Wednesday, November 12, 2008

Slaughtering Sacred Cows and Grinding Them Into Steakburgers

After getting back from the Investor's Day held by Steak n' Shake on Tuesday; I have had a few nights to sleep on the developments, curb my enthusiasm, and use the entire balance of the $15 gift card that was handed out to all of the attendees (my dividend for the year!). The bottom line is that I fundamentally don't understand Mr. Market's estimation of worth for the company- it is a valuation where the underlying assumption must be that this company, which was started in middle the Great Depression (which currently, has next to no debt on the books) can not weather this credit storm; has underlying real estate that must be worthless; and new management is inept... I don't buy in to that.

Management's Presentation: A power point presentation illustrated just how the company was going about turning itself around. With a new board member (Bill Regan), and former executives from Krystal, Burger King, Wendy's, and Friendly's coming on board, my confidence in the company is only bolstered. It seems evident that fixing operational and customer satisfaction problems are being/have been addressed. It was noted that 80% of all customer complaints come from the bottom 25% of stores... To fix this, a culture of accountability is being created, with promotions and pay raises based on performance, mystery shoppers, and management being visible on the floor of every unit. The company is also recruiting outstanding employees from other companies to not only higher level positions, but also in the individual stores.

Customer Satisfaction: To improve customer satisfaction and excite people about the brand (while minimizing cap-ex), the company is having Musak installed in all locations (an idea that came from the franchisees) and painting many of the store's white walls red-which really make the restaurants look more welcoming and less dirty (see picture on the left). New commercials will be rolled out that feature actual customers-departing form the smart mouthed employees featured by the recently dropped advertising agency, DJs will be endorsing the company on their radio shows, and merchandising is quite likely to occur-in the vein of TGIFriday's! In store promotions will involve "super fans", Steak n' Shake kids toys, and the upcoming 75th anniversary of the company. Also, there are 4 meals that are 4 dollars (See the first picture)-the first part of streamlining the menu to the company's core products.

Cost Cutting: Of all the questions posed, there was one about cost cutting which helped Biglari extrapolate on just how much the company is refocusing it's bearings towards cost cutting. Numerous suggestions have come from suppliers, who apparently were happy to share their knowledge. This was despite that they "had never been asked on how to cut expenditures". The company will be using thinner mailing promotional papers, non-branded ketchup, and my personal favorite-taking the red ink off of Styrofoam cups... Apparently, the red boxes on the cup pictured to the right, that take up under 1 square inch of space, will save a "ton of money" since the company will no longer have to pay for 2 screens of color in printing. While these cost saving measures may seem minuscule, if the company can save a meager $1,000 a month in every store-that would be equate to well over $5 million in cold hard cash per year. The company will also focus on not forcing customers to wait for coupons before they come in to the store. Reducing coupon mailings, improving the experience in the store (thus, increasing perceived value), and cutting costs to help reduce prices should work wonders-kind of like at Chipotle.

Future Growth: The company foresees itself growing to as many as 2,000 units, or roughly 4 times it's current size. This will largely be achieved through being in the real estate business (with the depreciation that comes along with it), and franchising like crazy. It was estimated that EBIDTA margins on franchisees could be as hearty as 50%.

Stock Buybacks: Once the company has enough cash on hand to run the business in ANY kind of economic environment, there will be either a buy back of shares or investment in some other restaurant company, depending on what security is cheaper at the time. This was the one item of the day that bothered me, mainly due to taxation issues concerning buying another company's common stock... Though, I have an immense amount of confidence in the capital allocation abilities of Sardar Biglari, and since the company is making all efforts to maximize intrinsic value on a per share basis, I am quite hopeful that these issues will be taken into consideration.

Debt: The companies credit lines will be left open-as is indicated in the most recent 8K, debt will be paid down by at least $10 million, and neither of the credit lines will have to be collateralize with real estate. Also, there was a great question asked about long term debt on the balance sheet, where it was discussed that the long term debt is related to lease obligations, not debt owed against the company's real estate. Biglari explained the accounting checklist that was gone through to determine how the obligations are carried on the books. In light of this, it really makes one wonder about the collateralized debt loads that are carried by not only Ruby Tuesday, but also Jack in the Box (which Western Sizzlin' is in the process of making a tender offer for some shares of) and O'Charlies.

Website: The company is currently working on updating and improving the website to make it into more of "an online community for fans".

Gift Cards: On a closing note, the company is now offering a $5 dollar off reward coupon when you buy a $20 dollar gift card before Christmas. I will be getting them for my friends and family; after all, it would be stupid not too! You may have to go to the store for this, as the company has yet to update their website with the offer.

Overall, I am quite happy with the progress that seems to have been made (as has also been highlighted in my previous writing on the Letter to Shareholders). From now on, the annual shareholder's meeting will take on an open tone, as this meeting had. While I hope that the stock price exceeds my estimates of intrinsic value before I get the chance to attend to many, I would certainly not mind being an owner in such a great company with such talented management for years/decades to come. While this writing did not contain many hard numbers that help with your calculation of intrinsic value, I am trying to shed light on the fact that Biglari and Company are delivering on the promises that they have made-which is what makes the company intrinsically worth so much more than before.

Disclosure: Long on SNS...

5 comments:

linkmont said...

thnx for sharing! yours is the 3rd summary i've read of the meeting. while brief, you managed to touch on a couple of points i havent seen in the others, like this little gem:

"...This will largely be achieved through being in the real estate business (with the depreciation that comes along with it), and franchising like crazy. It was estimated that EBIDTA margins on franchisees could be as hearty as 50%."

i was wondering why sardar had said he wants to be in both the real estate biz & franchising.

Abby said...

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softwareNerd said...

Thanks for the meeting notes. Much appreciated.

Long: WEST

Mark Perkins said...

nice. keep up the good work

STOCKMANMARC said...

Good read!

Some of the stores I've ventured into our using plastic cups instead of the glass, talking with the workers, they say this should save money because their always breaking them. Don't know if this is a strategy that their using in all stores, but it should be.