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Executives

Jeffrey A. Blade - Interim President, Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Wayne L. Kelley - Interim Chairman of the Board and Chief Executive Officer

Duane E. Geiger - Vice President, Controller

Analysts

Michael Gallo - C.L. King & Associates

David Tarantino - Robert W. Baird

Sue Aramian

Michael Schmidt - First Source

David Freeman - Freeman Capital

Patrick Walsh - Oak Street Capital Management

Greg Rudy - Stevens Incorporated

The Steak n Shake Company (SNS) F2Q08 Earnings Call May 14, 2008 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Steak n Shake Company second quarter fiscal 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Jeff Blade, Interim President, Executive Vice President, and Chief Financial Officer of the Steak n Shake Company. Please go ahead, sir.

Jeffrey A. Blade

Thank you. Good afternoon and welcome to the Steak n Shake Company’s conference call and webcast to report results for the fiscal 2008 second quarter. Before we proceed, I would like to remind everyone that the comments you are about to hear contain various forward-looking statements which represent the company’s expectations or beliefs concerning future events. These forward-looking statements involve risks and uncertainties and although the company believes the assumptions on which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company’s filings with the SEC.

With me today is Wayne Kelley, Interim Chairman and Chief Executive Officer, who will provide a brief update on the CEO search, as well as closing remarks; and Duane Geiger, Vice President and Controller, who will present the financial review. Following our prepared remarks, we will be glad to answer any questions you may have.

With that, I would like to turn it over to Wayne to provide a brief update on the CEO search.

Wayne L. Kelley

Thank you, Jeff. Since beginning the CEO search process back in February, we have seen several well-qualified and enthusiastic candidates and we remain optimistic that this process of obtaining our new CEO will be concluded in the near future. With that brief update, I will turn the call back over to Jeff Blade.

Jeffrey A. Blade

Thanks, Wayne. As we begin today’s call, the overall message that I would like to convey is that we remain dissatisfied with the current operating results and while improving, view them as unacceptable. Since our last quarterly update, we have worked with a sense of urgency and focus to develop a plan to address the current operating environment realities while also taking the actions necessary to support the long-term viability of the company. During today’s call, I will review the progress made during our fiscal 2008 second quarter and outline key elements of the operating plan developed to address the current challenging operating environment while evolving core strategic elements of the Steak n Shake brand.

During the second quarter, we had sequential improvement as same-store sales declined 6.3% versus a decline of 9.5% in the first quarter. Sales continue to be impacted by deterioration in the consumer economic environment and increased promotional activity throughout the restaurant sector. These challenges were partially offset by the successful execution of a $2.99 double steakburger and fries limited time offer promotion during the month of February. I would like to discuss each of these key drivers in more detail.

During the first half of our fiscal year, the continuing deterioration of the consumer economic environment has impacted sales at Steak n Shake as well as many of our peers in the restaurant sector. We continue to be concerned about the current state of the consumer as higher gasoline prices, continuing housing related issues, and declining levels of consumer confidence adversely impact our sales. Our current assumption is that the near-term consumer environment will continue to be very challenging and may get worse, especially as gasoline prices approach $4 a gallon across the country.

Aggressive promotional activity from competitors in both the QSR and the casual dining segments also continues and appears to be intensifying with deeper absolute discounts, buy one get one free offers, and now a number of simple free food and drink offers. We believe this level of promotion will continue given the challenges that restaurant operators face in holding guest traffic.

On the positive side, the $2.99 double steakburger and fries limited time promotion which ran in February performed well and resulted in a 20%-plus same-store sales run-rate change in the 12 core markets that executed the promotion. The success of the promotion enabled us to navigate a difficult month in February for the restaurant sector and exit the promotion with same-store sales that were approximately two percentage points higher than before the promotion began.

During the second quarter, we also launched our new breakfast menu items that included a Seattle’s Best Coffee program. Overall, the launch was successful, with coffee incidents up nearly 25% and breakfast sales increasing by approximately 17%. Given the small percentage of sales represented by the breakfast day part, not enough to impact same-store sales declines in a meaningful way but we remain encouraged as awareness of the new program continues to build.

I would now like to outline for you the key elements of the operating plan developed to address the current challenging operating environment while evolving core strategic elements of the Steak n Shake brand.

The plan includes the following: delivering improved customer value proposition through price value promotion and innovation; second, continuing to significantly improve the customer service experience and evaluate service model evolution; critically review underperforming units and markets, and generating incremental cash flow and delivering cost savings.

I would like to review each of these strategies in more detail. First on delivering improved customer value proposition -- our efforts around price value promotion are designed to focus on our core equities of steakburgers and milkshakes, communicate a compelling value proposition to consumers, and manage discounting to minimize equity degradation of our core items. These efforts will be executed through several promotion windows during the balance of this fiscal year. We are currently finishing a limited time $2.40 double steakburger promotion, which has run for the past four weeks. The promotion, while just concluded, has resulted in same-store sales run-rate improvement of approximately 4% to 5% in core markets that participated in the promotion.

In May and June, we will feature our successful side-by-side milkshakes at regular price. The promotion will be supported with television and print advertising and will remind consumers of the cut-above nature of Steak n Shake milkshakes and the uniqueness of the side-by-side product.

During this activity, we will also promote $0.99 kids classic milkshake to attract families during the key weekend meal periods where sales have been most challenging.

In the August promotion window, we will again promote core steakburger equity with the offer of either a $2.99 bacon cheese double steakburger in select markets or a $3.99 Frisco Melt in older Steak n Shake core markets with loyal Frisco Melt following.

In addition to the planned promotion windows that I just reviewed, we are also testing several price value offerings for use in future promotions. These tests include $1.99 milkshake happy hour between 2:00 and 5:00 p.m. Monday through Friday; $1 any kids menu item; free coffee day of the week, to continue building awareness of the new Seattle’s Best Coffee program and new breakfast menu items.

In addition, from an innovation perspective, we continue to build a pipeline of compelling product offerings that are focused around our core equities of steakburgers and milkshakes and that do not add complexity to store level execution.

Some of the near-term innovation includes steakburger wraps, which reinforce our focus on core steakburger equity while providing a lower entry price point for consumers, an incremental snacking occasion and something unique compared to competitive wrap offerings, which are all chicken based. This product is being test marketed during June.

Relaunching our triple steakburger as the 1934 steakburger. It is more than a third-pound and made to appeal to consumers who want a bigger burger. This concept will be test marketed this summer in Dallas.

We are also beginning some longer term work to enhance the cut above nature of our products that will enable us to better defend our traditional positioning and better compete based on our strong heritage. We will update you in the future as this work progresses.

Now I’d like to shift to what we are doing to continue to significantly improve customer service experience. During the quarter, we continued to make progress on the priority of significantly improving the customer service experience. We are currently implementing personalized service, which is an intensive update of our dining room service process. This implementation is critical to executing the Steak n Shake brand promise and addressing the current guest value equation gap. To date, all store general managers and above store leaders have been fully training on personalized service and are now training and certifying servers. These efforts are beginning to make a difference as measured in our guest satisfaction scores, which are currently at the highest level since we began tracking this measure several years ago.

In addition, we have completed a major effort to audit the cleanliness of all store locations and improve the awareness and execution of our high standards. Improvements have been reflected in the cleanliness scores in our guest satisfaction surveys.

Next I’d like to talk about critically reviewing underperforming units and markets. In an effort to maximize the return on invested capital, we are critically reviewing underperforming units and markets. This process has been executed in the past but we are currently reevaluating with a higher level of rigor that we believe is necessary to attain the highest possible return for every store.

With that, I would like to turn the call over to Duane Geiger to review our fiscal 2008 second quarter financial results as outlined in our press release.

Duane E. Geiger

Thanks, Jeff. I would like to review with you some of the details surrounding our fiscal 2008 second quarter results as outlined in our press release.

Total revenues for the second quarter, which includes net sales from company-owned restaurants as well as franchise fees, were $190.5 million, a decrease of 5.8% versus prior year revenue of $202.2 million.

Same-store sales, as mentioned earlier, declined by 6.3% during the second quarter. That consisted of a decline in guest counts of 8.8% partially offset by a 2.5% increase in average guest expenditure. The increase in average guest expenditure was due primarily to a 4.0% weighted average menu price increase that was offset by 1.5% impact of higher coupon redemptions.

Second quarter cost of sales were $47.4 million, or 25.1% of net sales, compared to $46.2 million, or 23.0% of net sales a year ago. The unfavorability as a percentage of net sales includes 1% related to increased commodity costs, specifically dairy and fried products; 0.4 percentage points related to the annualization of new menu items with higher food cost percentages, including our new entrée salads and chicken sandwiches; 0.3 percentage points related to food waste in the preparation of new products; and 0.4 percentage points related to incremental discounting.

Restaurant operating costs for the second quarter were $104.0 million, or 55% of net sales, and that’s compared to $101.8 million, or 50.6% in the prior year. The higher cost as a percentage of sales were due primarily to five-tenths of a percent related to minimum wage increases, one percentage point related to medical insurance and workers’ compensation, 0.9 percentage points related to incremental discounting, 0.5 percentage points related to utilities, 0.3 related to restaurant maintenance, the remaining 1.2 percentage points related to the impact of negative same-store sales on fixed costs.

Second quarter general and administrative expenses were $14.4 million or 7.5% of revenue as compared to $17.6 million, or 8.7% of revenue a year ago. The decrease in G&A is due primarily to headcount reductions executed as part of the planned reduction in G&A spending announced at the end of fiscal 2007, as well as reductions in outside consulting services and stock compensation expense.

The decrease in G&A was partially offset this quarter by $1 million of non-operating expenses incurred during the quarter related to advisory, proxy, and other professional fees, as well as severance related to the departure of our former Chairman and Interim CEO.

Second quarter marketing expense was $10.4 million or 5.4% of total revenues, versus $9.1 million or 4.5% of revenues in the prior year. The increase in marketing expense relates to timing and media and print related to the $2.99 double steakburger and fries promotion.

Second quarter depreciation and amortization expense was $10.5 million, or 5.5% of revenues versus $9.8 million, or 4.9% of revenues last year. The increase in depreciation and amortization is primarily due to new units opened in the back half of 2007 and the first half of ’08.

Pre-opening expenses were down slightly from the same quarter of a year ago at $700,000, or 0.4% of total revenues, and that compares to $800,000 last year. During the quarter, five new company-owned restaurants were opened.

An income tax benefit of $2.3 million was recorded for the second quarter. The effective tax rate was 45.0% versus 33.5% for the same quarter last year. Income taxes for the current quarter reflect the impact of decreased pretax earnings and the related proportionate increase of federal income tax credits when compared to total pretax earnings or loss.

The resulting second quarter net loss was $2.8 million or $0.10 per diluted share versus net income of $6 million or $0.21 per diluted share in the prior year. Despite these pretax losses, we continue to generate significant cash from operations. This quarter, we generated $13.9 million of cash from operations, most of which was used in our completion of our new unit construction. As we mentioned in the previous call, we have suspended our new unit development plan and will focus our efforts on the key elements of our operating plan discussed earlier by Jeff.

Now I would like to turn the call over to Wayne Kelley for closing remarks.

Wayne L. Kelley

Thank you, Duane. In closing, I would like to emphasize that the management team remains intensely committed to reversing the current negative same-store sales trend. We are encouraged by the results of our most recent promotion activities, the ongoing implementation of personalized service, and the other initiatives designed to deliver the excellence that Steak n Shake customers all deserve. We remain as confident as ever in the long-term future of Steak n Shake and its brand and the realization of the potential for this great brand.

We’d like to thank all of you for your continued support and interest in the Steak n Shake Company as we work through the current business challenges. At this time, we’d be glad to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Michael Gallo of C.L. King.

Michael Gallo - C.L. King & Associates

A couple of questions -- you mentioned in your prepared remarks you were looking at some potential units for closure. I was wondering if you had any sense for how many units aren’t cash flow positive or what criteria that you are looking at as you evaluate potential closure?

Jeffrey A. Blade

Sure. Let me give you a little background -- as you’ll recall, this is part of an ongoing process that we’ve done over the last several years, so if you’ll recall, we closed nine units in 2003, we closed two in 2005, and we impaired or closed 14 at the end of 2007. So we’ve had an ongoing process of looking at units and what we said in the prepared remarks is this is basically a continuation of that process and we are interested in going a bit deeper in that regard.

With regard to any specific units that are not cash flow positive, again we continue to evaluate them and at the appropriate time, we’ll come forward and let you know exactly what we are thinking of. And again, in the past with the units, we’ve done one of three things -- we have either put in place a turnaround plan so if the store was cash flow negative, ensure that we could get it on the right track to be a successful, productive store, or we looked at franchising if that was a better option, given location or ability to operate. Or if neither of those two were viable, we would close the unit.

Michael Gallo - C.L. King & Associates

Okay, great, that’s helpful. The other question I wanted to ask is just on breakfast. I know you noted in your prepared remarks that you had some early encouragement from some of the results you were seeing. I was wondering if you can elaborate on that a little bit. I know it’s early but just to give us a sense for what you are seeing at breakfast, whether it’s bringing incremental guest count into the stores or -- and also whether when you promote breakfast advertising wise on television, whether you are seeing any cannibalization of guest counts at lunch and dinner. Thank you.

Jeffrey A. Blade

As you’ll recall, the breakfast menu relaunch that we did during the second quarter, it was several things. One, it was to relaunch some breakfast items that were specifically in the handheld sandwich arena, so we took our successful bagel sandwich, we created essentially three varieties of handheld bagel sandwiches as well as breakfast melts to play to drive-thru sales, which obviously is where most of breakfast sales in the restaurant sector have been taking place. So we did that and then we also reformulated our hash brown, introduced a breakfast smoothie which utilizes our frozen yogurt milkshake as a base, and then importantly, partnered with Seattle’s Best for a new coffee program.

So in introducing the new coffee program, that was the basis for it. From an advertising perspective, we were very clear that in launching it, we were not going to cannibalize the core equities of steakburgers and milkshakes, so the launch took place with some television advertising tags on our regular steakburger and milkshake advertising, so that we weren’t cannibalizing. And then some in-store bounce-back coupons, some promotion on in-store placemats, et cetera.

So though part of the reason that the launch wasn’t necessarily bigger from an impact perspective was we were very clear that we wanted to relaunch it. We knew that awareness building would take some time to do but we did not want to cannibalize core steakburgers and milkshakes.

Part of the reason is because, as you’ll recall, our breakfast day part is 8% of our sales and only 4% of those sales are actually breakfast items. So while we are encouraged by the early results, I think that coffee incidents, as I mentioned, is up considerably. I think the response to the new Seattle’s Best Coffee program has been quite good and the reaction to the new breakfast items also has been good.

But it’s a relatively small day part.

Michael Gallo - C.L. King & Associates

Okay, that’s helpful. Thanks a lot.

Operator

Next we’ll go to David Tarantino from Robert W. Baird.

David Tarantino - Robert W. Baird

Good afternoon. Wayne, a question on the CEO search; is the board looking at both internal and external candidates? And if you could please comment on what qualifications and criteria you are using to identify the candidate.

Wayne L. Kelley

Certainly. The board is looking at both external and internal candidates, and the criteria was developed by the board with the help of our search firm and it has a heavy orientation, to be quite honest about it, with regard to restaurant experience, particularly restaurant operating experience. But that is not exclusive. We are looking at any qualified candidates and they also have to have all the other attributes that you would expect a CEO to have as well. But there is an emphasis toward restaurant operations experience.

David Tarantino - Robert W. Baird

Okay, thanks, that’s helpful. And Jeff, a question on the strategy to do more value promotions. And I think you mentioned that part of that strategy was to protect the brand equity and just wondering how you reconcile the increased discounting with protecting the equity of your premium positioning relative to QSR?

Jeffrey A. Blade

Sure. It’s a great question and it’s a very tricky trade-off, so one of the things we are very clear on is that we are not looking to be deep discounters. So we are not looking to move down and take on QSR or defend in that space. What we are also clear about is the reality of an intensely competitive restaurant space right now where deep discounting and other promotional offers, regardless of whether it’s QSR or casual dine, fast casual, are taking place almost everywhere.

So part of the fine line we are trying to find is having some compelling value and price promotion for consumers so that we are able to hold traffic but doing it in a manner that one doesn’t degrade the brand long-term, so that’s part of the reason that you are seeing us promote in the steakburger and milkshake arena, but try to do it with limited time offers and try to change up the offers that we are having.

So for instance, the $2.99 double steakburgers and steakburgers and fries, which has been the deepest discount we’ve done to date during February, we did that and we went as deep as we did, given the trends that we were seeing in December and January, which we thought were alarming. And so that was the reason that we went as deep as we did.

$2.49 was a much more mild discount. It was in the 30% range, which is more in keeping with our traditional coupon discounting. And in June, we are actually trying to rely on one of the core equities of side-by-side, so that product was introduced four years ago. It was the most successful milkshake innovation that we’ve had in a number of years, and so we are bringing that back in a promoted way from a television advertising perspective but we are doing it at full price because we think there’s a lot of equity there and we are tagging it with children’s $0.99 classic milkshakes in the attempt to draw families, especially during the weekend meal periods, where we struggle.

So the intent is to mix it up, to have a combination, to not denigrate the core equities but at the same time, be sober about the realities of the competitive marketplace. This is also giving us an opportunity to test some other promotions that -- both on product and price combinations that we think will also give us the opportunity in the future to not just be hitting core items. So the test of a milkshake happy hour, steakburger wrap, and some of the other things that we are doing is part of that strategy to have compelling value but not denigrate the brand.

David Tarantino - Robert W. Baird

Okay, that’s helpful. And could you clarify, Jeff, the impact of the limited time promotion on the comp for Q2?

Jeffrey A. Blade

Yeah, let me give you a top line and then we’ll give you an exact number later in the call. So from a run-rate perspective, the promotion ran for a month and in the 12 core markets where we’ve promoted it, we saw more than -- slightly more than a 20% run-rate change. So in terms of the same-store sales incoming to outgoing, it was about a 20% change. And then I will -- we are looking up the exact impact of it from the quarter perspective, because obviously it only ran during a month of the quarter.

David Tarantino - Robert W. Baird

Right, and did you get the type of return on that investment you were looking for? In other words, did it help you build profitability during the quarter?

Jeffrey A. Blade

So a couple of thoughts; first of all, in terms of the impact, it was about 2% in terms of the same-store sales impact for the quarter. And then from a profitability standpoint, so the way we are designing all of these promotion windows is they need to be break-even or better, so we are not designing anything to attract traffic at regardless of the cost, so we are not interested in losing money or making things any worse financially. So the $2.99 promotion was break-even to slightly positive.

David Tarantino - Robert W. Baird

Okay, that’s helpful. And then last question, is it fair to say there will be less benefit from those types of promotions going forward in terms of the impact on traffic for the balance of the year?

Jeffrey A. Blade

I don’t think we would say there would be less benefit. So obviously $2.99 had a large run-rate change one because same-store sales and guest counts were significantly off, and secondly the discount was pretty deep. So what we are tempting to do for the balance of the year is find an array of promotions that will give us the opportunity to attract guests with news and compelling price value, and hopefully as you exit those windows be able to hold some level of guest as well, so that you begin to climb your way out of the negative same-store sales that we’ve had.

The other thing that I would mention is that the double steakburger and fries, part of the reason that that had as big an impact as it did was that it was an incremental window to the calendar, so it was going against a non-promoted window in prior year. A number of the other offers that we have are going against promotional windows that we’ve traditionally had I prior years and we try to enhance them.

So for instance in June where we are going to do side-by-side milkshakes and $0.99 kids milkshakes, that’s an overlay to the traditional coupon that we have. So we are trying to find ways to find compelling offers and drive traffic.

David Tarantino - Robert W. Baird

Great. Thanks a lot.

Operator

(Operator Instructions) Next we’ll go to Sue Aramian.

Sue Aramian

Yes, my name is Sue Aramian. I have been asked many, many times to comment upon the company that I co-founded with E.W. Kelley in 1981. I have refused every request until this statement that I am making to you, and I am taking this position at this time for the following reasons.

Currently as you know, there is no permanent CEO to lead this company and there has been a vacuum of leadership that has not been corrected. This continued lack of leadership has resulted in a vacuum which in turn has resulted in poor operational results. This fact is indisputable.

I am aware that the immediate response would be that the board is looking for a replacement. However, shareholders were told in August of 2007 that this search would begin promptly and it is now 10 months since that day and we are still talking about not having a CEO. I was very surprised to learn that it only started in February of 2008.

Previous earnings over too many years have been disappointing, have been dismal and there is no mention of shareholder value which has diminished in an intolerable manner. I do not even mention dividends as I certainly understand that the board could in no way authorize the distribution when the balance sheet demonstrates that without inflow of money, there can be no outflow.

However, and importantly, management salaries, director fees, change of controlled severances, G&A expenses, et cetera, have all increased dramatically, which would be justifiable if there was a corresponding value for shareholders.

You have operated with the same team doing the same thing getting the same results. These results have brought the company to this undesired state.

I have informally visited many units recently, discussed the situation with loyal employees who recognized me and asked for anonymity because of fear of losing their jobs. Naturally these employees have great concern; it all stems from lack of good leadership and an understanding and appreciation of the basic concept.

I for one am saddened that after many years of continued growth and success, a company which has enjoyed iconic stature in the Midwest is now known as a sick company. I continue to believe in the concept and company.

Your report released today again, as in the many past years, underlines this assessment.

Jeffrey A. Blade

I don’t believe there was a question in that, so we’ll go on to the next question.

Operator

We’ll take our next question from Michael [Schmidt] of First Source.

Michael Schmidt - First Source

Good afternoon. Two questions, one about milkshakes, one about real estate. Reading your annual, you are assessing that more of your visits, customers are ordering milkshakes I believe the stat was about 50% of the time, so you therefore invested in equipment so you can have better consistency, as well as speed. I was wondering if you could update us on that initiative in terms of results, how widely now that’s rolled out.

Jeffrey A. Blade

Sure. We have not specifically invested. What we are doing is testing upgrades to the milkshake fountain process, so as you’ll recall, we as recently as five years ago, milkshake incidents was approximately mid-30s per 100 guests, now over 50 and in addition to three classic flavors, we’ve added a number of combinations and mix-ins, et cetera. So that’s been the right thing to do from a consumer perspective. It’s enabled us to reinforce the heritage of our stature as category killer in milkshakes. But it came at a price, which is a fountain that can no longer keep up.

So what we are in the process of doing is testing enhancements to our milkshake fountain process. We are testing it in approximately four -- approximately 20 stores plus four franchisees and we are in the process of evaluating it, so there has been no specific decision to roll it out or recommendation to the board to approve specific capital to do it, other than the test that is currently underway. And the test includes several things, it includes automating the portioning of milk dispensing, the portioning of syrup dispensing so you --

Michael Schmidt - First Source

Okay, okay -- I guess that’s my answer. I had expected more of an update and you are saying it’s still inconclusive?

Jeffrey A. Blade

What I would say is that the early test results are very promising, so from a food waste perspective, we are seeing the kinds of savings that we thought. In terms of the consistency of the shakes produced, the quality is high and we are still working through various pieces of the equipment and making sure that it is optimized.

Michael Schmidt - First Source

Okay. I look forward to more of an update on that. On the real estate, obviously of the company-owned stores, there’s a portion which now have been, since the locations sold and they are long-term leases, is there an opportunity for the ones where the company owns the real estate and the building at this point to comment as to what opportunities there are for the company in terms of engaging in sale lease-back type transactions, if that’s being explored and for how many of the stores that’s an opportunity.

Jeffrey A. Blade

Sure. So as you likely know, the company has a long history of engaging in sale lease-back transactions, so we have employed that as part of the capital structure of the company for a long period of time. We still own the land and buildings underneath approximately 160 of our stores and we continue to evaluate on an ongoing basis the role of sale lease-backs in our capital structure. So we haven’t done any in a while because there hasn’t been a need to but we continue to evaluate it and could --

Michael Schmidt - First Source

When you say there hasn’t been a need to -- wouldn’t that optimize the capital structure of the company further?

Jeffrey A. Blade

Not in the past several years, there hasn’t specifically been a need to generate additional cash and given the rates that were available on our revolver, it didn’t make sense because there was an imbalance in terms of the rate on our revolver, so no.

Michael Schmidt - First Source

So what would cause you to revisit that assumption or principal?

Jeffrey A. Blade

We are constantly revisiting and relooking at our overall capital structure so the combination of changing rates in revolver, shelf registration, and rates available to sale lease-back market have us continuously relooking at it.

Michael Schmidt - First Source

Is that something that’s being advocated by some of your board members at this time, your new board members?

Jeffrey A. Blade

I can’t comment on that.

Michael Schmidt - First Source

I would be an advocate as a shareholder.

Jeffrey A. Blade

Appreciate that input. Do you have another question?

Michael Schmidt - First Source

That’s it.

Jeffrey A. Blade

Thank you.

Operator

Next we’ll go to David Freeman of Freeman Capital.

David Freeman - Freeman Capital

This question is for Mr. Blade and Mr. Kelley; you guys have been leading this company for quite some time now and the results have just continued to be dismal, dismal, and it just keeps going down the drain. And I can’t see how it can get any worse. And my question to you, and it kind of continues what that other woman was saying before, my question to you is when are you guys going to lead the company so we could start creating some value for this [firm]? Because after so many years, that looks like the only important question at this time to me, because you can’t promote your way out of this problem. There’s service issues, there’s cleanliness issues. So that’s my question to you.

Wayne L. Kelley

We appreciate your concern. I will tell you that I don’t think we plan to leave the company anytime in the near future but we do appreciate your concern and interest.

Operator

Next we’ll go to Patrick Walsh of Oak Street Capital Management.

Patrick Walsh - Oak Street Capital Management

I had a question on G&A -- are there further G&A savings that can be realized? It seems like you guys took a bunch out in the last two quarters and I just wanted to know if there’s further savings that can be realized there?

Jeffrey A. Blade

Sure. For this year, as we mentioned in our prepared remarks, we are on track to reduce G&A savings by at least $8.1 million, and that’s nearly 20% of our G&A as a percentage of sales. Those actions were all taken prior to the start of the 2008 fiscal year and they were a combination of headcount reductions both in headquarters and a limited number of heads in the field, as well as a reevaluation of all lines of spending to ensure that we were not doing anything that wasn’t absolutely essential.

So those have been done and are in place. We’re on track to deliver it and we continue to reevaluate every aspect of this company and continue to look for cost savings, so I would tell you that the major efforts were undertaken but we continue to look at it closely.

Patrick Walsh - Oak Street Capital Management

Are you still sticking to the $8 million savings?

Jeffrey A. Blade

So far, and obviously we’ll update that every quarter because that’s key, and to the extent that there is upside, which we are continuing to look for, we’ll update on the Q3 call.

Patrick Walsh - Oak Street Capital Management

Got it. And then in terms of the underperforming units that you are looking at, specifically the units where you own the real estate and the land, if it made sense to sell off that real estate and close down the operations, what would you expect to get in the sale for the land and the unit?

Jeffrey A. Blade

It depends on the unit. It varies. I hazard to even give you a ballpark estimate because they are literally all over the board, depending on the location and the age of the units. In general, our new units cost between $2 million and $2.4 million, but obviously there is a wide range within that.

Patrick Walsh - Oak Street Capital Management

And does that 2.2, does that include equipment and leasehold improvements?

Jeffrey A. Blade

Yes.

Patrick Walsh - Oak Street Capital Management

So I would assume that you could sell it below $2 million, or above $2 million?

Jeffrey A. Blade

Again, I can’t comment specifically on -- because they are literally all over the board. So there would be some that would be below that, some that might be above depending on the location and land, potential land appreciation.

Patrick Walsh - Oak Street Capital Management

Got it. And then just finally in terms of capital expenditures, assuming that you dialed back unit growth, what would be a good run-rate for just maintenance capital expenditures, assuming that there’s no future units opened?

Jeffrey A. Blade

Typical maintenance CapEx on an annual basis is in the $6 million to $8 million range.

Patrick Walsh - Oak Street Capital Management

$6 million to $8 million -- okay, great. Thank you.

Operator

We’ll take our next question from Greg Rudy of [Stevens] Incorporated.

Greg Rudy - Stevens Incorporated

Thank you. Good afternoon. Jeff, can you kind of go back through when you look at closing down markets, just kind of walk us through some of the common denominators that necessitate that deeper dive -- is it significant same-store sales variance, is it real estate? Just help us understand some of the criteria you are using there.

Jeffrey A. Blade

Sure. I think it’s a combination of things, so I would characterize it in several ways. In some instances, there are stores that are underperforming because the real estate was not appropriate. So no matter how well we operated the unit, the unit is simply not in the right trade area or not in the right location within that trade area. So there is some level of those stores.

There are some instances in some markets where based on the development we’ve done, we have some cannibalization issues from a store perspective that we need to look at closely and be clear whether or not the density works or whether culling some select units would enable the overall market and individual stores to be more profitable.

There are also issues of geography, so we do have some stores in outlying areas where when you get sort of 45 minutes to an hour beyond a core market, unit supervision becomes an issue and perennially, we’ve had issues with some of those outlying stores, a number of which we’ve franchised to successful associates with the company, and so I think we have a track record of doing that and those kinds of stores have lent itself to that pretty well.

So it’s a combination of things and what we want to do is use this as an opportunity to make sure that we are being critical and going as deep as is necessary.

Greg Rudy - Stevens Incorporated

Okay, very good. I apologize if I missed this but did you provide an update of your new prototype and remodel effort? And then, to what extent do you need a new CEO to move forward with that program?

Jeffrey A. Blade

Let me comment on the first part and then I’ll have Wayne comment on the second. I did not specifically in prepared remarks talk about it. The update is that last quarter what we talked about was the fact that we were continuing to refine the design of a remodel and new unit prototype. That work continues. When that work is completed, what we would anticipate would be the remodel of two to four units and use that as an opportunity in a low-cost capital way to test the elements of the both interior and exterior remodel, which would also be representative of the way a new prototype would look. So we have some work to do yet to finish the design. We have some discussions yet to have with the board in terms of moving forward with that test but at some point, that’s our intention.

Wayne L. Kelley

I would add to that that although it would be helpful that we would have the new CEO on board at the time that the board is making the decision on that, we feel a need to proceed with our going forward with the remodel concept design and hopefully we will have the CEO on board, but we feel a need to proceed even if we do not.

Greg Rudy - Stevens Incorporated

Okay. And Jeff, in your discussion of pushing for enhanced service levels, can you discuss the one-time labor impact that we could potentially see in future quarters?

Jeffrey A. Blade

You should not expect to see anything in terms of a one-time impact, so the process that we are using at the store level, we are finding ways to do it within the existing cost structure, so there is not a significant incremental outlay. It’s really rethinking and redeploying some of the hours and utilizing, for instance, district managers in a more intensive way to provide coaching and feedback to both general managers and servers, general managers playing a more active role in the training and coaching, especially as we’ve tried to free up time from other activities in the store to be able to focus on it. So you should not look for an incremental labor impact.

Greg Rudy - Stevens Incorporated

Okay. Thank you both.

Operator

Ladies and gentlemen, that is all the time that we have for questions. I would like to turn the call back over to the speakers for any additional or closing remarks.

Jeffrey A. Blade

Great. Well, we’d like to thank all of you for joining us for this call and we’ll look forward to talking to you at the end of our third quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We’d like to thank you all for your participation and have a great day.

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Source: Steak n Shake F2Q08 (Qtr End 4/9/08) Earnings Call Transcript

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