Steak n Shake and Investing and Restaurants and Retail and Sardar Biglari and Real Estate & Retail

Will Biglari use Steak n Shake playbook at Cracker Barrel?

July 2, 2011

Sardar Biglari is one tough guy to figure out, which only adds to his mystique.

The man who revitalized the Indianapolis-based Steak n Shake chain doesn’t talk to the media or investors—except via his once-a-year shareholder letter and a lengthy question-and-answer session at the Biglari Holdings Inc. annual meeting.

As Biglari said in his latest shareholder letter, released in December, “Outside of regulatory requirements, we will not air our investment ideas, particularly in a world of investment competitors. We leave the yammering to others.”

So it’s up to others to speculate about what he has up his sleeve at Tennessee-based Cracker Barrel Old Country Stores Inc., where Biglari Holdings is now the largest shareholder.

San Antonio-based BH began scarfing up Cracker Barrel shares in March and now has amassed a 9.8-percent stake worth $109 million.

It’s tempting to think Biglari—who, though just 33, has never been shy about throwing his slender frame around—has control on his mind. After all, that was his playbook at The Steak n Shake Co. He began buying shares in 2007 and rose to CEO scarcely a year later.

At Steak n Shake, he slammed the brakes on new store construction, arguing that the chain’s restaurant prototype cost too much to build and that the expansion was incinerating shareholder value. He has since rolled out a cheaper format and revved up franchising.

Biglari also revamped store operations and the menu, halting a 14-quarter streak of declining same-store sales. The chain now has posted 14 straight quarterly increases in same-store sales.

Cracker Barrel hasn’t fallen to such depths, but it has cut forecasts the past two quarters because of declining guest traffic. Analysts say Biglari may believe he can boost results by bringing in more customers and halting the company’s plan to roll out more stores.

“In the past, Biglari has viewed building stores as shareholder-wealth destructive. We believe he will make the case here, too,” Stifel Nicolaus analyst Steve West said in a note to clients.

Yet it’s also possible Biglari’s big bet on Cracker Barrel will amount to nothing. Last year, he bought big stakes in Colorado-based Red Robin Gourmet Burgers and South Carolina-based Sonic Corp. only to unload them quickly.

“He may very well be rocking back and forth in one of the many chairs that line the rustic front porch of the roadside attraction, but that’s about it,” wrote Motley Fool columnist Rick Aristotle Munarriz.

Biglari’s shareholder letter warns investors against making assumptions about what he is up to.

“The critical point is that we could at one particular moment derive most of our earnings from one industry, such as restaurants, and then with a single acquisition begin to derive our earnings from a different industry,” he said.

If this all sounds unconventional for a public company, you’re right. But before taking the helm at Steak n Shake and rechristening it in his own name, Biglari ran a private hedge fund. That business is all about wisely allocating capital and generating cash—principles he still espouses.

Investors willing to go along for the ride so far have been rewarded. His latest feat: propelling sleepy Fremont Michigan InsuraCorp into play. He offered $24 a share for the firm in 2009 and upped it to $31 last December. A private firm in April snagged the insurer, agreeing to pay $36.15 a share—double where the stock was trading when Biglari began buying stock two years ago.

BH shares are trading for around $392, up more than fivefold from their April 2008 low. Impressive, to be sure. But as Biglari emphasizes in his shareholder letters, relatively short-term movements in stock price really aren’t the point.

In his latest letter, he even encourages shareholders who are caught up in the vagaries of the stock market rather than “long-term value creation” to put their money elsewhere.

“If you think [our] system does not jibe with your expectations, the time to sell is now, not after an economic shock or a negative press report,” he wrote.

Republic shares spring to life

Republic Airways Holdings Inc. spends hundreds of millions of dollars a year on fuel. So relatively modest declines in prices can translate into hefty increases in earnings.

That reality helps explain why shares of the beleaguered Indianapolis-based airline operator shot up 22 percent, to $5.67, on June 27. The runup came after analyst Duane Pfennigwerth at Evercore Partners issued an upgrade, citing fuel-price declines that would shrink losses at Frontier Airlines, the ailing scheduled-service carrier Republic bought two years ago.

Pfennigwerth said that acquisition remains a negative. Even so, “we see compelling risk reward and extreme pessimism priced into the stock.” He said shares could rise to as high as $9.•

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