EDITORIAL: Biglari putting Steak n Shake’s future at stake

It’s hard to argue with the short-term results Sardar Biglari has produced for Steak n Shake Co. since coming out
of nowhere to become CEO in August 2008. The brash, 32-year-old hedge fund manager who muscled his way into the company’s
executive suite has engineered a return to profitability and three consecutive quarters of positive same-store sales after
a 14-quarter losing streak.

That’s a feather in Steak n Shake’s cap—today. Wall Street rewards
the here and now, after all. But we have big concerns about what Biglari will mean in the long run to one of the city’s
oldest public companies.

Under Biglari, the 75-year-old company has started hoarding cash at the expense of investing
in its restaurants. As reported in IBJ last week, capital expenditures on restaurants has withered from an average
of $55 million a year over most of the last decade to a mere $5.8 million in 2009.

Biglari’s strategy of
scaling back makes sense in one regard. The period of big investments under previous management allowed Steak n Shake to fatten
up on revenue, but very little of it found its way to the bottom line. The company’s return to profitability under Biglari’s
approach can’t be overlooked.

But neither can strong signals that Steak n Shake’s CEO is using the
venerable restaurant chain as a cash machine to finance his bigger goals. Taking a page from his investing hero, Warren Buffet,
Biglari wants to deploy Steak n Shake’s cash to invest in all manner of opportunities—inside and outside the restaurant
industry—that he alone considers potentially lucrative. There is no investment committee involved; he doesn’t
rely on investment bankers.

Steak n Shake’s first big investment under Biglari—the purchase of Virginia-based
Western Sizzlin Corp. last fall for $39 million—made sense because it’s a restaurant chain and one Biglari leads
as chairman and CEO.

Then came Steak n Shake’s bid in December for Fremont Michigan Insuracorp Inc. The bid,
which was rejected as hostile by the insurance company’s board, confirmed what some Steak n Shake observers had feared:
that Biglari would use Steak n Shake’s cash to veer off into directions unrelated to the restaurant business.

“It’s hard to see how burgers and insurance policies go together,” a local portfolio manager told IBJ
last month.

Even if Biglari didn’t have an appetite for non-restaurant holdings, his decision to scale back
investing in Steak n Shake’s restaurants—a strategy that seems sound now—won’t serve the company well
in the long run.

In a restaurant segment as highly competitive as Steak n Shake’s, management can’t
take its eye off the ball for long and expect the chain to survive. •

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