Franchising costs dilute Biglari Holdings’ 2012 earnings

Steak 'n Shake, the full-service burger and shake concept, has ramped up resources to franchise the brand, a program creation that reduced parent company Biglari Holdings Inc.’s 2012 annual profits by a third, the company reported.

San Antonio, Texas-based Biglari Holdings earned nearly $21.6 million, or $16.15 a share, in the year ended Sept. 26 compared to $34.6 million, or $25.86 a share, in the prior year. Revenue was $740.2 million, compared to $709.2 million in 2011, the company reported Monday.

“The decrease was primarily driven by increased general and administrative expenses related to our efforts to franchise the Steak 'n Shake concept, higher incentive compensation costs and an increase in legal and professional services,” Biglari Holdings said in Securities and Exchange documents.

As of Sept. 26, Biglari Holdings had 414 company-owned Steak 'n Shake units and 83 franchised stores in 25 states. The company also owns the Western Sizzlin brand, which had five company-operated restaurants and 87 franchised units in 17 states.

Company chairman Sardar Biglari, in a letter released during the weekend, told shareholders that while the franchising efforts “dilute Steak 'n Shake’s near-term earnings, we estimate that we are augmenting the company’s intrinsic value. Eventually, franchising will represent a business that will not consume cash but will coin it.”

Biglari added that the company was intent on leveraging the Steak 'n Shake brand through franchising because it is a model that is “a noncapital-intensive strategy that generates high-return, annuity-like cash flow.” He added, “We are going for a great return by giving up a good one.”

Direct franchising costs in fiscal 2012 reached 14.8 percent of Steak 'n Shake’s general and administrative expenses, he said, compared to only 2 percent in fiscal 2008. “This year, we are on track to spend even more,” Biglari said.

Steak 'n Shake in early October announced its first international development agreement with the Saleh Bin Lahej Group to open 40 restaurants throughout the United Arab Emirates. “Over the last year, we have made good progress in recruiting franchise partners,” Biglari said in his letter. “We have signed agreements with franchisees who in the coming years have committed to opening 171 units.”

He said the UAE deal was a springboard for other international development. “To manage international operations systematically, we are in the process of opening an office in Europe,” he said.

The company has also set up a new subsidiary, Biglari Design Inc., to assist franchise partners and evolve the look of the restaurant, which has included the Steak 'n Shake Signature fast-casual unit near New York’s Time Square.

“As innovators, we have an advantage in design, and our expertise shows as it has elevated Steak 'n Shake’s ability to secure partnerships to enhance its brand domestically and abroad,” Biglari said.

Customer traffic at Steak 'n Shake increased 3.7 percent in fiscal 2012, the company said.

Biglari Holdings and affiliates also own about 18 percent of the stock in Cracker Barrel Old Country Store Inc., shareholders of which recently rejected a second bid by Biglari to gain a seat on the board.

Contact Ron Ruggless at [email protected].
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