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BEHIND THE NEWS: Honeymoon period ends for Steak n Shake's CEO

May 29, 2006

The steakburgers and shakes still taste good, but suddenly the stock is less appetizing.

Shares of Steak n Shake Inc. have shed 22 percent of their value since late March, wiping out $122 million in market value. And now CEO Peter Dunn, who had the Midas touch after coming aboard as president in September 2002, is confronting skepticism on Wall Street.

"It just seems like something is missing," A.G. Edwards analyst Jack Russo told Dunn during Steak n Shake's quarterly conference call May 18.

"You had that magic early on, and of late it has been tougher to come by."

Indeed, it has. After the former Borden Foods executive joined Steak n Shake, it posted 10 straight quarters of increased same-store sales. But that string ended last fall, and it's now reported three consecutive quarters of decreasing same-store sales.

In the most recent quarter, which ended April 12, same-store sales were barely in negative territory, declining 0.3 percent. But in the company's May 18 earnings release, Dunn tempered expectations for the rest of the fiscal year, citing "rising energy prices and other influences on discretionary consumer spending."

After that release, Steak n Shake's shares continued to slip, leaving them slightly down for the year. The stock now trades for $16.70 a share, down $4.75 in three months.

The 462-restaurant diner chain is getting stung by its concentration in the Midwest, which is being walloped by wrenching changes in the U.S. auto industry, and by its reliance on low- to middle-income customers, said Bryan Elliott, an analyst with Raymond James.

"These folks have some, but not a significant amount, of discretionary income week to week, paycheck to paycheck," he said, "and some of that discretionary spending has had to be diverted from restaurants to the gas tank."

In a report, he added: "Steak n Shake continues to have long-term potential if the current management team can create sustained improvement in samestore sales. This seems unlikely in the current environment."

During the conference call, Dunn sounded as sure-footed as ever.

A Harvard grad with an MBA from the University of Virginia, Dunn analyzes everything-from customer satisfaction to the reasons employees quit.

Rather than hitting the gas on expansion, as too many restaurant chains have done, he's been methodically building management bench strength first. The company is gradually stepping up expansion, adding 26 locations in fiscal 2006, compared with 19 last year.

New stores are performing well, and the growth strategy is on track, he told analysts.

On the call, Dunn acknowledged "seeing a number of indicators of price sensitivity that are different than we have seen in the past." Unfortunately for Steak n Shake, that heightened sensitivity coincided with a company initiative to scale back coupons in an effort to boost profit.

But Dunn said another reason sales have slipped is that prior years received a big lift from blockbuster new-product introductions, such as the sippable sundaes and side-by-side milkshakes.

"Part of that challenge is we hit it out of the park on several introductions in a row in the early days," Dunn said.

He said continued product innovations will be key to the chain's long-term success. But it has taken time to build the R&D firepower that can produce and test a steady stream of winners.

Dunn said the last introduction-premium-topping steakburgers-"either met or exceeded our expectations." And he's optimistic about the newly launched line of Bits n Pieces milkshakes, which contain M&Ms and other candies.

The company also hopes to boost the frequency of customer visits with more healthful fare, including a frozenyogurt milkshake that has debuted in Florida.

On the call, Dunn didn't speak rhapsodically about the 72-year-old chain, as he's sometimes wont to do. But he still had his swagger. When an analyst asked about the company's shakes and hamburgers, Dunn couldn't help but interrupt.

"[That's] steakburgers, by the way," Dunn said.

"Steakburgers. Well, pardon me," the analyst said.

Swooning over Simon

Mall owner Simon Property Group Inc. has been a top-performing stock for years, and analysts are optimistic the Indianapolis company will keep up its win streak.

An analysis by Bloomberg News found Simon had the 36th-highest average analyst ranking among all stocks in the S&P 500.

On a five-point scale, the average rating for the 16 analysts following the company was 4.5.

So far this year, Simon shares are up just 1 percent. But they've climbed 238 percent since the start of 2000. In that span the S&P 500 index lost 14 percent of its value.


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