Sardar Biglari’s Annual Letter to Steak ‘n Shake (SNS) Shareholders

Sardar Biglari is in the early stages of proving himself to be the next great capital allocator/businessman.


Highlights (Pulled directly from Annual Letter)

Generated approximately $30 MM Owner Earnings in FY 2009.

Q4 2009 Customer Traffic up 20% and Same-Store Sales up 10%. Traded average check for traffic.

Strategically, our intention is to maintain a very strong balance sheet since we find it to be a source of competitive advantage.

We started fiscal year 2009 with cash equivalents of $6.9 million and total debt under credit facilities of $30.7 million. We ended the year with a cash position of $51.4 million (plus $3 million in investments) and total debt under credit facilities of $18.6 million.

Cash returns are currently unremunerative. But they never burn a hole in our pockets.

Same-store sales do not constitute the main, exclusive, or most important metric to evaluate results. If the main objective of management is growth in same-store sales, then hovering over that idea looms the ominous issue that the resultant number could be manipulated, for example, by spending heavily on marketing without achieving an appropriate return on investment.

Disproved the outworn quotation, “You can’t cut your way to success.” This overused adage is hazardous to decision making acuity.

Achieving sustainable cost advantages is the cornerstone of our business model.

Strong value proposition resonated with consumers because they perceived and actually received far more in quality, taste, and service than the price they paid.

While the turnaround has achieved success, I subscribe to the logical thinking of IBM’s late Thomas Watson, Sr. In his words a business “is merely succeeding, going a little farther each year in its endeavor to succeed. Whenever an individual or a business decides that success has been attained, progress stops.” At Steak n Shake, we will never rest on our laurels.

We aim to grow long-term cash flows, not reported earnings

Growing through existing stores is obviously superior to opening new ones. Same-store sales could be kindled through increases in customer traffic, or increases in the average check, or both.

Steak n Shake’s future growth lies in franchising as they provide a non-volatile revenue stream along with high returns on capital.

The strength of the Steak n Shake brand has been substantiated by its successful start-up in the midst of the Great Depression and its successful turnaround in the midst of the Great Recession. We are a company that is sufficiently competent to perform in all economic seasons.

Simply because profits are generated in the restaurant business doesn’t mean the money must be reinvested there. The parent firm has been reorganized as a holding company and thus is now in the business of acquiring other businesses — with the objective of maximizing its intrinsic business value on a per share basis.

Steak n Shake is no longer a static business; we run all our businesses on a cash basis with the conscious decision to redeploy that cash in the greenest, most fruitful pastures. The reinvestment of cash flow will be indispensable to magnifying the growth rate of intrinsic value.

If we don’t know enough about a business, we don’t want someone to teach us on your tab.

Our capital allocation is a matter of discovering where we can generate the highest returns, adjusted for relevant risks. In sum, opportunity will shape our company.

Steak n Shake is in the process of purchasing Western Sizzlin Corp. for $23 million. This is a logical consolidation, which will expedite Steak n Shake’s morphing into a more diversified holding company.

Western now has 94 franchised locations, 5 company-owned, a joint venture, real estate property for development through Western Real Estate L.P., an approximate 9% ownership in publicly traded ITEX, and a 51% interest in Mustang Capital Advisors, an investment advisory company with around $45 million in assets under management.

To attract knowledgeable long-term owners, we will initiate a reverse stock split. A reverse stock split of 1-for-20, effective on December 18, 2009.

Because of my substantial financial interest in the company and my decision to use The Steak n Shake Company as a vehicle for creating value for all shareholders, I am personally committed to the company for the long haul.


*The author has a position in Steak 'n Shake (SNS). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.