attractive for the long-term oriented shareholder.

Steak ‘N Shake also held its Annual Meeting for shareholders this past Friday. Please see Jeff’s excellent set of notes from the AM here. Much appreciated Jeff.

Often wrong but seldom in doubt,

(a). The actual amount of non-cash stock compensation expense is lower than the amount used in the calculation which clubs that expense and deferred rent expense together in one line item. The 10-Q should provide the breakdown but this works as an estimate.

Monday, April 20, 2009

Sellers Capital offered buy-out at Premier

See the press release here. First, the title. It's blatantly misleading. This is not an offer for the RMS Titanic Inc., a wholly-owned subsidiary of Premier. Second, the value of the offer as it relates to the Titanic business of Premier is not $40 million. It's $25 million for the rights to exhibit the Titanic over a "multi-year" period and $15 million for Sellers Capital's 16.3% stake in the company(@$3/share). Third, far as I can tell, Contango Oil and Gas(MCF) has no beneficial interest in Premier. Fourth, you can't pay off the largest shareholder and expect to get all board and executive positions in return. The board of directors is not Sellers Capital's to sell. I'll stop here.

Later in the day, Premier issued a press release clarifying the offer. To summarize:

a. Premier gets $25 million over a five-year period, in installments of $5 million each, in exchange for the rights to exhibit the Titanic. Premier also gets an undisclosed percentage of merchandising/television revenues. This also means that Premier keeps the Titanic assets, both the ones that are owned outright and the ones currently under adjudication.
b. Sellers Capital is being offered $3/share to give up their stake in Premier.
c. Michael Harris, the principal of Wlm Inc, is asking for 3 board seats and control of all executive positions. This is in addition to 1 million shares and an undisclosed number of options.

It is not clear whether the offers to Premier and Sellers Capital are tied in any way. The offer to manage the Titanic assets is intriguing.

The good:
Quite clearly, there is a lot to like about a $5 million royalty payment every year for the next 5 years. No costs, no capital investment. So long as Wlm Inc. is good for the money, this is a deal worth considering.
It seems like Premier would give up the exhibition at the Luxor in Las Vegas (there are no exclusions in the offer). This would take the associated annual lease payments, amounting to $3.3 million currently, off Premier's hands.
Also, it's worth noting that the offer to manage the Titanic assets comes from one of the co-founders of the RMS Titanic Inc who runs a Titanic attraction in Orlando. Therefore, it's reasonable to believe that the payments being offered to Premier are not extravagant. I'd suggest that this offer goes to show just how profitable the operation of the Titanic exhibits alone currently is or is likely to be as we approach the 100th anniversary of it's sinking in 2012.

The bad:
The 1 million shares (at what price anyway?) represent about 3.4% of the 29.2 million shares outstanding as of January 5, 2009. This disregards about 4.3 million options that were out of the money as of that date. The effect of the dilution is worse if you consider the shares undervalued as of today and the effect of the "undisclosed" number of options that Harris is seeking.
The other problem with the Titanic offer is that the $5 million payment for the first year is likely not enough to offset the revenue hole caused by the lack of exhibition days later this year. G&A expenses alone were at $6.4 million for the most recent quarter. This means further dilution if Premier were to raise additional capital.

As for the offer to buy-out Sellers Capital, it's worth remembering that in addition to running a hedge fund, Sellers is Premier's Chairman. Fiduciary responsibility would quite clearly dictate that he not seriously consider any offer that is not being offered to all shareholders. Based on my estimation of Sellers' character, I'd expect that the buy-out offer will be rejected.

For those curious about Michael Harris, he is one of the co-founders of the RMS Titanic Inc. and was terminated from his employment for "misappropriating" $70,000 of the company's funds. See the note on page 10 in the 2004 10-K. Much more colourful personality and character insights can be gleaned from a Google search.

Often wrong but seldom in doubt,