INDIANAPOLIS, Oct. 22 /PRNewswire/ -- The Steak n Shake Company (NYSE:
SNS) today issued a letter from Sardar Biglari, the Chairman of the Board
of the Company:
(Logo: http://www.newscom.com/cgi-bin/prnh/20000606/STEAKLOGO )
Dear Steak n Shake Shareholders:
Since I became Chairman and CEO of The Steak n Shake Company, we have
conducted a comprehensive review of the business, evaluated management and
associates, and mobilized a revitalization plan - all with a sense of
urgency. In this letter, I will explain our business principles and
objectives while sharing details of our rejuvenation.
The sine qua non in carrying out a successful program, in our view, is
to set the following goals: to form a strong management team, achieve a low
cost structure, maintain a sound balance sheet, establish a focused
strategy, and ultimately execute the plan decisively. Currently, we are
shifting resources and changing processes to implement our plan. This
letter will be a springboard to Investor Day on November 11, 2008 when we
will elaborate further on the items discussed herein.
Maximizing Intrinsic Value Per Share
The nucleus of our long-term objective is to maximize intrinsic
business value per share of the company, because doing so will optimize
shareholder value. (Intrinsic value is computed by taking all future cash
flows into and out of the business and then discounting the resultant
number at an appropriate interest rate.) Our present shift in objective is
significant, even mandatory, because prior management instilled throughout
the organization the concept that it was necessary to escalate earnings per
share (EPS) even at the expense of lessening cash flows. Needless to say,
our financial mantra is to maximize free cash flow and return on invested
capital.
As a corollary, capital allocation is immensely important. Because of
past results and current performance, we have put a moratorium on new store
openings. Still, our capital must be invested in a manner that achieves the
highest risk-adjusted returns. We believe we will attain the highest
return, relative to other opportunities, by improving present
restaurant-level operations. By forgoing new openings, we can now dedicate
our resources to remedying the stores in operation.
Expense Discipline
One of our critical changes involves slashing uncompetitive levels of
expenses. Manifestly, spending must be limited to appropriate levels. Our
cost structure has been a significant competitive disadvantage, but we have
been working to turn it into an advantage. We have extensively analyzed the
company's operations from the bottom up and have in the process
investigated every outlay. For fiscal 2009, we anticipate G&A to be
approximately $20 million lower than it was in fiscal 2007 or an
approximate total expenditure of $37 million. That figure is simply an
estimate because we will not identify a specific number and then manage
around. We may increase what may be deemed an expense, but, if so, we will
look at it as an investment. Conversely, we have a number of projects under
way to ascertain means to prune G&A further. In short, I am following John
Maynard Keynes' advice, "I'd rather be vaguely right than precisely wrong."
In addition, we are reducing restaurant operating costs. Poor cost
arrangements on outside services along with outmoded insurance programs
have burdened the stores with noncompetitive overhead. We have thus far
estimated an annualized reduction of around $8 million.
Historically, the company has attempted to pass on these elevated costs
to customers, who rejected higher prices, as evidenced by our declining
guest count. Our employees and shareholders have endured the pain from this
ill- considered folly. We are doing all we can to reduce superfluous G&A
and other spending so we can distribute most of the savings to the customer
through better product quality and pricing strategy. Steak n Shake was
started in 1934 on the premise that it must provide exceptional value to
its customers, a policy that in turn creates exceptional results for its
shareholders. We are retracing our auspicious beginnings so we can serve
high quality products at competitive prices. As an organization, we will
continue to treat every expense as a variable one to ensure that we are
properly managing our business.
These savings are being countered by rising commodity costs. In many of
our major spends, such as beef, prices have risen dramatically over the
prior year. Because of our declining sales, we are working assiduously to
reduce our costs with our eye on free cash flow. In our attempt to protect
free cash flow, we are undertaking massive projects to shrink the inflation
plaguing us. Through better sourcing, distribution, and controls, we expect
to offset many inflationary pressures. We are meeting with our suppliers to
ensure that we uncover ways to cut costs and improve customer experience.
Many vendors will collaborate with us to lower costs because they plan to
be with us for the long term. Of course, some turnover is inevitable, for a
few vendors will depend on their ongoing relationship with us and will
overlook their performance/price.
While expense reduction provides some relief, ultimately we must
increase sales and profit to create a vibrant enterprise. However, without
expense curtailment and a reevaluation of how resources are allocated, a
turnaround, in my view, will not turn. Our fundamental idea is to become
the most efficient restaurant company in the industry. Therefore, we must
first cut the knowable, the costs, and then invest to increase the
unknowable, the sales.
Strategic and Operational Initiatives
Steak n Shake is a classic American brand, and we intend to lead and
dominate the premium burger and milkshake segment of the restaurant
industry. The philosopher Isaiah Berlin cited a parable about a fox and a
hedgehog with the latter defeating the fox because it knew one thing very
well, whereas the fox knew many things very shallowly. We have chosen a
hedgehog strategy, namely, emphasizing our core - burgers, fries,
milkshakes, and chili - which make up almost 80% of our sales. We will be
creative and innovative around our core products. To win out, we must
aspire to best-in-class in cleanliness, product, service, value, promotion,
and menu. We now constantly gauge ourselves against the very best so we can
improve dramatically, ultimately take the lead, and be in a class unto
ourselves. It is critical that our food to be distinctive, savory, and
priced to attract higher frequency of return. For our guests we seek the
benefits of an experience in coolness and coziness that is unmatched in the
industry; passionate, hard working employees fanatical about hospitality;
brightened product and value; and as a lagniappe a wait service eager to
attend to customers' needs.
We want to excite our present diners so they will visit our stores more
often, and we want to attract new patrons. To capture a larger clientele,
we will work vigorously with a relentless and tireless eye on the
customers' preferences. Every decision we make is customer-centric in order
to build an ardent following for generations to come.
With our renewed verve, we are working on a new menu - to reduce it to
clear and appealing choices and thus simplify. Too much complexity has
sapped efficiency from our operations. We currently are working through
several test markets to determine the most appetizing menu selections by
simultaneously improving variety while discarding slow-moving items. To
increase guest count profitably, we will add items to span the prices in
the menu; a three-tiered pricing strategy bridging low, medium, and higher
priced items is intended to boost customer traffic and profit.
Steak n Shake will celebrate its 75th anniversary in 2009, an ideal
opportunity to capitalize on the heritage of the brand and reconnect with
our fans. Our marketing plan for calendar 2009 will stress our celebration
of this memorable occasion. As we reconnect generations of customers to our
brand, we aspire for our restaurant décor to be clean, up-to-date, casual,
and exciting, suitable for everyday enjoyment. To continue our theme, we
will incorporate music into the stores, change color schemes, improve
lighting, and stylize uniforms - all to spur excitement in our associates
and customers.
These changes do not entail major capital outlays. For instance, a new
coat of paint is not expensive. We are limiting our expenditures because we
do not believe that major remodeling will achieve an appropriate return. We
are only making an expenditure on what the core customer, the superfan if
you will, truly values and will reward. We have a good concept, and thus
the plan is to fix the fixable and make improvements visible to the
customer on the inside and the outside of the building.
To carry out our initiatives, we need better training programs and a
staff that relentlessly focuses on operational excellence. To attain the
level of hospitality that we envision, we recently appointed to the
management team Dennis Roberts, formerly chief operations officer of
Friendly Ice Cream, as Steak n Shake's Vice President of Operations
Excellence. He is now overseeing a group that will audit the stores as well
as heighten operational execution. He will work collaboratively with Omar
Janjua, Vice President of Operations, and his team to accomplish our
objective, operational excellence in hospitality, a prerequisite for
financial excellence.
To accelerate our initiatives, we have engaged a number of people from
outside Steak n Shake to supplement our personnel. Through testing and
experimentation we will continuously strive for faster decision-making and
a systemwide scramble for winning concepts. All these ideas are, of course,
geared to take an iconic brand and translate it into a great company, which
by definition must remain great for a long time, and as a byproduct to
deliver an upsurge of shareholder value.
Hours of Operation and Closures
In all, we have reduced our hours of operation in 125 stores. Because
of the recent reduction of hours in 75 stores, we expect annually to save
around $1 million in the affected restaurants, not including the other
benefits from closure - e.g., sales transfer, less strain on management,
time for thorough cleaning, and less food waste.
To date, we have closed 14 restaurants. We are monitoring the cash
flows of underperforming stores, and we will contemplate all our options,
including lease terminations.
Franchising
We believe the future growth of Steak n Shake lies in franchising.
Growth through franchising yields numerous benefits: It allows management
to allot more resources to the development of better products and marketing
practices as well as improved quality control - emerging into more
productivity and wiser resource allocation. Franchising is a strategy of
expanding the brand in a disciplined manner to generate higher returns on
capital in a lower-risk manner. It is our long-range plan to be in the
franchising and real estate businesses in order to realize high returns on
capital while minimizing cost of capital.
We are also open to refranchising stores under the right conditions,
and we will move forward on an opportunistic basis to do so, namely in
tertiary markets. Because of the restaurants' deteriorating performance and
depressed valuations, the soundest maneuver to maximize the value of the
company is to improve company-operated stores.
To grow through franchising, we are working to improve the current unit
economics. We have a deep heritage and a strong brand affinity that coupled
with the right operator and location will be highly attractive for a
franchisee. We have credibility with generations of customers because we
are the pioneer in the premium burger and milkshake segment of the
restaurant industry. We plan to nurture the brand sensibly and use it to
defend and construct a great company.
Capital Structure
At the end of the third quarter total debt under our credit facilities
was $27 million. Our initial plan is to reduce this debt by paying off the
outstanding balance of around $17 million with Prudential. We own the land
and buildings of 150 properties. We also have for sale 14 improved
properties and 20 parcels, which we had previously purchased for
development.
Tax refunds. We have approximately $16 million in taxes paid in fiscal
2006 that should be recovered in the coming months. Kevin Kovacs, our
Director of Tax and Treasury, is credited with leading the initiative that
will result in our recovering taxes from two years ago. We commissioned a
tax fixed asset study which cost us approximately $400 thousand. In spite
of the expense, we should recover approximately $6 million, which included
a cost segregation study on our restaurants to pinpoint charges that
qualify for accelerated depreciation as well as identified fixed assets
that were not being depreciated through using the optimal tax recovery
periods.
Our plan is to engender extreme financial flexibility through
strengthening our balance sheet. We have several choices available to
reduce debt and to fund operations, some we have already undertaken - e.g.,
disposition of unimproved properties and unproductive assets, along with
tax recoveries. Furthermore, we constantly weigh these options against
other alternatives.
Culture of Ownership and Accountability
The culture of Steak n Shake is changing to one that is performance-
oriented. This transition, of course, requires an evolution in behavior.
Although switching behavior invites unease and criticism it is mandatory
for our survival because perpetuating the obsolete is worse. As Charles
Darwin said, "It is not the strongest of the species that survives, not the
most intelligent, but the one most responsive to change." Even though we
are slaying sacred cows, in the process we are becoming more efficient. The
positive upshot is we are developing flexibility and quick adaptability.
While we have made significant alterations to the management team, we
will continue to replace talent throughout the organization so that only
those performing at a very high level will remain. This business, like
others, is about execution. We simply must execute at a pace that is faster
and more productive than that of any of our competitors.
I have long been convinced, and have expressed my conviction very
strongly based on empirical evidence, that stock ownership aligns interests
properly between management and shareholders. I represent a group owning
more stock in The Steak n Shake Company than any other shareholder. My
personal interests are aligned with yours, the shareholders'. This
philosophy must pervade our business from the board level to the store
level.
Consequently, the board recently agreed to take its annual retainer
fees in stock instead of cash. Here, we are paralleling the boards' and our
shareholders' interests. At the store level, we are working on a program to
engage general managers who will become the most valuable leaders at Steak
n Shake. As of now, we are reviewing incentive programs, job
responsibilities, and expectations. That is, we expect our managers to be
committed financially and emotionally. Our arrangement will be to pay for
performance so our managers can earn more money; then we can attract the
very best people to Steak n Shake. We are seeking to assemble a team that
is committed to and passionate about winning.
The ownership culture involves you, our shareholders, because you own
our assets. Accordingly, we view you as a part owner of the business and
thus of every store. We are seeking long-term shareowners, for we plan to
manage the company on the same time frame. Everyone connected with Steak n
Shake should be proud of our people, product, and place. As a result, I
request that when you frequent a restaurant, of which you own a part,
notice whether the cleanliness, service, speed, or any other aspect is or
is not up to your standards; if it fails to meet or even exceeds your
expectations, please e- mail owner@steaknshake.com. While it is not
feasible for me to communicate through this medium, I can assure you that I
will read every comment regarding your experience. I would expect no less
if the two of us owned a single unit and you were the "capital" partner
whereas I were the managing one. This ideal exemplifies Steak n Shake's new
culture of ownership and accountability.
My excitement over our brand and our ability to reignite it should not
be taken with unrestrained revelry. Turning around the business will take
some time, and our current trend is not one to be envied. We will never
excuse our results based on the economy, weather, or such factors.
(Otherwise, with good results we should also give external factors the
credit!) After all, we are in the restaurant business, not the excuse
business. We must do well over time, and it is incumbent upon us to execute
and beat the competition under any condition. Naturally, we feel optimistic
about the prospects of successfully turning around the business.
Shareholder Communication
In lieu of conference calls, we will connect with shareholders through
the upcoming Investor Day on November 11, 2008. We look forward to sharing
with you recent developments that we are currently testing. To be fair to
all shareholders as well as to be prudent with our time, Investor Day is a
stand- in for one-on-one communication. We will hold this informative
meeting so shareholders can confer with management and spend as much time
as needed to address questions. Our goal is to manage the business based on
the long-term, and we will communicate in a manner consonant with
attracting shareholders with a similar time horizon. Later, we plan to
answer shareholder questions at the annual meeting. Our approach may be
unconventional, but we find it to be more productive and more sensible than
some more orthodox methods.
We are starting to do business in a manner that makes us nearly unique
in the industry because we want to achieve uniquely good results.
Naturally, we have a fairly lengthy journey before reaching our goals. We
will do what it takes to prevail.
While the past focused on building traffic through new store openings,
same store sales, quarterly results, and EPS, the future focuses on growing
traffic through existing stores, store profit, long-term value, and free
cash flow. We believe the new plan is the way we will advance shareholder
value.
To better burgers,
Sardar Biglari
About Steak n Shake
Steak n Shake is a classic American brand serving premium burgers and
milkshakes through its chain of 490 restaurants.
Risks Associated with Forward-Looking Statements
Certain statements contained in this press release represent forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. In general, forward-looking statements include
estimates of future revenues, cash flows, capital expenditures or other
financial items, as well as assumptions underlying any of the foregoing.
Forward-looking statements reflect management's current expectations
regarding future events and use words such as "anticipate," "believe,"
"expect," "may" and other similar terminology. A forward-looking statement
is neither a prediction nor a guarantee of future events or circumstances,
and those future events or circumstances may not occur. Investors should
not place undue reliance on the forward-looking statements, which speak
only as of the date of this report. These forward-looking statements are
based on currently available operating, financial and competitive
information and are subject to various risks and uncertainties. Our actual
future results and trends may differ materially depending on a variety of
factors, many beyond our control, including, but not limited to :the poor
performance or closing of even a small number of restaurants; our ability
to attract and retain guests; he ability of our franchisees to operate
profitable restaurants; changes in guest preferences, tastes and dietary
habits; minimum wage rates; the availability and cost of qualified
personnel; fluctuations in food commodity prices and the availability of
food commodities; harsh weather conditions; unfavorable publicity relating
to food safety or food borne illness; our ability to comply with the
restrictions and covenants to our debt agreements; our ability to
renegotiate our debt agreements and refinance our current debt at similar
rates; our ability to comply with existing and future governmental
regulations; our ability to adequately protect our trademarks, service
marks and other components of our brand; and other risks identified in the
periodic reports we file with the Securities and Exchange Commission.
Additional risks and uncertainties not currently known to us or that are
currently deemed immaterial may also become important factors that may harm
our business, financial condition, results of operations or cash flows. We
assume no obligation to update forward-looking statements except as
required in our periodic reports.
SOURCE The Steak n Shake Company
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Related links:
http://www.steaknshake.com
Photo Notes:
NewsCom: http://www.newscom.com/cgi-bin/prnh/20000606/STEAKLOGO
AP Archive: http://photoarchive.ap.org PRN Photo Desk
photodesk@prnewswire.com
CONTACT:
David C. Milne, Vice President, General
Counsel, Corporate Secretary of The Steak n Shake Company,
Dave.milne@steaknshake.com
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