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.


  1. Ragu,

    Many thanks for bringing this stock to my attention when trading at its lows :)

    I am looking to add to my position in mid to low 9s if possible (market timing I know) ..


  2. Qleap,

    Heh. Sardar has said that he'd like to run Steak 'N Shake forever. Assuming he stays healthy enough to continue to make the capital allocation decisions here, I believe the odds are good that today's prices will look cheap a decade from now.


  3. Qleap,

    Ragu hit the nail on the head... SNS is still damned cheap. A few bucks a share is not that much, especially when you are getting such a great deal already!

  4. Hi Ragu.

    I've really enjoyed your blog. I've learned quite a bit but I'm coming out with different numbers for owners earnings. Using the exact method described in your 01/29/09 post, I'm coming out with (-1187+16929+1748+917-12-2098)-2612-2407 = $11.278 million for both quarters.


  5. Larry,

    Glad you enjoy the blog. Your numbers are correct. Whilst I told you to ignore the cash flows resulting from changes in other assets, I didn't do so in my calculations resulting in the difference that you note. Thanks much for noticing. I will update my post with the changes.


  6. Ragu-

    Thanks for confirming my calculations – I just wanted to make sure I was on the right track. Besides noting the trend in calculating owners earnings, I’m curious as to how you utilize it to calculate the intrinsic value of SNS. Do you use these owners earnings in a discounted cash flow model and/or do you slap a conservative multiple on normalized earnings to come up with a fair value? Maybe a topic for a future post. :)


  7. Ragu,

    Do you have any annual letters of Biglari's Lion Fund ? Just curious to know how he fared in prior years.


  8. Qleap,

    The letters, AFAIK, are not available in the public domain. A Harvard Business School case study on the Friendly's Ice Cream situation is here: Highly recommended reading. It includes the Lion Fund's performance numbers through early 2007 since it's inception in 2000 (no breakdown provided on an annual basis).