Biglari's Third Quarter Not a Charm
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The business of operating the Steak ‘n Shake and Western Sizzlin’ restaurants has taken a back seat this quarter to Biglari’s Cracker Barrel (NASDAQ: CBRL) obsession. He is now in a proxy fight for two board seats for Phil Cooley and himself.
Biglari Holdings (NYSE: BH) according to the 13F has the following holdings:
Unrealized gains were $53 million, mostly on one security and that would be Cracker Barrel. BH has made about 25% on CBRL shares. Shares are at $62 -— most of the investments were high $40’s to mid-$50’s. While CBRL shares are up around 50% in the past 12 months, BH shareholders have not fared as well and BH is flat.
The problem lies with Biglari’s identity crisis and position somewhere between asset manager and restaurant turn-around whiz kid. His Steak ‘n Shake career started with an impressive string of quarters of higher traffic and same store sales growth pulling the company out of a negative comp death spiral.
Comparable comps have been harder to come by in the past few quarters and growth has slowed along with significant margin contraction in Q3. Q1 2010 was a high-water mark for comps and traffic.
Q3 2012 has some of the lowest comps seen since Biglari took over and the share price has dropped almost 12% since the first week of August. Investors seemingly are not impressed with the unrealized gains on CBRL stock and are looking at Q3 operating results for the restaurants that were some of the worst seen during the Biglari tenure.
Net income decreased 44% year over year largely due to higher restaurant operating costs. Workman’s compensation cases went against them, there were more employees to pay and unemployment taxes were higher. EPS were $3.63 compared to $6.49 in Q3 2011. Nine months EPS of $13.59 is still considerably less than the 2011 $17.79.
General and administrative costs increased 1.4% year-over-year as they made a push to franchise restaurants and increased executive compensation. The spending on franchise sales resulted in a net gain of 5 franchisees (164 to 169) in nine months. Franchise fees are now $2.5 million or 1.4% of restaurant revenue. When Biglari took over Steak ‘n Shake his goal was to make franchises a major contributor to restaurant revenue. So far that plan is moving slowly. Franchises are a good way for restaurants to capitalize on their brand and cost little in the way of expenses for the revenue they bring in. Steak ‘n Shake and Western Sizzlin’ have not been popular franchise concepts as evidenced by slow franchise growth over three years. The launch of Signature was an attempt to create a more desirable franchise product, but there is no comment on how many of the net 5 franchises were Signature brand. Mr. Biglari does not do conference calls and the information was not in the 10Q.
Restaurant revenue increased 3.1% to $172 million with same store sales at 2.9% and increased traffic of 2.2%. In Q3 2011, same store sales were 4.9% and traffic was 4.8%. Gross margins dropped to 23.8% on higher commodity costs. Western revenue dropped 2% and EBIT was down 18%. SNS revenue increased 2.9% and EBIT was down 11%.
On the non-restaurant side BH earned interest, dividend and other investment income of $1 million mostly through dividends from CBRL. It’s not completely clear how Biglari’s pursuit of CBRL has benefited his own shareholders yet. It may be when the gains are realized, BH shareholders will see some profits and the BH will resume its growth.
Interest expense tripled year-over-year to $1.8 million for the current quarter. The interest is paid on Steak ‘n Shake’s credit facility of $119 million (including revolver) presumably partially used to buy CBRL shares.
Biglari Holdings investment segment saw net realized investment gains of $227,000 from the sale of securities in Q3. For nine months those gains are $4.2 million.
The following table is Q3 margins and growth:
Cash flow from operations for 9 months was $34.7 million compared to $49.8 million in 2011. CAPEX spending was $6.8 million in 2012 and $10.5 million in 2011. Biglari continues to be a cheapskate when it comes to investing in his property. One company Steak ‘n Shake restaurant has been opened year to date -- the $6 million is largely maintenance CAPEX. Spread over 419 restaurants, that is about $14,000 per restaurant. Biglari has been in place for around three years and may need to start dedicating some CAPEX spending to remodels.
McDonald's (NYSE: MCD)spends $700,000 for a typical update and remodel; Wendy’s spends between $750,000 to $850,000. Denny’s finds it necessary to overhaul stores about every seven years. Restaurants get heavy use and become worn and outdated. At present Biglari is spending next to nothing per store and there are stores in his base that could use some work. Clean, new, fresh remodels increase business by 40% to 50% in McDonald’s experience. Part of the declining revenue and comps at SNS may be due to overdue restaurant overhauls.
Investments consumed $103 million compared to $127 million in 2011. Cash decreased from $98 million to $46 million with the investment spending.
Nine months margins and growth
It’s all about the restaurants
In the end it was not a great restaurant quarter or investment quarter either except for unrealized gains on CBRL. Since Q3 results the share price has been trending down. Investors want better results from the restaurant side. The investment side is not adding a lot to earnings this quarter -- the lion's share of Biglari’s earnings rely on running a successful restaurant business with the asset management/investment side not doing a lot to grow revenue and earnings in 2012. The Cracker Barrel investment is still a work in progress and may prove successful at some point. It is unclear what a Biglari takeover of the CBRL board and/or restaurant chain would accomplish. CBRL’s Q3 numbers were slightly better than BH results and the stock price has done much better.
Executive compensation had a negative impact on Q3 G&A expense. By Q4 that impact will be greater as Biglari is on track to collect his bonus for a 6% increase in book value. Last year he made $5 million total pay and it should be similar this year in spite of the flagging restaurant operations, contracting margins and flat share price.
Maybe it would be best for Biglari Holdings shareholders if Sardar would resist meddling in running Cracker Barrel and mind his own store.
LeKitKat has no positions in the stocks mentioned above. The Motley Fool owns shares of Biglari Holdings and McDonald's. Motley Fool newsletter services recommend Biglari Holdings and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
