Steak n Shake CEO ordering up cost cuts, but shares still sag

The Steak n Shake Co. has dropped plans to build 20 new restaurants, is cutting overhead expenses by about $20 million,
and closed 14 locations.

The Indianapolis-based restaurant chain found $16 million in tax savings dating back to 2006 and is
working on a new, simple menu built around burgers, fries and milkshakes–all part of a turnaround plan
orchestrated by the chain’s new CEO, Sardar Biglari.

Biglari described his plans to restore Steak n Shake as a "classic American brand" in
an old-fashioned way: by letter, not by conference call or Webcast. He also sends annual letters to shareholders
in Virginia-based Western Sizzlin Corp., another chain he controls.

The letters are a nod to Biglari’s investing idol, Warren Buffett, whose annual missive to shareholders
of Berkshire Hathaway is a must-read, even for those who don’t own shares.

Biglari, the Texas investor who began snapping up
stock in Steak n Shake in August 2007, sent his first letter to the company’s shareholders Oct. 21. And
like Buffett’s letters, Biglari’s had plenty of folksy nuggets.

He quoted a parable by the philosopher Isaiah Berlin in describing Steak n Shake’s mission to
"dominate" the burger and milkshake segment of restaurants: The hedgehog defeats the fox because
it knows one thing very well, while the fox knows a little about a lot of things.

"We have chosen a hedgehog strategy, namely,
emphasizing our core–burgers, fries, milkshakes, and chili–which make up almost 80 percent of our sales,"
Biglari wrote.

He closed
the letter with this: "To better burgers, Sardar Biglari"

Steak n Shake’s stock price has fallen more than 60 percent in the last year and continued to
drop after Biglari took over as CEO in August. Shares hit a 52-week low of $4.97 Oct. 23.

The chain is planning an "investor day"
Nov. 11 to answer questions and update shareholders on the company’s progress. Management’s goal is to
cut costs and improve individual restaurant performance to reverse 12 consecutive quarters of declining same-store
sales.

The letter is a
good prelude to that meeting, said Steve Huse, a former president of Steak n Shake and current co-owner of
St. Elmo Steak House.

"It sounds to me like they’ve looked at all the problems and have potential solutions for most of them," Huse said.
"Now it’s up to execution."

Biglari has the right ideas, but executing in such a nasty environment for casual restaurants,
as consumers are cutting back on eating out, will be a tall order, said Michael Gallo, an analyst with
New York-based C.L. King & Associates Inc.

"These kinds of turnarounds typically take years," Gallo said. "They can improve operations,
but don’t get guests back right away. The guests you’ve lost, you don’t just wave a magic wand and get
them back."

Gallo
in particular applauds the company’s efforts to realize tax savings from previous years. (It spent $400,000 on a study
that found depreciation-related savings for fiscal 2006.) And he agrees Steak n Shake shouldn’t open new restaurants until
it turns around existing ones.

Gallo would like to see the chain close more restaurants–targeting in particular the 125 locations where it has cut store
hours, a move the company said would save it $1 million this year.

"If you’ve reduced hours, you can’t be happy with the results you’re getting," said
Gallo, who has a neutral rating on Steak n Shake’s shares.

The company has not released a list of which restaurants it has closed. But at least one Indianapolis
location shut its doors in the last few weeks, a restaurant at 6360 E. 82nd St. in Castleton.

In his letter, Biglari announced Steak n Shake’s
hiring of Dennis Roberts, the former chief operating officer at Massachusetts-based Friendly’s Ice Cream,
to head efforts to improve efficiency in the chain’s restaurants.

While acknowledging a turnaround won’t be easy, Biglari pledged not to blame outside factors like
the economy or weather for Steak n Shake’s results.

"Otherwise, with good results we should also give external factors the credit!" he added.

Biglari, who declined to speak with IBJ
for this story, walked the walk in August when the company reported a third-quarter loss of $9.8
million.

"In my view,
our poor performance is not the result of poor economic conditions," he said in a statement. "Much of our operating
shortfall, I believe, is the result of our own lack of execution."