Struggling restaurant chain Steak n Shake, the centerpiece of San Antonio-base Biglari Holdings Inc.’s collection of businesses, is in an “era of radical transformation,” according to its leader.
In a letter to Biglari Holdings shareholders released Saturday, Chairman and CEO Sardar Biglari said part of the shift underway at Steak n Shake has cost it about half its revenue.
Steak n Shake is forsaking costly table service for a self-order model where customers order their meal at a kiosk.
“By eliminating the unprofitable business our dining rooms generated, we effectively reduced revenue by one half,” Biglari said. “Yet Steak n Shake’s labor now runs at around 29% of net sales (down from 38.5 percent), albeit at a lower sales volume. The dining room with table service was undoubtedly a revenue center, but it was not a profit center.”
Steak n Shake reported $344.3 million in revenue last year, a nearly 55 percent drop from 2018 when it posted $760.5 million in revenue. It generated $595 million in revenue in 2019. The chain registered an operating loss of $4.6 million last year, down from $18.6 million in 2019.
Biglari expressed confidence that Steak n Shake’s conversion to a “bona fide quick-service restaurant chain” will return it to profitability this year.
While the decision to transition to the new service model was done before COVID-19, he said the virus “hastened the inevitable.”
Biglari limits his communications with shareholders to just twice a year — in the annual shareholders letter and at the company’s annual meeting where attendees can to pose questions to him for a few hours or so.
The struggles at Steak n Shake have dragged down Biglari Holdings’ results. The parent company lost $38 million, or $110.05 per Class A share, on $433.7 million in revenue last year. That compares with earnings of $45.4 million, or $131.64 share, on $668.8 million in revenue in 2019.
Steak n Shake accounts for almost 80 percent of Biglari Holdings’ revenue.
The restaurant chain also is transitioning company-operated units to single-unit franchises. The number of company-operated units shrank to 276 at the end of last year from a peak of 417 in 2016. Fifty-seven of the 276 were closed as of Dec. 31, but Steak n Shake intends to reopen most of them.
The new franchise arrangement calls for a franchisee to make a $10,000 initial investment. The franchisee also is assessed a fee of up to 15 percent of sales and 50 percent of profits.
As of the end of last year, 86 company-operated units were converted to single-unit franchises. Steak n Shake had received roughly 35,000 applications to operate a franchise — meaning only 0.25 percent were accepted, Biglari said. The franchisees earned on average about $161,000 last year.
Biglari has boasted that Steak n Shake has churned out $300 million to its parent company over much of the last decade, fueling Biglari Holdings’ growth.
Biglari Holdings, though, dipped into its capital to pay Steak n Shake’s $153 million in debt that was coming due March 19. There has been speculation that Steak n Shake would seek bankruptcy if was unable to refinance the debt or pay it off.
The parent company’s decision to pay the debt will result in a major reduction in cash and investments on its balance sheet at the end of this quarter, Biglari said. It has about $118 million in cash and investments as of Dec. 31.
“Today, the entire enterprise — the holding company and its operating businesses — is devoid of debt,” Biglari said in his letter.
In a Thursday note, credit-rating agency S&P Global Rating said the absence of significant debt for Steak n Shake provides it “time and flexibility to execute its turnaround plan.”
Biglari Holdings’ other operating businesses include two insurance companies, an oil company and men’s magazine Maxim.
Maxim kicked up $1.8 million in earnings to Biglari Holdings last year, Biglari said, up from $742,000 in 2019. That’s despite revenue remaining flat at about $4.1 million.
Biglari Holdings’ best-performing business is First Guard Insurance Co., an underwriter of commercial truck insurance. First Guard earned $9.6 million before taxes on about $31 million in revenue last year. By comparison it earned $7.1 million before taxes on $30.1 million in revenue in 2019.
Biglari wants to use Biglari Holdings’ earnings to purchase other insurance companies, but he said “identifying and purchasing an insurance gem is not easy.”
Investment losses of $29.6 million from Biglari Holdings’ stake in two partnerships called The Lion Fund accounted for the bulk of the parent company’s loss last year. Biglari said the yearly fluctuation in the value of the investments makes those figures meaningless for analytical purposes.
The Lion Fund owns 8.7 percent of Cracker Barrel Old Country Store Inc., its biggest investment.
Biglari Holdings’ Class A shares rose $1.04 to close at $585.54 Friday, while it Class B shares fell $3.34 to $117.14.
pdanner@express-news.net
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