Notes from Steak 'n Shake's Investor Day 13 comments
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After returning from Steak 'n Shake's (SNS) Investor Day last Tuesday, I have had a few nights to sleep on the developments, curb my enthusiasm, and use the entire balance of the $15 gift card that was handed out to all of the attendees (my dividend for the year!).
The bottom line is that I fundamentally don't understand Mr. Market's estimation of worth for the company- it is a valuation where the underlying assumption must be that this company, which was started in the middle of the Great Depression (which currently, has next to no debt on the books) can not weather this credit storm; has underlying real estate that must be worthless; and new management is inept... I don't buy in to that.
Management's Presentation: A Powerpoint presentation illustrated just how the company was going about turning itself around. With a new board member (Bill Regan), and former executives from Krystal, Burger King (BK), Wendy's (WEN), and Friendly's coming on board, my confidence in the company is only bolstered. It seems evident that fixing operational and customer satisfaction problems are being/have been addressed. It was noted that 80% of all customer complaints come from the bottom 25% of stores... To fix this, a culture of accountability is being created, with promotions and pay raises based on performance, mystery shoppers, and management being visible on the floor of every unit. The company is also recruiting outstanding employees from other companies to not only higher level positions, but also in the individual stores.
Customer Satisfaction: To improve customer satisfaction and excite people about the brand (while minimizing cap-ex), the company is having Musak installed in all locations (an idea that came from the franchisees) and painting many of the stores' white walls red-which really make the restaurants look more welcoming and less dirty (see picture on the left). New commercials will be rolled out that feature actual customers-departing from the smart mouthed employees featured by the recently dropped advertising agency, DJs will be endorsing the company on their radio shows, and merchandising is quite likely to occur-in the vein of TGIFriday's! In store promotions will involve "super fans", Steak 'n Shake kids toys, and the upcoming 75th anniversary of the company. Also, there are 4 meals that are 4 dollars (See the first picture)-the first part of streamlining the menu to the company's core products.
Cost Cutting: Of all the questions posed, there was one about cost cutting which helped Biglari extrapolate on just how much the company is refocusing its bearings towards cost cutting. Numerous suggestions have come from suppliers, who apparently were happy to share their knowledge. This was despite the fact that they "had never been asked on how to cut expenditures".
The company will be using thinner mailing promotional papers, non-branded ketchup, and my personal favorite-taking the red ink off of Styrofoam cups... Apparently, the red boxes on the cup pictured to the right, that take up under 1 square inch of space, will save a "ton of money" since the company will no longer have to pay for 2 screens of color in printing. While these cost saving measures may seem minuscule, if the company can save a meager $1,000 a month in every store-that would be equate to well over $5 million in cold hard cash per year. The company will also focus on not forcing customers to wait for coupons before they come in to the store. Reducing coupon mailings, improving the experience in the store (thus, increasing perceived value), and cutting costs to help reduce prices should work wonders-kind of like at Chipotle (CMG).
Future Growth: The company foresees itself growing to as many as 2,000 units, or roughly 4 times its current size. This will largely be achieved through being in the real estate business (with the depreciation that comes along with it), and franchising like crazy. It was estimated that EBIDTA margins on franchisees could be as hearty as 50%.
Stock Buybacks: Once the company has enough cash on hand to run the business in ANY kind of economic environment , there will be either a buy back of shares or investment in some other restaurant company, depending on what security is cheaper at the time. This was the one item of the day that bothered me, mainly due to taxation issues concerning buying another company's common stock...
Though, I have an immense amount of confidence in the capital allocation abilities of Sardar Biglari , and since the company is making all efforts to maximize intrinsic value on a per share basis, I am quite hopeful that these issues will be taken into consideration.
The company's credit lines will be left open-as is indicated in the most recent 8K , debt will be paid down by at least $10 million, and neither of the credit lines will have to be collateralize with real estate. Also, there was a great question asked about long term debt on the balance sheet, where it was discussed that the long term debt is related to lease obligations, not debt owed against the company's real estate.
Biglari explained the accounting checklist that was gone through to determine how the obligations are carried on the books. In light of this, it really makes one wonder about the collateralized debt loads that are carried by not only Ruby Tuesday, but also Jack in the Box (which Western Sizzlin' is in the process of making a tender offer for some shares of) and O'Charlies.
Website: The company is currently working on updating and improving the website to make it into more of "an online community for fans".
Gift Cards: On a closing note, the company is now offering a $5 dollar off reward coupon when you buy a $20 dollar gift card before Christmas. I will be getting them for my friends and family; after all, it would be stupid not to! You may have to go to the store for this, as the company has yet to update their website with the offer.
Overall, I am quite happy with the progress that seems to have been made (as has also been highlighted in my previous writing on the Letter to Shareholders). From now on, the annual shareholders' meeting will take on an open tone, as this meeting had. While I hope that the stock price exceeds my estimates of intrinsic value before I get the chance to attend too many, I would certainly not mind being an owner in such a great company with such talented management for years/decades to come. While this writing did not contain many hard numbers that help with your calculation of intrinsic value, I am trying to shed light on the fact that Biglari and Company are delivering on the promises that they have made-which is what makes the company intrinsically worth so much more than before.
Disclosure: Author holds a long position in SNS
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This article has 13 comments:
I see $169Million in debt on yahoo. The company is also losing money (22Million in the last 12 months) and so is currently not profitable.
Why risk investing in a restaurant chain given the deteriorating economy. Surely there are safer sectors to invest in.
The majority of "debt" that you see on yahoo finance is simply a long term obligation, and not something that is bearing interest.
The company is in a transitional period, and is currently generating significant cash flows-as I talked about in my last write up on them: ragnarisapirate.blogsp...
On Nov 18 02:55 PM missedinv101 wrote:
> "............... which currently, has next to no debt on the books"
>
>
> I see $169Million in debt on yahoo. The company is also losing money
> (22Million in the last 12 months) and so is currently not profitable.
>
>
> Why risk investing in a restaurant chain given the deteriorating
> economy. Surely there are safer sectors to invest in.
2) If the real estate is so valuable, why hasn't it been sold? My guess is that prices are lower today than they were 6 months or a year ago. But I also don't think prices are likely to go up any time in the next couple of years. So that cash flow really will not be coming in any time soon.
Anyone can give phony, overly optimistic projections. It seems management here is outright lying.
I am guessing that he reason for the rule is that you can enter into leases for property/goods, and make your ROA/ROIC look a lot better than it really is.
2) Property: There is an example of a single property (that was not owned by SNS) being recently sold for $1.6 Million: www.costar.com/News/Ar.... While this is not necessarily a good representation of all of their properties, it certainly shows that the real estate still has significant worth, as is shown by the future cash flows that the property can provide. This is something that the turnaround going on at SNS will on only help.
Management has said that property will selectively be sold, and has been selling properties where the economics of the deal make good sense. With SNS, you are not only investing in their brand and real estate, but also their management's strong record of excellent capital allocation skills.
On Jan 07 09:51 PM 123 wrote:
> 1) If the debt is not interest-bearing, why is there about $13M of
> interest expense the last 4 quarters? That amount capitalized at
> 6% is around $215M. Hmmm....
>
> 2) If the real estate is so valuable, why hasn't it been sold? My
> guess is that prices are lower today than they were 6 months or a
> year ago. But I also don't think prices are likely to go up any
> time in the next couple of years. So that cash flow really will
> not be coming in any time soon.
>
> Anyone can give phony, overly optimistic projections. It seems management
> here is outright lying.
In the 10K, it says that they sold 1 restaurant and 11 parcels of land in 2008. I haven't yet found this, but did they mention how much cash they got for those properties.
pg 4
We own the land and buildings of 164 properties and 20 parcels of land. The other 260 or whatever are leased.
At the end of fiscal year 2008, we have $25.4 million in assets held for sale which includes the 14 improved properties and 20 parcels of land which were previously purchased for development.
14 properties + 20 parcels = 34 unimproved and improved parcels. They are held for sale at less than $1M each, about 700K each for $25M
Say they sell all 160 properties for (an optimistic, best case scenario of) 1.5M each - that is $240M. OK. That's ignoring taxes, selling costs, etc. So what's left? A bunch of leased burger restaurants, their operating success is pretty much up in the air.
I think that his really has to be a successful operating business for this to work out and that's not at all clearly the case right now.
The problems with their operations (and to a greater extent, profitability) are due to the management that was in control when they went from something like 150 units, to the 475+ that they currently have- there is just one hitch... THEY MAKE LESS NOW WITH 475+ UNITS THAN THEY DID WITH 150!!!
Obviously, they were allocating capital terribly-which is now stopping with Biglari and Co. in control of the company... Obviously, eroding same store sales suck, but that is being fixed, as is highlighted in this article. Plus, they are doing a ton of stuff to reduce costs and improve profitability. Their new offerings like 1/2 price shakes from 2-4 PM on weekdays should get store traffic up.
Something to remember is that SNS started in the midst of the Great Depression-and was profitable during their start. In addition, fast food is something that will be popular forever in America (well, as long as we are the fattest nation in the world). It is cheap, and is one of the last things to be trimmed out of the budget (unlike TVs).
Bottom line: provided that there is no out break of Salmonella or something like that, SNS can liquidate above the current stock price, and if it continues to operate, it is intrinsically worth a few times what it is presently trading at.
On Jan 10 12:38 PM 123 wrote:
> Also: (from 10k)
> pg 4
>
> We own the land and buildings of 164 properties and 20 parcels of
> land. The other 260 or whatever are leased.
>
> At the end of fiscal year 2008, we have $25.4 million in assets held
> for sale which includes the 14 improved properties and 20 parcels
> of land which were previously purchased for development.
>
> 14 properties + 20 parcels = 34 unimproved and improved parcels.
> They are held for sale at less than $1M each, about 700K each for
> $25M
>
> Say they sell all 160 properties for (an optimistic, best case scenario
> of) 1.5M each - that is $240M. OK. That's ignoring taxes, selling
> costs, etc. So what's left? A bunch of leased burger restaurants,
> their operating success is pretty much up in the air.
>
> I think that his really has to be a successful operating business
> for this to work out and that's not at all clearly the case right
> now.
>
>
>
1) You ignored that I said the $1.5M per property was a best case (read: unrealistic, in my eyes) scenario because it excluded costs and taxes, and also because it's not at all clear what the value of the properties is.
2) You didn't reply to my question about how much they received for the properties that they did sell.
3) Assuming this (very optimistic, for reasons stated above) liquidation value, the stock is trading around (not above) its liquidation value. And I did not include the $30M of debt or $80M of current liabilities. The company has $60M of current assets, but I don't think they'll get book value for those (I think they'd get less in a liquidation).
4) Even if they can liquidate at the current market cap, where in the world is there any evidence that the leased businesses are profitable at all? Some subset of them may (and I emphasize MAY) be profitable, but (i) if management is so shareholder-friendly, why didn't they disclose which of the restaurants are profitable, and how much profit they're making). My point is, that as a group the leased stores might not be profitable at all. Lets say 10 of the stores are profitable - so they might make $1M a year collectively, or $5M a year collectively, who knows? Not me.
5) Please don't mention this nonsense about how the chain was started during the Great Depression. That is just propaganda from management. Numbers only, please, corroborated by facts. Leave the propaganda at the annual meeting, thank you.
I used the 1.5 million as a rosy scenario, since I thought it was the one you were operating with... I don't remember exactly what the locations sell foron average, but even if they sell for 1/2 million (in a fire sale) each, there isn't much downside for the common stock. I remember them selling some smaller (in terms of revenue) stores in the middle of Iowa for roughly 850K/ea. I have trouble wrapping my head around how their property plant and equipment can't be worth at least 1/2 what it is on the books for (which is after a Hell of a lot of depreciation). granted, a chunk of the PP&E is in stuff like fixtures that are not worth anything, but I still think I am being pretty conservative.
Personally, I would have a problem with them saying "location x is making this much money, z this much, and y is loosing this much"-too much info on operations that is not necessary to come up with a value for the company. The company is closing restaurants that are/have been under preforming (which will do a lot for cash flow and earnings), and guest count is no longer eroding as precipitously as before.
Their franchisees do quite well in terms of revenue, and I would imagine run their operations better than the company has historically, so re franchising is being done, and helps to up the overall value of the company.
this shareholder letter might help shed some light on things to come.
yahoo.brand.edgar-onli...
Please understand, that while 'propaganda' may not be numbers, that doesn't mean that it isn't true- after all, under good management, they will be quite profitable! The main part of the upside potential to this company is the capital allocation of Sardar Biglari.
On Jan 13 08:24 PM 123 wrote:
> correction at to #3: I meant to say that the stock is not trading
> below its (best case, for reasons above) "liquidation value", rather
> it's trading about equal to it
Yes the real estate may be there but the point is that proceeds from its sale make this at most - at most- a wash.
As for the operating business:
There is another company with a great brand, you could say a long and storied history, selling at a market cap to sales of 1:3, in the casual restaurant industry: it's called Krispy Kreme donuts. I'm sure that after about 15 seconds another 5-10 names would pop up that fit this description.
I just don't think that is an automatic homerun, not even close. If additional facts come to light perhaps, but my final word is that this could very well be a dead company by now. Even if it survives, etc., it will not necessarily be great for investors. Restaurants in general usually just don't have great economics for shareholders.
As for Biglari's capital allocation abilities, there's really not much he can do with a bad business, if this is a bad business. What's he going to do, buy more restaurants?
If you strip away the PR I think that there's much less here than a lot of people think.