Steak n Shake Earnings Call Notes

Last night I listened to Steak n Shake’s first quarter 2008 earnings conference call. You might be wondering why I was interested in this conference call. The reason I made time to listen to this call was because of a recent letter Sandar Biglari of Western Sizzlin (WSZL) sent to Steak n Shake (SNS) shareholders. Since I hold Western Sizzlin in both the Fat Pitch Financials Portfolio and the Special Situations Real Money Portfolio, I have been closely following the activities of this unique little company. It current target is Steak n Shake, so I’ve also been following the news regarding Steak n Shake. Here’s what I heard on yesterday’s call: 

The first speaker to be introduced was Alan Gilman, Chairman, interim President, and CEO of Steak n Shake. He started by discussing the press release issued on the first quarter results for Steak n Shake.  Gilman began by admitting, “Our fiscal 2008 first quarter was a very challenging period for the Steak n Shake company.” How challenging was it? The company saw a 9.5% decline in same store sales in the first quarter versus a year ago sales! Here are the reasons excuses provide for this terrible performance:

• Guest traffic impact by deterioration in consumer economic environment
• Aggressive promotion by other restaurants in the sector
• Prior year coupon not repeated
• Weather in December
• Ongoing challenges with store level execution

It seems to me the most likely reason for the decline was last reason provided, poor execution. I know it is painful to provide disappointing news, but could this CEO’s voice be any less enthusiastic or energetic? I heard no enthusiasm in his tone even when he discussed future initiatives. I guess this is why the company is looking for a new CEO. Might also be time for them to consider shopping for a new Chairman.

Jeff Blade, the CFO, was the next to speak. In contrast to Gilman, Blade seemed energetic and had a good command at what was happening at the company.  He addressed how they planned to address Steak n Shakes problems:

He discussed several near-term initiatives that included the following: 

• Price promotion on core menu double steak burgers
• Coupons
• Media spending
• Breakfast program
• Several other operational initiatives

It appears the main initiate is to reduce the price of their $5.35 double steak sandwiches to $2.99 and promote that deal with television advertising. They are also rolling out a new breakfast menu in March featuring more hand held sandwiches and Seattle’s Best Coffee.

Jeff also seemed excited by an improved milkshake production design and a few other operational initiatives. You would think that a restaurant featuring shakes in the name with already have perfected their shake production. The change is expected to improve consistency and speed of shakes, but at a cost of $7500 per restaurant. Interestingly, 50% of guests to their restaurants get milk shakes, so I guess the shakes must already be pretty good. They better hope their new more efficient process doesn’t end up turning off their loyal customers if the shakes come out different using the new machine. Other operational initiatives included, removing items from menu with low sales or unique ingredient requirements, implementing success routines (sounds like business school blather to me) and improved cleanliness. How dirty are the restaurants now? A need to improve the cleanliness has to make you wonder.

Jeff went on to discuss the “success routines” and personalized service processes. My eyes glazed over and all I heard in my head was blah blah blah… It sounded like Jeff was a little too into business school case study type analysis and less into just getting things done. He also discussed how the company expected to reduced 8.1 million in general and administrative costs this year. At least that is a move in the right direction.

The next topic of discussion was new store openings. They have already completed 6 of 9 new store openings for this year. Now they can lose money even faster. Apparently, they are also developing a new store prototype to reduce cost of new stores by about $200k. However, it will cost $250-300k to remodel older restaurants to this new design. For 2009, they don’t plan on opening any new units until this prototype developed.

Finally, Jeff ran down some of the ugly numbers. These included:

• 7.4% revenue decrease in first quarter from prior year
• 13.3% decrease in guest count

It appears a 3.7% price increase on menu helped offset the decrease in customers. I found it interesting that the expected decrease in general and administrative expenses is coming from less consultant costs, lower bonuses, and a few other things. I guess they haven’t had much results from the money they spent on consultants in the past.  There will be a shareholder meeting in early March, but I believe shareholders expected it to occur in February.  Maybe they hope they can finally find a permanent CEO to replace tired sounding Gilman by the time the shareholder meeting occurs. However, it might be hard for them to attract a new CEO with Biglari trying to take over the Board, since a new Board may not look kindly at a CEO selected by a previous regime.

At the end of the call, there was a question and answer session.  Here is what I heard:

Q: Is this more aggressive promotional strategy a near-term tactical move or long term change?

A: Just near term. We are not going to play in deep discounting. It’s just a response to the current marketplace.

Q: What is risk of damage to brand if you want to position yourself in a premium position or premium price?

A: We are only discounting a specific popular item. Coupons usually provide a 30% discount and this is more around a 40% discount.

Q: How we should see the return on capital on this?  What kind of traffic increase will you need for this?

A: We are not going to attempt to capture market share regardless of cost. We are optimistic to achieve break even.

Q: Sales first month of second quarter? 

A: Continued 9% decline give or take a few points. Primarily due to late on couponing in January.

Q: What is the rate in turnover in managers and staff?

A: Store manager turnover, 25-27 range (staying the same) and staff tracking in a 120-130 range. Field moral is very good still.

Q: How many coupons last year versus this year?

A: 5.5 million

Q: 24/7?

A: Looking at it and testing in 30 stores.

Q: Why can’t you do some of these initiatives?

A: We’ve been studying since August and working on it. Strategic alternatives review is underway.

Q: No change on capex guidance. EBITDA is falling with revenue and likely to go into a cash flow deficit. Would you need to draw on a credit facility? 

A: They do have one. $75 million left on it.

My notes got a bit sparse on the question and answer session, but as you can see there was no major turn-around plan revealed, and instead there are several potential margin eroding initiatives discussed. As one questioner observed, hasn’t there been enough studying since last year. The focus need to be on improving store profitability and cash flow generation. They should implement Biglari’s advice or hand over the reigns.

Disclosure: I have a long position on WSZL and no position on SNS.