As Sardar Biglari stirs controversy, Steak n Shake hums along

September 11, 2010

Sardar Biglari sometimes seems so self-absorbed that the flaw obscures his real accomplishments.

This is a guy, after all, who rechristened the publicly traded Steak n Shake Co. as Biglari Holdings, and installed “welcome” photos at every restaurant that feature him front and center.

And that was just a warm-up. This year, critics thought they’d seen his real stripes when he rolled out a hedge-fund-style compensation plan for himself that could put staggering sums in his pocket. He’d receive 25 percent of any increase in the company’s annual book-value growth topping 5 percent, in addition to his $900,000 annual salary.

Many supporters turned detractors. And in August, Biglari put the shareholder vote for the pay plan on hold, citing the need to address “misinformation and mischaracterizations of the proposed agreement by certain analysts and investors.”

Sardar Biglari mug Biglari

But through it all, the Steak n Shake chain’s performance has been strong, at times even dazzling.

Biglari became CEO in August 2008, and in the quarter ending that December the company posted its 14th straight decline in same-store sales. But since then, the Steak n Shake chain has been on a tear, recording six straight quarters of increasing same-store sales. Fiscal third-quarter numbers, released last month, showed same-store sales climbing a robust 7.5 percent.

The message to investors: Maybe this guy is worth a second look.

“As odious as many of the moves Biglari the man has made are, the company’s third-quarter earnings report showed that he is still able to get results,” wrote Rich Duprey, a columnist for the Motley Fool investing website.

It’s hard to argue with the strategy that Biglari launched in the midst of one of the worst economic slumps since the Great Depression—he slashed expenses and menu prices. His four-meals-for-four-dollars advertising blitz has spawned fast-food industry copycats.

Less proven is his plan to turn Biglari Holdings into a holding company for a range of investments. So far, he’s acquired a company he also led—Western Sizzlin—and made plays for firms in fields as diverse as insurance and auto parts.

It’s a strategy that has worked well for Biglari’s investing idol, Warren Buffett, whose Berkshire Hathaway is one of America’s great wealth-building success stories.

But it should go without saying that Biglari, who’s only 33, is no Buffett, at least not yet. Biglari still has plenty to learn—a point he sometimes doesn’t seem to fully appreciate.

Nor, apparently, do Biglari’s fellow board members, who have granted him extraordinary latitude. As the company notes in its press releases, “All major operating, investment, and capital allocation decisions are made by Sardar Biglari.”

At least one former board member didn’t buy giving the prodigy free rein. In his March 2009 resignation letter, Wayne Kelley complained, “The advice of board members has not been sought, either before or after major decisions affecting the company.”

But in an interview with IBJ later that year, Kelley also pointed out that Biglari had made some smart moves and breathed new life into the company.

So that’s the dilemma for Biglari Holdings investors: Do the CEO’s very real skills trump his unnerving self-assurance and his desire for an outsized compensation package?

True-blue ITT investor

Investors have fled ITT Educational Services Inc. in recent weeks in a near panic over proposed student-lending reforms that analysts say would sharply cut profit.

But not San Francisco-based Blum Capital Partners, which began scarfing up ITT shares following what heretofore was the company’s darkest day—a surprise February 2004 federal raid of ITT’s Carmel headquarters.

That probe focused on allegations the company falsified records. Most of Wall Street responded with a where-there’s-smoke-there’s-fire mind-set. The day the news broke, ITT shares fell by nearly half.

Blum Capital’s buying spree was an unequivocal bet that management would be found credible and the probe would amount to nothing—which is exactly what transpired.

Investors are similarly apoplectic over the lending rules—which could sharply limit the company’s access to federal student loans, its primary source of revenue. ITT shares traded for around $110 this summer but now are fetching only $53.

And Blum—run by Richard Blum, husband of U.S. Sen. Dianne Feinstein—is back in a buying mood. On Aug. 31, Blum purchased 30,000 shares for $53.22 per share. It owns 3.8 million shares, or 11 percent of the company.•


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