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BEHIND THE NEWS: Sales are sizzling at Steak n Shake Minting Managers Sticking with steakburgers

February 7, 2005

When shareholders of The Steak n Shake Co. gather for their annual meeting this week, expect a lovefest. Peter Dunn, who joined the company as president in September 2002 and added the title CEO last year, seems to be doing a bang-up job reinvigorating one of the nation's oldest restaurant chains.

Choose whatever measure you like: Since Dunn's arrival at the Indianapolis-based company, Steak n Shake shares have appreciated 92 percent, whipping the 46-percent gain for the S&P 500-stock index. The company in January reported its eighth straight quarter of increased same-store sales.

In that quarter, the company, which owns 384 restaurants and franchises another 45, reported profit of $5.1 million on revenue of $126.5 million. Helping lift results were frothy sales of holiday-themed milk shakes, and of two new treats: sideby-side milk shakes and sippable sundaes.

Impressive results, but are they sustainable, especially now that the company is accelerating openings of new restaurants? Any veteran investor can rattle off a litany of restaurant chains that saw performance slide when they ramped up expansion.

For Steak n Shake investors, the good news is Dunn is a detail guy. Listen to his comments on conference calls with analysts, or at investor conferences, and they're all about doing the little things that will lead to happy customers and keep them coming back.

"Management continues to focus on five key operating strategies that are linked in a 'virtuous cycle,'" notes the company in a Securities and Exchange Commission filing. The five: developing effective field leaders, improving employee satisfaction and training, increasing customer counts, improving profit margins and expanding the Steak n Shake brand.

If it sounds like MBA-speak, that's no coincidence. Dunn, 49, who previously was president of Borden Foods, has an undergraduate degree from Harvard University and an MBA from the University of Virginia.

In his first months with the company, he said, "We are bringing a rigorous, MBA-like analytical approach to all of our stores." And he's living up to the promise. An initiative he's now rolling out, known as Fast & Friendly, is aimed at providing quicker service for drivethrough customers and friendlier greetings for those who dine in.

Another top priority is developing management bench strength. This year, the company will invest $1.2 million to help ready 125 to 150 managers for the 18 to 24 company-owned stores slated to open in the fiscal year ending in September.

That compares with the 16 companyowned stores opened in the last fiscal year. In the fiscal year ending in September 2006, the chain plans to open at least 26 company-owned restaurants.

Dunn seems to recognize that all his best-laid plans could crumble if the management-training effort falters. Steak n Shake has adopted an arduous process, which it says focuses on creating store leaders who "manage from the dining room."

Because competition in the industry for managers is brutal, the company focuses on developing those leaders from within, and it figures they need six to 12 months running an existing store before they have the wherewithal to open a new restaurant.

"We are proactively making investments necessary to avoid the potential pitfalls of expansion," Dunn said during the Jan. 26 conference call to discuss results for the quarter ended Dec. 22. He said the company won't expand faster than its ability to execute.

After that call, at least three analysts issued or reiterated "strong buy" or "outperform" recommendations on the stock. New York-based Standard & Poor's said the shares, which were trading last week for $19.75, might top $23 apiece within 12 months.

"We believe a premium is warranted, given the company's strong sales momentum and our increasing confidence in its expansion strategy," S&P said.

Added San Fransicso-based JMP Securities, which estimates the shares will reach $24: "The management turnaround that began in 2002 continues to gain momentum."

Michael S. Dell, whose Dell Computer Corp. dominates PC sales, is also enjoying an impressive run as the biggest shareholder in Steak n Shake.

Filings with the SEC show MSD Capital LP, the investment business Dell set up seven years ago to manage his family fortune, owns 2.1 million shares of Steak n Shake worth $41 million.

The holding represents a 7.4-percent stake in the company. MSD has held onto the shares since amassing them in early 2003, when Steak n Shake's stock price was about half its current level.
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