The King of Steakburger's Shaky Quarter

J.A. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are a few ways a restaurant chain can increase revenue: they can open new restaurants, increase traffic, and increase prices for menu items. In short, earnings will grow if they can manage expenses and increase margins.  Biglari Holdings (NYSE: BH) failed to do all of these last quarter, and with a minimal revenue increase earnings per share fell.

Steak ‘n Shake/Western Sizzlin's (restaurant operations only) revenue grew 1.3% in Q1 2013. Same store sales were 1.3% on traffic increases at 1.6%, while prices decreased 0.3%.  That compares to traffic increases of 5.7% in Q1 2012 and same store sales of 5.5%.The comps and traffic have been in decline for several quarters, suggesting  consumers are finding the Steak 'n Shake concept less interesting than some of the competition who continue to turn in better traffic numbers and same stores sales. Chipotle, Panera Bread Company and Buffalo Wild Wings continue to turn in better traffic numbers and same stores sales with higher revenue growth then Biglari’s restaurants.

Chipotle (NYSE: CMG) has managed impressive same store sales and traffic growth over the past two years:

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While comps slowed in the past quarter, it has numbers that Biglari should be shooting for. Chipotle also manages to increase its store base without cannibalizing its existing stores, and that has allowed revenue growth of over 20% for nearly three years. These are all lessons Biglari needs to take to heart. Without increased same stores sales, better margins, and store growth, revenue will be stalled and earnings per share will be disappointing.

Initially, Biglari had an impressive track record of increasing margins, same store sales, and traffic. That road to growth has become less effective as the Steak 'n Shake wreck was fixed and innovation beyond cost cutting and promotional programs 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.

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Total restaurant revenue growth in Q1 was 1.3% and franchise revenue increased 15%, but with franchise revenue at only 1.5% of combined revenue this isn’t enough to provide noticeable growth. Operating income declined 41% and adjusted EPS was down 30.5%. Biglari was unable to decrease expenses and improve restaurant/franchise margins this quarter, and combined operating income came in at negative numbers due to a 50% decline in operating margins.

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Fortunately for Biglari Holdings they were paid a dividend from Biglari’s arch rival Cracker Barrel (NASDAQ: CBRL) accounting for around 50% of Q1 earnings per share.  Biglari's Q1 2013 EPS was $3.42 and decreased from $6.60 in Q1 2012. In Q1 2012 there was a realized gain on investments and adjusting for the gain on sale, and EPS was $4.92. 

Cracker Barrel's revenue increased 4.8% in the first quarter ending Nov. 2, 2012. CBRL same store sales increased by 3.3% -- 2.5% due to menu price increases/mix and  0.8% from higher traffic.

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Cracker Barrel has not only outperformed Steak ‘n Shake, but they are also returning cash to shareholders and increased the dividend by 50% year-over-year to $0.50 in Q1. 

If we remove the dividend paid by Cracker Barrelyin Q1 2013, EPS would have been $1.51 and that approximates what the restaurant segment of Biglari is earning. It's ironic that Cracker Barrel is contributing so much to Biglari's bottom line. Sardar Biglari himself has spent almost two years condemning management and their approach to running restaurants and claiming he would be a better manager.  Although not brilliant at running restaurants, Biglari is an adequate stock picker under the right conditions. His activism may have both convinced the market that Cracker Barrel was undervalued and spurred Cracker Barrel management to return some cash to shareholders through dividends. When he attacks the management of a company, it often creates changes that cause the share price to increase. Several of his targets were acquired at premiums by third parties -- part luck and perhaps part design.

The yield on his rather large investment (4.74 million shares) is only 3%. He might do better if he was managing his own restaurants more dynamically. Unrealized gains on the Cracker barrel 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. If he is not going to be a great restaurateur then he better become a great money manager.

As 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. That's what I call a sweet deal.


LeKitKat has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Cracker Barrel Old Country Store. The Motley Fool owns shares of Chipotle Mexican Grill. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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