Steak 'n Shake same-store sales fell in 2017

The CEO says the company is focused on improving service and quality after traffic fell 4.4% last year.

Steak ‘n Shake’s same-store sales declined 1.8% in 2017, as the chain’s restaurants struggled to lure new customers, parent company Biglari Holdings said on Monday.

Same-store traffic at the 615-unit chain declined by 4.4% for the full year.

“Last year can be summarized, in contrast to Sinatra’s lyric: It was not a very good year,” Biglari Holdings CEO Sardar Biglari wrote in a letter to investors on Monday.

But sales appeared to improve in the fourth quarter. The company’s full-year decline, after a year in which its quarterly same-store sales declined at least 2.8% in each of the first three quarters, implies that the chain’s same-store sales rose 2% in the last three months of 2017.

The recent decline has wiped out much of the restaurant chain’s per-unit earnings.

In 2016, for instance, a typical company-owned Steak ‘n Shake generated $83,000 in operating earnings per location, according to Biglari’s letter. Last year, that declined to $1,000 per location.

Steak ‘n Shake’s earnings before interest and taxes were “about breakeven,” which was the lowest under current management.

While increased customer traffic leverages fixed costs and increases value, “the opposite is also true,” Biglari wrote. “Decreasing customer traffic diminishes value.”

Biglari Holdings is based in San Antonio and has evolved as a holding company for other companies in a number of industries, including restaurants, insurance companies, Maxim magazine and investments. It also owns nearly 20% of Cracker Barrel stock through an affiliated holding company called The Lion Fund.

Biglari Holdings does not hold regular earnings calls with investors and analysts, much like other companies, but generally limits corporate communications to Biglari’s annual letter and an annual meeting.

Steak ‘n Shake, Biglari Holdings’ biggest holding, had for years enjoyed uninterrupted same-store sales growth, which helped fuel its parent company’s success.

After same-store sales declined 7.1% in 2008, the chain’s same-store sales increased every quarter through the spring of 2016, a remarkable streak of 29 straight quarters.

Biglari wrote that the number of customer visits to the same 400 company-owned stores have grown by 26 million since 2008.

But over the past two years, the chain’s restaurants lost 7 million visits.

Biglari wrote that Steak ‘n Shake lost customers “because we failed to execute on delivering a superior value proposition.”

Biglari Holdings made some investments late last year in improving food quality, which has hurt the chain’s profits.

Restaurant revenues declined 1.3% to $807.2 million, from $817.9 million, while net earnings from the restaurant business declined 61% to $9.7 million.

Steak ‘n Shake’s food costs increased in 2017, to 30.5% of sales from 27.9% a year ago. Biglari Holdings attributed that increase to higher commodity costs and an increase in product quality in the second and third quarters.

“When faced with a decision to improve short-term profits by reducing product quality and customer experience, we opted to do the opposite, which in the near term contracts profit margins,” Biglari wrote.

Biglari also said the company is working to improve the customer experience. “The entire organization is … working assiduously to become exceptional in operations,” he wrote. “We are injecting verve into the company by allotting significant resources to improve the customer experience.”

Total revenues at Biglari Holdings declined 12% last year to $840 million, from $850 million the year before, due largely to the decrease in revenues at Steak ‘n Shake.

Earnings at the company were cut in half, to $50.1 million, or $40.80 per share, from $99.5 million, or $81.37.

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