Archived postings from June, 2010...

Hotel RevPar and Casual Recovery

Posted: Thu, June 24, 2010 at 4:01pm (CDT)

Darden Restaurants' quarterly report yesterday showed a steep difference between its brands' performances. Capital Grille and LongHorn Steakhouse both increased comp sales; Olive Garden and Red Lobster fell. This is a microcosm of the restaurant sector in general -- upscale casual chains have been recovering swifter than midscale and lower scale restaurants with wait staff. The reason, perhaps, is that while customers are still frugal businesses are spending more freely. We spoke with one hotel franchisee who told us that his occupancy and RevPar numbers were up 10 percent this spring, and numbers from Smith Travel Research show that he's not alone. Occupancy increased 5.8 percent at U.S. hotels last week, and 12.3 percent in the luxury segment. The rich are getting richer, so to speak.
STR Global (Press release), June 24, 2010

Luby's Gets Its Burger Brand

Posted: Thu, June 24, 2010 at 8:50am (CDT)

Those of you waiting with baited breath for the outcome of the Fuddruckers deal can now relax: The U.S. Bankruptcy Court in Delaware has OK'd Luby's winning, $61 million-plus bid for the assets of Magic Brands. The court OK'd the bid over the objections of Tavistock Group, the investment firm that had been the stalking horse bidder and had submitted a final bid of just under $60 million. The deal, expected to close by the middle of next month, gives the 96-unit, Texas-based Luby's a burger chain with more than 200 restaurants. Franchisees own two-thirds of Fuddruckers.
Business Wire (press release), June 24, 2010

Darden Shows Some Weakness

Posted: Wed, June 23, 2010 at 4:50pm (CDT)

Just when you thought that casual dining was on the comeback trail, there's this: Darden Restaurants this afternoon reported a 2.3-percent decline in comp sales for all of its restaurant brands -- led by Red Lobster, where same-store sales fell 4.6 percent. The broader measure beat Knapp Track, but as the category leader Darden should beat Knapp Track. The performance is an indication that a recovery in the casual dining sector is going to continue to be painfully slow.
Darden (press release), June 23, 2010

Tavistock Questions Luby's Bid for Fuddruckers

Posted: Tue, June 22, 2010 at 3:00pm (CDT)

Tavistock, the investor group that had been the stalking horse bidder for Fuddruckers in the bankruptcy auction of parent company Magic Brands, is questioning Luby's winning bid of at least $61 million for the burger chain. Pointing to Luby's steep losses last year ($26.4 million) and thus far this year ($3.4 million), Tavistock in a court filing questioned Luby's financial wherewithal to make the bid. If Luby's is not qualified to make the bid, then Tavistock would get the company as the second highest bidder. But Tavistock also said in its filing that this wouldn't be fair, because its bid of $59 million was $9 million higher than the next highest bidder, Fidelity National, which submitted a bid of just under $50 million. Tavistock also claimed in its filing that there was some improper communication between Luby's and Fidelity after the latter made its final bid. ...continue reading.

Luby's Buying Fuddruckers

Posted: Fri, June 18, 2010 at 1:47pm (CDT)

Texas-based Luby's said today that it has won the auction for the bankrupt Fuddruckers chain. It agreed to pay $61 million and will pay another $2.45 million if it doesn't assume certain leases and contracts. The bid was far higher than the $40 million that had been submitted by the stalking horse bidder, the investment firm Tavistock Group. A hearing on the Luby's bid is set for Tuesday, and the deal could close by July.
PR Newswire (press release), June 18, 2010

Stabilizing California

Posted: Fri, June 18, 2010 at 1:33pm (CDT)

The unemployment picture doesn't look good. Nobody needs to be reminded of this. But there is some good news in the employment numbers when you look at them on a state-by-state basis, particularly California. The Golden State gained 23,400 jobs last month. This is a drop in the bucket compared to the 244,900 jobs it has lost over the past year, but an increase is an increase and we'll take any good news we can get right now. That increase confirms what some restaurant executives have been saying in recent weeks, that California and some other states hit hard by the recession are stabilizing and showing signs of a modest rebound. Given the populous state's importance to so many restaurant chains, that employment uptick is a refreshing change.
Bureau of Labor Statistics, June 18, 2010

Sardar Biglari is No Baby Buffett

Posted: Thu, June 17, 2010 at 2:56pm (CDT)

The comparisons between Sardar Biglari and Warren Buffett have come fast and furious in the past few months, and not by accident. Biglari is a publicly professed Buffett geek, and a lot of what he's done over the past decade clearly shows his hero's influences. He is using a publicly traded company as an investment vehicle. He writes folksy, annual letters to shareholders. The website for his company, Biglari Holdings, looks as if it borrowed the same template as Buffett's Berkshire Hathaway.

Investors have taken the bait. There's little doubt that Biglari's company, the former Steak & Shake, now known as Biglari Holdings, traded at something of a premium based on the idea that the Texas-based Biglari is this generation's Oracle of Omaha -- the Sage of San Antonio, perhaps.

Such comparisons are too early for the 32-year-old. And they are wrong. Because Sardar Biglari is not Warren Buffett. He is Gordon Gecko.

This isn't to say that what Biglari has done with Steak & Shake has been bad. He has injected energy into a once-tired brand and reversed years of sliding sales. The chain's cofounder says, simply, "He's saved the company."

Yet the aggressive methods that have marked the confident 32-year-old's career to this point have been more like Oliver Stone's corporate raider from the movie "Wall Street" than the famed billionaire investor. 

"There are worse people you can admire," said Mike Gallo, analyst with C.L. King and one of the only analysts watching Biglari Holdings. "But Buffett became Buffett not by copying what anybody else is doing."

Biglari is a wunderkind. He was born in Iran and his family moved to San Antonio when he was 5. As a teenager he and a partner started a dial-up Internet service called INTX with a minimal investment, lured more than 1,000 subscribers who paid $20 a month. They sold it quickly at the peak of the Internet boom. Terms of that deal were never disclosed, but based on rates being paid at the time the purchase price could not have been much more than $750,000.

Biglari then started his own hedge fund. Between 2000 and 2003, The Lion Fund generated some impressive early returns, yielding an average of 17.9 percent annual return at a time when the S&P 500 declined 5.3 percent per year. At first, Biglari focused mostly on equities and was a passive investor. That changed in 2005, when Biglari set his sights on Western Sizzlin.

The chain was largely profitable under CEO James Verney, but it was easy pickings, and investors knew it. Franchisees had acquired the company following its 1993 bankruptcy. Many had grown tired and wanted out. The stock was trading at less than $1 a share. The number of units had shrunk from 215 in 2001 to 135 in 2005.

Investors began circling. Among them was the former head of a Los Angeles packaging company, Shawn Sedaghat, a Beverly Hills investor named Jonathan Dash and Paul Sonkin, head of Hummingbird Value Funds. Each bought up large stakes in the company from franchisees eager to sell, as did Biglari.

The franchisees viewed the investors as a breath of fresh air. When Biglari asked for seats on the board for himself and Philip Cooley, his former Trinity University professor who has become his investment partner, the company obliged. It also gave a seat to Sonkin.

Once on the board, Biglari demonstrated his ability to build alliances with other large shareholders, and then use their combined ownership to gain control of the board and make changes. He aligned with Dash and Sedaghat and used their combined shares and the threat of a proxy fight to win battles. Within a few months, seven board members resigned or opted not to run for their seats, many of whom sold their shares to Biglari. Among those who left was Sonkin, who had tried, and failed, to align with Dash and Sedaghat.

One former executive said that Biglari exerted a "dictatorial authority" over Western Sizzlin. He turned the company into a holding company and then formed an investment subsidiary called Western Acquisitions that would make investments in companies like Applebees, Jack in the Box and a Washington bartering company called ITEX.

In one change that shows Biglari is not entirely a Buffett clone, he reduced the number of board seats from 10 to 6. Buffett's Berkshire has 14. The smaller number of board seats could make it easier for Biglari to control the company.

Yet Western wasn't a good candidate for an investment vehicle. The chain is not a big cash generator -- working capital was just south of $3.6 million in 2008. The brand continued to lose operators after Biglari took over, and the company had few growth prospects.

Friendly's offered more potential. In 2005, the 500-unit family chain lost $27 million and was heavily in debt -- operating income that year was $13.2 million and had been higher than $38 million two years earlier. Biglari believed that the company could pay off its debt by selling corporate stores to franchisees, much like investors thought Applebee's should do.

Biglari bought stock through his Lion Fund and through Western Acquisitions. But Western did not generate the cash to fund the stock purchase, so he used margin loans to enable the company to buy $5 million in stock. It was a risky move -- a failed deal could have bankrupted the chain, according to insiders.

The deal didn't fail. Biglari used the activist investor playbook he'd follow multiple times: He demanded board seats, aligned himself with a former founder and key shareholders and launched a public proxy fight criticizing existing management, complete with a website, enhancefriendlys.com.

Biglari found a backer in S. Priestly Blake, who had co-founded the chain and himself owned 13 percent of Friendly's stock. Together they seemed prime to win the proxy fight until Friendly's sold to Sun Capital Partners for $15.50 a share. The deal netted Biglari and his various holdings more than $8 million in profits even if the move kept him from taking over the chain.

Biglari did not return phone calls seeking comment for this article, but according to the Indianapolis Business Journal he described his investment strategy as a 'rope a dope,' where he waits for the moment when the other side is weakest. He targets companies that have assets with some value but are weak, often due to poor management. Then he publicly agitates for change, playing to shareholders frustrated at declining stock prices. He is persuasive, and he does his research.

He got his next opportunity in 2007 with Steak & Shake, a mostly corporate owned chain out of Indianapolis that is something of a hybrid QSR and family restaurant.

Biglari began buying up stock in Steak & Shake in 2007 at an average of around $14 a share, again using margin loans to make the purchases. He bought around 8.5 percent of company stock with his various holdings. In October that year he sent a letter to shareholders complaining about the company's 'failed vision, failed strategy, failed execution and failed board.' In November he put up billboards in Indianapolis urging shareholders to 'vote Biglari & Cooley.'

The two would replace Alan Gilman, the company's long-time chairman who was serving as interim CEO at the time, and James Williamson, its top independent director.

The company generated cash. In 2006 it generated nearly $70 million in cash, and another $43.4 million the next year. But it used up much of that on expansion. Capital expenses exceeded $80 million in 2006, and the company spent another $66 million the next year. The chain wanted to franchise more but didn't have a fully formed plan, and operators weren't interested in the concept anyway because of poor unit economics.

Declining sales did not help matters. Guest counts fell 5.6 percent in 2007 and same-store sales dropped 3.2 percent. They'd worsen the next year: Comp sales fell 7.4 percent in the first quarter of 2008 amid a 13.3-percent decline in traffic. The analyst, Gallo, noted that the company had made some questionable decisions. It promoted a low-fat yogurt milkshake but its stores didn't have the skim milk to make it less caloric. It also advertised during soap operas.

The performance led to a steep decline in the chain's stock price. By January 2008, Steak & Shake's stock price had fallen to $7 a share. This meant that Biglari lost half of his investment, but it also further frustrated shareholders and fueled the proxy fight. The board didn't help matters by approving a bylaw requiring 80 percent of shareholders to hold a special meeting. The bylaw was an effort to keep Biglari from calling a special meeting to vote on the entire board.

Biglari won his two seats but was passed over as chairman and CEO in favor of Wayne Kelley, a former Steak & Shake franchisee whose stores had been purchased by the company years earlier. Kelley said in an interview that the move was designed as a temporary one. The company had been looking for a CEO since 2007, with Gilman filling the role on an interim basis, and Kelley said he wanted to retire and agreed to keep the job only for six months.

Biglari pushed for more, and this time he found a willing group of backers, including Tim Taft, a former chief executive at Pizza Inn, and Sue Aramian, a former vice chairman who had helped found the company. Biglari and the investors, who also included Dash, controlled 13.1 percent of company shares. 

One month after the investors publicly backed Biglari in an SEC filing, Aramian got on a conference call announcing Steak & Shake's second quarter earnings that year and blasted management. She said that earnings have been disappointing for too long, but "management salaries, director fees, change of controlled severances, G&A expenses, et cetera, have all increased dramatically, which would be justifiable if there was a corresponding value to for shareholders."

One month later, Biglari was named Steak & Shake chairman. In August 2008, he named himself CEO. He had taken over Steak & Shake.

Reached by phone, Aramian kept her comments to a minimum. "I just thought he could do a better job than the existing regime, and I was right," she said. "He's done what he promised he'd do. He's saved the company."

Biglari quickly got to work on picking off the chain's low-hanging fruit. The company stopped expanding, cutting its capital expenses down by 90 percent. It also started heavily discounting, including a popular four meals for under $4 promotion. The cuts in prices, buoyed by a new ad strategy, brought customers back to the restaurant. Same-store sales soared 10 percent in the fourth quarter last year and traffic was up 20 percent.

The company is now targeting franchisees as its growth vehicle, and is introducing a new, smaller prototype that might make the economics more feasible for operators who had once shunned the concept. "They've done a very good job getting same-store sales back on track," Gallo said. "The brand had lost its way. And there was some low-hanging fruit. But there's still a long ways to go. There's no finish line, so to speak."

As with Western, Biglari took steps to reorganize the company and use its cash to make investments. He also generated a reputation for having almost singular authority to run the company. Numerous board members resigned or opted not to run for their seats after Biglari took over. Biglari didn't fill many of them, reducing the board members down to 5.

One of the board members to resign was Kelley. In his resignation letter, Kelley said that contributions from himself and other board members "have not been welcomed or appreciated." "In my opinion," he wrote, "the current leadership of the Steak n Shake Company is less interested in the company and the brand than in the leadership itself."

"I didn't think the board was being paid attention to or consulted on the development of strategy," Kelley said from his Charlotte, NC home. "And if I'm not going to be listened to, I don't need to be there. I'm not just there to attend board meetings and collect a fee."

Biglari, who received unanimous board support to make investments, is now so influential that the company considers the prospect that something might happen to him as its No. 1 risk.

The board OK'd a merger with Western Sizzlin in a complex deal in which Steak & Shake gave Western shareholders debt worth nearly $23 million at 14-percent interest. Gallo, who has been following Steak & Shake for years, questioned the deal, saying that he believes Steak & Shake could have borrowed the money on better terms. "Maybe in the long run it's a good deal," he said. He called the benefits of a merger marginal. "He's consolidating a conflict of interest."

He renamed Steak & Shake Biglari Holdings, and also engineered a 1-for-20 reverse stock split, ostensibly to keep out small investors. The stock now trades at near $317, but there are only 1.43 million shares outstanding. Many question the split's necessity. "That didn't accomplish much,"" said Max Olson of Max Capital Corporation, a Biglari Holdings shareholder. "But it didn't hurt."

In recent weeks, Biglari's efforts haven't borne fruit. He tried a hostile takeover of Fremont Michigan Insuracorp., a small Michigan insurer. That company has aggressively fought off Biglari's efforts. Biglari also made an exchange offer with Advance Auto Parts that was later withdrawn amid concerns that the complex deal undervalued the auto parts chain.

Biglari's most controversial move came in late April when the company announced plans to merge with The Lion Fund in an effort to consolidate Biglari's holdings. Along with the deal came a proposal to pay Biglari much like a hedge fund manager, giving him 25 percent of any increase in book value above 5 percent a year.

Even though the deal would require Biglari to spend half his bonus buying stock in the company at market prices, the deal acted like a thick, brick wall in front of the Biglari Express -- the company's stock price, which had soared to above $400 a share, sunk to well below $300.

"For a guy who, from what we can tell is very wrapped up in the company and plans to stay a long time, why does he even need a compensation structure like this?' said Gallo, who called the 5-percent threshold a '"joke." In effect, the deal means that the company loses a quarter of any of its gains above 5 percent. "If he's planning to be there for the long-term, and believes they'll be successful in their model transition, he's going to make an awful lot of money. He does not need to try to strip a quarter of the book value growth over a long period of time."

Thanks to the pay proposal, Biglari now has to face his own activist investor. Earlier this month, a group led by the investment firm GAMCO Investors submitted its own filing with the SEC, declaring its intent to vote against the pay plan.

— Jonathan Maze


...continue reading.

Mexican Restaurants Doesn't Want to be Public Anymore

Posted: Thu, June 17, 2010 at 11:29am (CDT)

Mexican Restaurants, Inc., which runs -- you guessed it -- Mexican-style restaurants, said today that it doesn't know if it wants to be a public company anymore. The operator of chains like Mission Burrito and Casa Ole said today that it has formed a special committee to "consider alternatives to reduce cost burdens" of being a publicly traded company. The committee is going to examine whether it would be worth it to de-list the company's stock and terminate its registration. This is the kind of thing that companies consider when their same-store sales fall 11.7 percent, as Mexican's did last quarter.
Business Wire (press release), June 17, 2010

The Continued Concern on Unemployment

Posted: Thu, June 17, 2010 at 9:55am (CDT)

Unemployment claims unexpectedly rose this week by about 12,000, to 472,000, which may not seem like much but is when you consider the big picture. The continued concern over employment is a big issue for restaurants, of which owners, operators and executives are well aware. During the recent Piper Jaffray Consumer Conference, a handful of executives during presentations indicated that the employment picture is key to their own fortunes. So the rise in jobless claims, following last month's decidedly weak unemployment report, is clearly bad news, demonstrating that the employment picture will take some time to clear up. While business travel is on the increase, helping a lot of upscale restaurants, and consumer confidence is rising, restaurant sales won't begin showing consistent improvement until that employment needle moves.
Department of Labor, June 17, 2010

Storm Clouds on McDonald's Horizon?

Posted: Tue, June 15, 2010 at 11:28am (CDT)

The University of Michigan's Ross School of Business released its American Consumer Satisfaction Index this morning and, among many other things, it noted that McDonald's was the only fast food company to post a decline in customer satisfaction. It was an ironic finding, given the chain's booming sales. The survey noted that economic concerns are driving customers to the chain, but they're not satisfied with it. "These new customers seem less satisfied," the report said, "and were it not for the economy some of them would rather eat somewhere else." The danger: Those customers may leave once they feel comfortable enough spending money at a more expensive restaurant.
ACSI, June 15, 2010

Good News For Family Dining?

Posted: Mon, June 14, 2010 at 12:59pm (CDT)

Here's some good news if you're running a family restaurant and are wondering where the customers are: A survey from the consulting firm Technomic found that budget-conscious consumers have not forgotten about the segment and its low price points. More than two-thirds of respondents said in the survey that it's highly likely they'll go to a family restaurant when they want an affordable sit-down meal. Nearly three-quarters said they visit once a month. So far, with the possible exception of IHOP, these numbers haven't translated into positive comp sales for family dining chains, many of which are struggling. But at least consumers aren't ignoring the segment.
Technomic, June 14, 2010

Who Might Buy Wendy's/Arby's?

Posted: Fri, June 11, 2010 at 1:53pm (CDT)

The analysts we've read today who've been speculating on the identity of the mysterious "third party" that indicated an interest in the Wendy's/Arby's Group seem to have differences in opinion about what that party might be. Some say it's a restaurant. Others private equity. We get more excited by the former, only because private equity acquisitions seem to be a dime a dozen these days. But we can think of few potential suitors, led by Yum! Brands, which doesn't have a burger chain, has the size to swallow Wendy's and has experience running multiple brands. Yet we're putting our bets on private equity, given that there are funds eager to put money to work and because Wendy's/Arby's is perceived by some to be undervalued.
Yahoo! Finance, June 11, 2010

Peltz Looking For Wendy's Exit?

Posted: Thu, June 10, 2010 at 4:33pm (CDT)

Nelson Peltz, whose Trian Fund Management combined the Wendy's and Arby's chain, said this afternoon in an SEC filing that he's received a preliminary inquiry from a "third party" expressing an interest in an acquisition involving the company. Details are, as tends to be in these filings, sketchy. Yet the filing later said that Peltz and Trian plan to "review their investment" on a continuing basis and "may take such actions with respect to their investment in the Company as they deem appropriate."
SEC, June 10, 2010

Logan's Roadhouse Going Public

Posted: Mon, June 07, 2010 at 9:04am (CDT)

Logan's Roadhouse is going public, ending a four-year drought of restaurant company IPOs. The steak chain's parent company, LRI Holdings, filed its registration statement with the SEC this morning, saying it plans to raise $200 million. This is not the first registration statement the 211-unit chain has filed -- it had previously filed an S-1 in 2006 only to withdraw the registration later when its parent company at the time, CBRL Group, sold the chain to a private equity group. We can only assume that the registration will stick this time.
SEC June 7, 2010

Biglari Facing His Own Uprising

Posted: Fri, June 04, 2010 at 5:00pm (CDT)

Sardar Biglari, the activist investor who took over Steak & Shake largely by inflaming shareholder anger, is himself facing a shareholder uprising. A group of investors led by GAMCO Investors this afternoon filed a Schedule 13D amendment announcing opposition to Biglari's pay plan. Biglari turned Steak & Shake into a holding company and renamed it Biglari Holdings. In late April the company announced a proposal to pay Biglari like a hedge fund manager, giving him a bonus equal to 25 percent of any increases in Biglari Holdings' book value above 5 percent. That plan angered shareholders, helping drive down the company's stock price by a third.
SEC June 4, 2010

O'Charley's CEO Resigns

Posted: Fri, June 04, 2010 at 9:24am (CDT)

O'Charley's this morning said that its CEO, Jeffrey Warne, has submitted his resignation, but judging from the terse, three paragraph press release, we don't think the decision was unwelcome news at the company. Philip Hickey, the company's chairman, said only that he is "appreciative" of Warne's service, and "we wish him the best in the future." More to the point: O'Charley's has been under-performing, even in a tough market, and the returns on the company's stock have badly lagged other publicly traded restaurants.
Business Wire (press release)

Bielinski: Good Growth Prospects For Fast Casual, Large Chains

Posted: Thu, June 03, 2010 at 2:59pm (CDT)

Larger chains and franchisees are having an easier time finding capital nowadays, according to Bob Bielinski, managing director of CIT' restaurant industry practice. Smaller operators and concepts, on the other hand, continue to struggle with financing issues. In a Q&A in CIT's regular executive spotlight, Bielinski also said there are good growth prospects for fast casual and QSR brands, but casual dining will have trouble attracting capital because of uncertainty in their growth potential. "As long as there is uncertainty on the sales front," he said, "casual dining will remain capital challenged."
CIT

66-Unit JIB Sale Completed

Posted: Thu, June 03, 2010 at 1:09pm (CDT)

National Franchise Sales today said that it has completed the sale of a bankrupt group of Jack in the Box franchises out of Northern California once owned by Abe Alizadeh. Ten units in the Chico-Redding area were sold to existing Jack operator Ben Nematzadeh. His company, TBS Foods, had last month agreed to take steps to prevent harassment at one store to satisfy EEOC demands. The restaurants had gone bankrupt amid the collapse of Alizadeh's restaurant and real estate empire. Nematzadeh's group purchased 11 other stores, Anil Yadav bought 26 and the remainder were split between a pair of franchisee groups. ...continue reading.

NPD: Traffic Declines Easing

Posted: Thu, June 03, 2010 at 11:51am (CDT)

The restaurant industry is slowly emerging from its doldrums. This morning, the NPD Group said that restaurant traffic declines fell 2 percent, continuing a gradual softening the market's declines — traffic fell 3 percent in the fourth quarter of 2009. And NPD's Salestrac Weekly reported same-store sales gains in March and April at the 47 QSR and family chains it measures. Still, the market is clearly precarious, as noted by the National Restaurant Association's performance index, which last week found that sales had softened in April after improving in March. But we'll take any good news we can get these days.
NPD Group