As (sorta) promised, here are part of my notes from the 2010 Steak 'n Shake (now, fortunately, 'Biglari Holdings'). If there is one thing to be gathered from this meeting, it is that the company will now, more or less be a hedge fund/holding company hybrid, and that Sardar Biglari will be there for a long time. Which quite frankly, I think is great.
I have decided in light of the fact that my near complete write up got inadvertently deleted, that I will break this up into what will likely be 3 parts; it not only serves my style and situation in a better manner, but will be something new to try on this blog. At the end of the series, drop me a line and let me know if you like getting them all at once or in pieces better- I might take it into consideration for the next set that will come from the VIC West and Wesco.
The meeting started at 1PM; beforehand, I got the chance to meet some new people and to chat with old friends- always a good time. For all of this article, I will keep my own opinions to a minimum, despite the fact I heard little (if anything) that I didn't like. Everything that I type is as close to a quote as I can give you, as I respected the 'no recording devices' request at the meeting; with that said, I will disclose that I am relying on my hand written notes.
There was a presentation given by Biglari, with Cooley at his side, of the new structure of the company. In addition, they also showed a video of the new prototype Steak 'n Shake locations. I was pretty impressed with the video and building as a whole, but was audibly offended when the video had the song 'Clocks' by Coldplay playing... but need I digress.
The footprint went from what used to be 4,200 sq ft, down to 3,200 sq ft, mainly by the elimination of office and locker space, while only reducing the number of seats in the restaurant from 97 to 94. Opening expenses went form $2.2 million to $1.5 million. With that said, these things look GREAT. The lay out is a lot more inviting, there are many more diverse seating arrangements (due to the increased use of tables, rather than booths), and a kitchen that is proudly displayed to the customer- the grill and shake mixer are front and center for all to see. Truly, this will be a much more entertaining restaurant for consumers. The outside has also been revamped in a way which is much more visually appealing, while still maintaining the retro look that SNS is famous for. Outside, there are are also tables with umbrellas.
If I understood correctly, the 3 new units that will be constructed via franchisees in Virginia and Georgia will be prototype units. Additionally, there will be a SNS location inside of a casino in Las Vegas (during the only break in the meeting, I heard a consultant saying that they wouldn't have done the deal had there not been potential for more units) and a franchisee in Denver. It was reiterated that there could be a total of 2,000 stores in the U.S., with many more abroad- which there has been interest in from various parties. The company will also be constructing one on the land that is owned by Western Acquisitions on 'the loop' of San Antonio; a great sign that headway is being made with the plot that was bought a while back.
As always, Biglari talked of maximizing cash flows, not earnings. He talked of his love for franchising; how he hates capital intensive businesses and obsolescence.
New in his schpeel was that the company was 'a liquidity provider', letting companies compete for the capital of the company. Biglari said he likes to use other people's money; not really a new thought for anyone who knows anything about the company, but new to the presentation and comments, none the less. Biglari stated that he liked insurance, better than money management, as the demand for insurance is recession resistant, risk is generally pretty diversified, and the obvious use of float. He doesn't like the debt that many insurers have. In addition, he quipped that he cherishes the hunt for an insurance company; which surely must be welcome words for people worried about him being trigger happy with acquisitions. Biglari made it certain that anyone investing in the company should view it as a hedge fund, and noted that the board was discussing the idea of buying his hedge fund; obviously, this was pretty good foreshadowing to more recent events. At the meeting no one seemed to upset by the idea; now, it seems that I am the only person in front of a keyboard that isn't calling for Biglari's head on a platter. This, despite the fact that I do feel poorer after the pay package announcement- mainly because I don't think that Biglari is the type of person to sandbag shareholders due to lack of compensation.
In addition he made it known that he likes for all of the company's debt to be offset by cash. He cautioned about relying on same store sales, rather than sustainable cash flows, stating that the recent linear trajectory could not be sustained. One plus about SNS paying all of it's earnings to the parent company, is that restaurants generally have negative working capital requirements, as they have a negative cash conversion cycle, when absent of the reinvestment of capital. To put to rest all of the concerns about cap ex being understated: there are repairs that are made which don't show up in the income or cash flow statements, Biglari specifically stated that keeping the restaurants looking nice, through painting and replacement of booths and such, was "non-discretionary".
As we now know, shareholders overwhelmingly approved the name change from Steak 'n Shake to Biglari Holdings. Apparently, there was only 1 letter sent in regard to the name change, which, apparently came from Sanjeev Parsad- a guy that I have a tremendous amount of respect for (who said that he sent it in his forum, his name didn't come up at the meeting). Regardless, Biglari and Cooley didn't seem to be fazed, and joked about a vocal minority.
Cooley went so far as to (rightly) say that since everyone has a name, and most have actually named another person, that they often view themselves as being an expert on naming things! Biglari added that if an artist created his masterpiece, that it would be absurd to ask him to not put his name on it. I will go on the record and say that I presently have, and never really much of an issue with the name change.
Q&A (or, rather, the ones I feel like writing about)
1) Some guy from the Humane Society talked about using cage free eggs, not once, but 2 times in the Q&A session. Each time, Biglari gave a very good answer, as a response. I was quite impressed actually; not only with the conviction that the questioner has to such a useless cause, but also in regards to Biglari's sincere and thoughtful response- I probably would have told the guy to go to Hell. Basically, he said that the company wasn't doing anything illegal and that unless it would generate returns for shareholders, it didn't matter what he thought about the matter.
The gentleman from the Humane Society pressed on later in the meeting by asking why SNS wouldn't use the cage free eggs since WalMart (WMT), Costco (COST), and a host of other companies do. Sardar stated that they don't do things simply because others are, and that at the moment, since breakfast represents such a small amount of revenues, that they wanted to raise profitability of that section of the business. With that said, they didn't think it would do well. On a more personal note, I don't care what kind of torture that the egg vendors of the company put chickens through; I just want for SNS to have a damned good and tasty product, that customers get a great deal on, which generates superb legal returns for the owners of the company.
More to come later...
Disclosure: The author holds a position in BH