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No. of Recommendations: 6
Steak ‘n Shake turns in another forgettable quarter

There are a few ways a restaurant chain can increase revenue. They can open new restaurants, increase traffic and increase prices for menu items. Earnings will grow if they can manage expenses and increase margins.

Steak ‘n Shake/WEST (restaurant operations only) revenue grew 1.3% in Q1 2013. Same store sales were 1.3% on traffic increases of 1.6%-- prices decreased 0.3%. That compares to traffic increases of 5.7% in Q1 2012 and same store sales of 5.5%. The same store sales and traffic have been in decline for several quarters suggesting consumers are finding the SNS concept of burgers and hand dipped shakes less appealing than some of the competition. Chipotles, Panera and Buffalo Wild Wings continue to turn in better traffic numbers and same stores sales with higher revenue growth.

Initially, Biglari was able to impressively increase margins, same store sales and traffic. That avenue to growth has become ineffective as the SNS wreck was fixed and innovation beyond cost cutting and promotional items was absent.

The company under Biglari's leadership has not been growing through new store openings either and franchise expansion is slower than the line at the DMV.

Q4 2012 Q1 2013 Q1 2012
======================================================

SNS owned restaurants 414 414 413
SNS franchised 83 87 78
WEST owned restaurants 5 5 5
WEST franchised 87 87 87


Franchise revenue increased 15%, but as franchise revenue is only 1.5% of combined revenue, this isn’t enough to provide impressive growth.

SNS did not manage to decrease expenses through improved restaurant/franchise margins this quarter with growth in combined operating income coming in at –41%.

Fortunately, for BH net income and earnings per share, there are dividend payments mainly from Biglari’s arch rival Cracker Barrel accounting for around 50% of Q1 earnings per share.

EPS in Q1 2013 was $3.42 and decreased from $6.60 in Q1 2012. In Q1 2012 there was a one-time realized gain on investments that boosted earnings per share. Adjusting for the gain on sale, EPS was $4.92.

If we remove the dividend paid by CBRL in Q1 2013, EPS would have been $1.51 and that approximates what the restaurants sans dividends are doing. It is ironic that Cracker Barrel is contributing so much to his bottom line. Biglari is an adequate stock picker under the right conditions and the right conditions usually include bullying the object of his takeover interest. His activism may have both convinced the market CBRL was undervalued and spurred CBRL management to return some cash to shareholders through dividends. However, even with the dividend, EPS was down 31% year-over-year adjusted for the realized gain in 2012.

The yield on his rather large Cracker Barrel investment (4.74 million shares) is only 3%. He might do better if he was managing his own restaurants more dynamically and bringing back same store sales in the double-digits -- 14.4% Q1 2010.

Unrealized gains on the CBRL investment are now around $61 million and rather than accept a 3% yield on the investment he might want to consider using that money elsewhere for a better return. Cracker Barrel is never going to give him and Phil Cooley seats on the board or let him take control of the restaurants. If he is not going to be a great restaurateur, then he better become a great money manager.

Finally, a footnote -- if all else fails and he steps aside, he will be able to make a living off the value of his name. What’s that worth? He has an agreement signed in January 2013 that he personally will receive a 2.5% royalty on any revenue derived from use of the name Biglari. Sweet deal.
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