Monday, July 21, 2008 1:41:58 PM
Steak n Shake’s previously announced initiatives, in our opinion, are directionally off course and thus woefully inadequate. The most significant problem that must be corrected is the continually deteriorating operating performance of company-operated restaurants. Our plan would call for a moratorium on the establishment of new company-operated restaurants. New management must center on improving the restaurants already in existence through better execution to make them more appealing to the customer and ultimately more profitable. The lever to maximize the value inherent in Steak n Shake is, in our view, to improve restaurant-level operations. Additionally, unit economics must be attractive for the company and its franchisees... It’s far more lucrative to increase traffic at existing stores than to increase it by building new outlets. Alongside better operational execution, the company should strategically focus on growth through franchising.
The future of Steak n Shake lies in franchising. Growth through franchising is a higher-return and lower-risk endeavor. Franchising represents a strategy of disciplined unit growth by leveraging the brand with market penetration in a manner that generates low-risk revenue and high-return cash flows. Such a long-range plan would yield numerous benefits: It would allow management to focus on propelling the value of the brand by allotting more resources to development of better products, improved quality control, shrewder marketing practices — all resulting in better overall productivity, resource allocation, and high returns on capital and free cash flow. Thus, the company should be in the franchising and real estate businesses for the cogent reason of maximizing return on capital while concurrently minimizing cost of a powerful capital —combination that would lead to creating value for all shareholders.
http://www.sec.gov/Archives/edgar/data/93859/000092189508000219/dfan14a06824004_01232008.htm
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