Warning is sounded on Steak n Shake
Analyst says eatery chain’s weak numbers could bring loan default or bankruptcy filing
Steak n Shake’s financial troubles may be deepening.
The restaurant chain’s weak operating performance could cause it to eventually default on its debt or file for bankruptcy, an analyst warned.
A subsidiary of San Antonio’s Biglari Holdings Inc., Steak n Shake has been grappling with falling sales, fewer customers, higher costs and stiffer competition in the quick service restaurant industry. The chain is known for its burgers and shakes.
S&P Global analyst Mathew Christy said he expects that Steak n Shake’s operating results will continue to deteriorate further and that it may not be able to meet its financial obligations in the near-term.
“We just see them kind of running into essentially a cash issue — that they’re just not going to have enough cash to run their business here some time in the near future,” Christy said.
More evidence of Steak n Shake’s financial woes surfaced in court papers Monday in two lawsuits in which hundreds of the restaurant’s workers in the St. Louis area alleged that they were not paid overtime. Under terms of a settlement that still requires a judge’s approval, Biglari Holdings will pay the workers almost $8.4 million to settle the lawsuits.
The chain’s “financial condition played a significant factor in resolving both cases for this amount at this time,” a court filing stated. The settlement can’t be canceled if either Steak n Shake or Biglari Holdings goes bankrupt.
In a report released Friday, S&P cut Steak n Shake’s credit rating from “CCC” to “CCC-.” The ratings agency signaled that the outlook for Steak n Shake is “negative,” meaning the rating could be cut again because of the chain’s weakened financial condition. It has a $180 million term loan due in March, he said.
Steak n Shake is a downgrade away from a “CC” rating, which
anticipates that a default on debt is a “virtual certainty.”
A call left with Biglari Holdings was not returned. Chairman and CEO Sardar Biglari generally does not speak with the media.
It’s been quite a reversal of fortunes for Steak n Shake in recent years after registering 29 straight quarters of rising same-store sales and customer traffic under Biglari’s watch. He acquired Steak n Shake in 2007 and took the helm the next year.
Sales and operating earnings have been tumbling since peaking in 2015. The chain posted an operating loss of $10.7 million on $760.6 million in revenue last year.
Steak n Shake’s performance worsened in the first quarter. Sales at stores open at least 18 months fell 7.9 percent, while the number of customers coming into its restaurants decreased 7.7 percent from a year ago. It had an $18.9 million operating loss in the three months ended March 31.
Results have been affected by the chain’s value pricing strategy and higher labor and commodity costs, Christy said.
Steak n Shake went awry by expanding its menu and losing sight of the importance of superior customer service, the Indianapolis Business Journal reported in May, citing observers.
“I am afraid Steak n Shake is on a failure path,” Ron Pratt, who served as a Steak n Shake district manager decades ago, wrote in an email to the publication.
Recently, Steak n Shake has been “temporarily” closing company-operated locations as part of a plan to turn over operations to franchisees and relaunch the restaurants. Forty-four locations, or 11 percent of its 413 company-operated stores, were affected by the change.
“We’ve never seen that before,” Christy said, calling the chain’s strategy “odd.” “It does not make sense, unless, of course, these restaurants are a significant drain on the overall operations.”
He was skeptical that all of the closed restaurants will reopen within a year. A St. Louis store that had closed as part of the franchising initiative has since reopened, Restaurant Business reported.
Steak n Shake’s competitors, including larger and better capitalized players such as McDonald’s and Wendy’s, have a greater ability to manage their costs and menu pricing, Christy said in his report.
Biglari has blamed Steak n Shake’s lackluster results on its failure to be “fast and friendly.” It’s developing a “sophisticated operating and delivery system” to allow the chain to gain volume through speed, he said in a February shareholder letter.
Christy does not expect that Biglari Holdings will support Steak n Shake’s debt obligations.
“The term loan facility lacks any parent (company) guarantees or security, and there is no historical track record of support from Biglari to SnS,” he added in the report.
Steak n Shake could pursue a “distressed exchange” in the next six month, Christy said. That could mean it offers new or restructured debt or converts debt to equity.
The chain’s settlement of the federal overtime cases follows a $7.7 million judgment issued by a judge in the first case in May. With the second case slated to go to trial, the parties entered mediation last month before reaching a “global settlement” of both cases.
After lawyer fees and other costs in the first case, 286 workers will share more than $2.8 million — just under an average payout of $10,000 each. The 428 workers in the second case will share almost $2.4 million, for an average payout of about $5,600.
The parties agreed to keep mum about the settlement.
Under the terms of the settlement, if contacted by the media, the parties agreed to issue either a “no comment” or “The matter has been resolved to the satisfaction of all parties.”
Biglari Holdings’ Class A shares closed unchanged at $512 Monday, while its Class B shares were off $1.50, closing at $98.05.