PETITION

Back in July 2018 in “Casual Dining Continues to = a Hot Mess,” we noted that certain lenders were agitating to engage Steak N’ Shake in restructuring discussions, which is owned by Biglari Holdings ($BH). At the time, the casual dining chain (i) had somewhere between 580 and 616 locations, (ii) was pivoting towards franchisee-owned stores rather than company-owned stores (even though, at the time, the overwhelming majority were company-owned), and (iii) had $183.1mm outstanding on a $220mm term loan due 3/21 that had dipped into the mid-80s, dangerously close to stressed levels. Significantly, the term loan is NOT guaranteed by Biglari Holdings. A big cause for concern? The company also had consecutive years of declining same store sales. We wrote:

In a February shareholder letter, Biglari Holdings Chairman Sardar Biglari channeled his inner-Adam Neumann (of WeWork), stating:
We do not just sell burgers and shakes; we also sell an experience.
And if by “experience” he means getting shot, being on the receiving end of an armed robbery or getting beat up by an employee…well, sure, points for originality?
Given all of the above and the perfect storm that has clouded the casual dining space (i.e., too many restaurants, the rise of food delivery and meal kit services, the popularity of prepared foods at grocers), lender activity at this early stage seems prudent.

(Shaking heads).

Biglari reported Q1 earnings on May 3, 2019, and revenues for “restaurant operations” were down by over $20mm. Why? Good question. Allow us to show you:

That is some serious hemorrhaging. Same-store sales were down 7.9% with a 7.7% decrease in customer traffic. On the costs side, higher wages and benefits led to costs increasing as a percentage of sales by 3.6%.

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And, now a quick break for PETITION’s Opportunity of the Week:

Source: “Nation’s Restaurant News”

Wow. That’s almost too good to refuse! As noted above, a key component of Sardar Biglari’s turnaround plan for Steak ‘N Shake is the conversion of company-owned restaurants to franchises. Because, like, there’s nothing like offloading exposure and suckering some poor saps into a franchisee arrangement to stabilize revenues and lessen exposure. 🖕🖕

And, yet, interestingly, franchise royalties and fees were also down. That conversion plan, therefore, must not be going so well — even with the company having 12 more franchisee-owned locations as of March 31, 2019 than it did on March 31, 2018. For what it’s worth, the company also has 48 fewer company-operated stores (44 of which are in limbo, “temporarily closed until such time that a franchise partner is identified.”). Given the deterioration of the Steak ‘N Shake enterprise, those locations may be closed for a long time.

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Occasionally I'm asked about Biglari Holdings $BH. I wouldn't touch it with a 10-foot pole because of governance. From looking years ago, I thought I could not hold a lower opinion of Sardar Biglari. Well, apparently it's even *worse* than I remember... https://t.co/uXO9gI4dP5
— Askeladden Capital (@AskeladdenTX) May 3, 2019

We don’t typically lend much credence to SeekingAlpha content but when someone entitles a post, “The Fyre Festival of Capitalism” — a clear riff on the “Woodstock of Capitalism” moniker conferred upon Warren Buffett’s Berkshire Hathaway annual meeting — we have to take a gander. AND. BOY. WAS IT WORTH IT. The piece is a summary of the Biglari Holdings investor meeting that recently took place.

Some choice bits describing “perhaps, the worst corporate governance in America”:

One shareholder asked if Steak n Shake would introduce “vegan hamburgers.” Another questioner asked for applause for the company’s management, a request which was greeted with awkward silence. One shareholder was displaying a copy of John Carreyrou’s Theranos book “Bad Blood” and was asking if people thought Biglari Holdings’ board was like Theranos’ board and if Sardar Biglari was like Elizabeth Holmes (and another shareholder then referenced this in a question).
My perception of Sardar Biglari’s attitude towards Biglari Holdings shareholders reminded me of John Updike’s great line about Ted Williams refusing to respond with a hat-tip to the pleading ovation of Red Sox fans after Williams’ home run in the last at-bat of his career: “Gods don’t answer letters.” This meeting made this point crystal clear: Sardar does not answer to shareholders, nor does he work for them. You [shareholder] want me [Sardar] to buy stock back to close what you perceive as a price-value gap, too bad, I’m not going to do it. If you are upset because the share price went down 58% last year and then the board increased my compensation, sell your shares in the company. If you have any questions about me [Sardar] earning something like $80 million over the previous few years while the market cap of the company is like $250 million, or the employment of Sardar’s family members for “consulting services”, or the company’s Netjets membership, or the opening of Biglari Café so Sardar can spend time in the Port of Saint-Tropez, or anything else for that matter – then sell your shares. If you wonder if he should be spending more time on Steak n Shake after a year in which it lost 7% of its customer-traffic and a three-year period in which it lost 12% of its business – and you have some doubt that his plan to install new milkshake machines (yes this is his turnaround plan) will succeed in stopping the bleeding – then you just don’t believe in his vision and you should sell your shares. If you bought your shares seven years ago and have a significantly negative return on them and suggest to Sardar that it would be great to get a positive return on them at some point, then you just don’t share the same time horizon as Sardar. If you wonder why he calls Biglari Holdings an acquirer but they have only ever done a couple of tiny deals and haven’t made an acquisition of any size in over five years, then you just don’t understand his “program of conglomeration.”

While there is no mention of this in the company’s SEC filings, the second prong to Mr. Biglari’s turnaround strategy for SNS is…wait for it…new milkshake equipment!! That’s right. New milkshake equipment. And it will onlycost $40mm to implement (or $100k per store). Super compelling! Sign us up for one of those available franchises stat!!

So after losing over 7% of their customers last year, 13% of its customers since 2015, and over three straight years of negative customer-traffic and same-store-sales numbers during which time Steak n Shake went from profitable to unprofitable, what is Sardar’s plan to turn around Steak n Shake? What he said at the meeting is that he has a plan to turnaround Steak n Shake and one of the main elements of it is fixing the milkshake making process – so they are creating a new milkshake making process. This is not a joke, this is what his plan is. They are also trying to make homemade ice cream at Steak n Shakes. They think this and other similar improvements is the crux of the turnaround plan (along with the franchise partner plan).

It gets better:

One shareholder commented on how last year, his turnaround plan to fix Steak n Shake was thicker cheese and better bacon – but then they lost 7% of their customers in that year. And the year before his turnaround plan was a new menu launch, but that seemed to accelerate the customer-traffic and same-store-sales losses, or at least did not halt them. Why was this year’s turnaround plan – new milkshake processes and homemade ice cream – going to work when the last few did not?

Spoiler alert: it won’t.

But…maybe cut some cherries?

Sardar Biglari at one point said that Steak n Shake spends $1 million per year on cherries for milkshakes and that he would love to get rid of that $1 million. Three different shareholders pointed out, in conversations, how ridiculous that sentiment is. Decrying having to spend $1 million for cherries on milkshakes while spending $8.4 million on administrative expenses to manage the Lion Fund, spending lavishly on hiring his brother and father at Steak n Shake consultants, maintaining an office in Monaco, the company’s opening of Biglari Café on the Port of Saint-Tropez and the Netjets memberships that the company apparently pays for – anyway, given all of that, shareholders were pointing out that maybe there is a better way to save $1 million rather than eliminating cherries from Steak n Shake’s milkshakes.