Circle of Competence

Steak N Shake (SNS), led by newly installed Chairman Sardar Biglari, has had a quite an interesting week or two.  I want to highlight 3 pieces of news for those following the story:

1. Administrative Outings:

The first is the resignation of CFO Jeff Blade, who had been subject to the criticism of Biglari and Co. since their complaints surfaced last year.  The second ouster, less publicized, is that of Chief Marketing Officer Steven Schiller.   A little seen Form 4 shows that Schiller forfeited his stock options due to resignation:

“Mr. Schiller forfeited these options when he resigned from the Company.”

To those who have been following the Steak N Shake story, the executive turnover comes as no surprise.  At the Western Sizzlin’ annual meeting a few weeks ago, Biglari wasn’t short on criticism for the way that (then current) executives had managed the company through its downturn.  Poorly, to say the least.

Thus, a house cleaning was inevitable.  Both of the former top executives, Alan Gilman and Jeff Blade, are now gone.  CMO Schilling is gone.  The board will probably continue to see turnover in the coming months.  All of this is good news.

A company can’t change unless the people who screwed it up leave, that’s a simple enough fact to grasp.  Equally important now is that Biglari recruits a new executive team to replace them.  Biglari, as Chairman, is not an operational CEO, nor should he try to be one.  Current chief Wayne Kelley is merely an interim CEO.  The lack of permanence in the executive team is first on the menu for resolution.  Something to monitor closely, but we do know this is Biglari’s current priority, as evidenced by his words at the WEST annual meeting.

2. Moratorium on Capital Spending:

Another fun piece, brought to my attention by  the editor of NoiseFreeInvesting, was this one, from a Galesburg, Illinois newspaper.  Here’s a quote with the salient facts:

“Construction has halted for now on the new Steak ‘N Shake in Seminary Square, but an official of the Indianapolis-based restaurant said not to worry.

Brad Manns, vice president of development for Steak ‘N Shake, said the delay has to do with a change in upper management.

“In the last couple of weeks, we have added a new executive chairman and he is evaluating every capital project in the company, which had us put a number of projects on hold a while, at least temporarily,” Mann said in a voice mail message left Thursday.”

It seems that Biglari has stopped at least one capital project mid-construction, consistent with his thoughts dating all the way back to last year in letters to SNS shareholders.  Not only is excessive capital spending a Biglari no-no, it was the major Achillies heel causing the SNS meltdown in the past decade.   In order to generate judicious levels of Free Cash Flow (caps intended), restaurant building needs to come to a stop, at least until the operations at the existing restaurants are fixed.

This reminds me of a video I’d once seen with Michael Price, famed value investor formerly of the Mutual Series Funds.  He was going through a newspaper, in order to illustrate what generally grabbed his attention, when he came across an article entitled “Saks Fifth Avenue to Open Stores in China.”  His comment on this article went something like this:

“I told my Saks analyst this morning, ‘They can’t operate their stores here, how the hell are they gonna do it in China?’”

Thus is the fate of Steak N Shake.  Until they figure out how to best operate their current restaurants in a profitable manner, building new ones is a loser’s game.   Even when they do figure it out, it’s still unlikely that most of these capital projects will be resumed.  Franchising is the future of Steak N Shake with Biglari at the helm.

3. Steak N Shake needs Healing

The last piece I came across this week was an editorial from the Indianapolis Business Journal (IBJ), entitled “Steak N Shake Needs Healing” with the subtitle “Biglari deserves turnaround shot.”

My favorite bit:

“An overhaul of such proportions rarely happens without someone cast as the loser. We’re sorry the regime that once presided over Steak n Shake in good times now finds itself in that role, but the company clearly needs a fresh start, and there’s no reason Biglari can’t provide it.

It’s not as if he’s completely divorcing the company from its past. Among his supporters are S. Sue Aramian, a former board member and close associate of late company patriarch E.W. Kelley, and Charles E. Arnett, another former associate of Kelley’s. There should be plenty of institutional knowledge to complement Biglari’s new strategy.

The important thing is that the dissension should be just about over. Finally, Steak n Shake shareholders have a shot at leadership with a common vision for unlocking the brand’s true value.”

Although I disagree that the last regime “presided over Steak N Shake in good times,” shareholder value has been destroyed for at least a decade now, this excerpt sums up the situation relatively well.   The interests of all parties are now aligned for unlocking value; brand, market, and business.

Disclosure: I own shares in SNS and WEST.