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Cracker Barrel defends its strategy, and pokes Sardar Biglari

The company, in a proxy battle with its longtime activist, explains its decision to back away from Punch Bowl Social.
Photograph: Shutterstock

Cracker Barrel CEO Sandra Cochran defended her company’s performance, and particularly its decision not to support Punch Bowl Social at the outset of the pandemic earlier this year, in a wide-ranging letter to company shareholders on Thursday.

And one of the CEO’s points of comparison to define the company’s success was Biglari Holdings, the investment company and Steak ‘n Shake owner run by Sardar Biglari, the activist currently trying to get a representative placed on Cracker Barrel’s board.

Cochran explained that Biglari Holdings’ total shareholder return over the past 10 years was -61%. By contrast, the family dining chain operator’s return was 520% over the same period. “As further evidence of destroyed value,” Cochran wrote in a letter to shareholders, “the market value of Biglari Holdings is worth significantly less than the combined net asset value of the businesses it holds.”

Biglari has long been a thorn in Cracker Barrel’s side, even if that thorn is considerably smaller today than it was a couple of years ago. The investor controls 8.7% of the company’s stock through his hedge fund, largely purchased with funds from Steak ‘n Shake and his company’s other holdings. But that is down from the 20% it had owned for years.

Biglari has nominated Raymond Barbrick to the Cracker Barrel board, the latest in a series of attempts over the past decade to gain board seats or use proxy fights to force the company to take certain actions. Barbrick is the co-CEO of restaurant and hotel operator Briad Group.

Cracker Barrel opted not to nominate Barbrick, arguing in the letter that he is not as qualified as the company’s existing directors. Instead, it nominated Gisel Ruiz, a 26-year Walmart veteran, to its board of directors.

Central to the proxy, however, is Cracker Barrel’s decision to invest in Punch Bowl Social last year and its quick decision at the outset of the pandemic to walk away from that investment, writing off $133 million in the process. Biglari first started criticizing the investment last year, saying it was too different from Cracker Barrel’s core concept. He has since taken the company to task for backing off that investment quickly and before any potential government stimulus program became known.

But Cochran said that Punch Bowl would require far more money and attention than any stimulus would provide.

“Because Punch Bowl Social is a large-scale concept whose revenues are driven by large in-person social gatherings and corporate events, its business was devastated by the pandemic,” Cochran wrote. “Given this reality, it became clear to us that Punch Bowl would require significant management attention and millions of dollars of capital, above and beyond any funds available under the CARES Act, just to survive.

“In light of the highly uncertain environment in March, our board and management team determined that these resources would be better spent on Cracker Barrel and Maple Street (Biscuit Co.) than on mothballing, and eventually resuscitating, Punch Bowl.”

Cochran then says this: “Six months later, Punch Bowl continues to struggle because of the pandemic, and we believe it is likely to remain challenged for the foreseeable future.”

Cracker Barrel argued that it made key adjustments to make it through the pandemic, such as shifting toward takeout and rolling out curbside delivery, while using a sale-leaseback to free up cash. Cracker Barrel argued that its shareholder return was better than the return for other family and casual dining companies over the past decade, as well as in 2020.

Cochran said that the fast-casual Maple Street, which it acquired last year, has performed “admirably during the pandemic," saying that, “We believe it can grow into a meaningful contributor to our bottom line as we open more units.”

Proxy fights like this often end up much like political campaigns, in which a challenger works to convince voters, the shareholders in this case, that the incumbent has not done a good job and needs an injection of new blood.

In Cracker Barrel’s case, however, the challenger is backed by the executive of a publicly traded company with an extensive track record of controversial actions, particularly when it comes to corporate governance. And Biglari Holdings’ own flagship concept, Steak ‘n Shake, has itself struggled mightily even before the pandemic.

Indeed, Cochran’s harshest criticism for Biglari in its letter was over his stewardship of the burger chain—which Biglari took over in 2009 after he won a proxy fight to get on the Steak ‘n Shake board. He then became its chairman, renamed it Biglari Holdings, merged it with another company he took over, Western Sizzlin, and since then has used it as an investment vehicle.

Steak ‘n Shake has struggled for much of the past three years with falling sales, operating losses and closed stores. Last year, same-store sales declined 6.9%. Customer traffic plunged 11.2%.

“We consider the deterioration of Steak ‘n Shake, a brand that once held a storied place in American restaurant history, to be a cautionary tale of poor capital allocation, underinvestment, lack of strategic vision, subpar leadership, and lost brand identity,” Cochran wrote.

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