Biglari Holdings (NYSE:BH), the personal fiefdom of CEO Sardar Biglari, is best known for its activist investment in Cracker Barrel Old Country Store (Nasdaq:CBRL). Biglari picked up 9.7% in June 2011. His company now owns 20% of Cracker Barrel. What ultimately happens in this tug of war is anybody's guess. If Biglari's first-quarter earnings are any indication, however, he should be worrying more about his own operations, which were mediocre at best. You'll want to avoid Biglari's stock. Here's why.
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Steak 'n Shake
Sardar Biglari thinks he can run Cracker Barrel better than current management can. He's spent 20 months accumulating a significant position in Cracker Barrel, yet his restaurant operations aren't exactly performing like a house on fire. Steak 'n Shake's 2013 first-quarter same-store sales (ending Dec. 19, 2012) increased 1.3% on a 1.6% increase in traffic. That's not horrible but it's not any better than Cracker Barrel, whose same-store sales in its 2013 first quarter (ending Nov. 2, 2012) increased 3.3% on a 0.8% increase in traffic. Cracker Barrel produced twice as much increased revenue as Steak 'n Shake at restaurants open at least a year despite a lower increase in traffic. In fact, it was Cracker Barrel's fourth consecutive quarter of positive comps for traffic, restaurant sales and retail sales. Mr. Biglari might have managed to pull Steak 'n Shake from the wreckage in 2009, but that doesn't mean he knows what's best for a restaurant chain that's outperforming his own. Perhaps Cracker Barrel CEO Sandra Cochran should give Biglari a tip or two instead.
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Since Biglari announced its 9.7% interest in Cracker Barrel on June 3, 2011, Cracker Barrel's stock has gained approximately 50% compared with about 1% for Biglari and 30% for PowerShares' Dynamic Leisure and Entertainment Portfolio (ARCA:PEJ). I mention this particular exchange traded fund because Cracker Barrel is a 2.63% weighting and one of 11 restaurant companies in the fund's portfolio. While a stock's performance doesn't always tell a good company from bad, the fact that Biglari itself has benefited from Cracker Barrel's exemplary performance is ironic given that its CEO isn't just content to own a good investment, but wants to force changes where it appears none are required. In the past year, Cracker Barrel's board has twice upped its quarterly dividend to 50 cents providing shareholders with $2 per share in annual payments, a yield that is higher than 3% despite a big run-up in its stock. Meanwhile, Biglari's stock pays no such dividend and has delivered nowhere near the capital appreciation. Mr. Biglari should follow his supposed idol Warren Buffett's example and leave the operations to people who have real experience running restaurants.
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Biglari's first-quarter earnings before income taxes were $5.9 million, 60% less than in the first quarter of 2012. So what exactly prompted the decline in pretax earnings? That would be its restaurant operations, which declined by 37% year over year to $8.8 million thanks in part to higher food costs and restaurant operating costs. This was despite a 1.4% increase in net revenues. Making matters worse, its pretax income would have been significantly lower if not for the $2.5 million in dividend income it received from Cracker Barrel. It seems to me that Biglari wants to get his hands on Cracker Barrel not because he can make it better, but because it generates so much more cash flow than either of his own restaurant operations. That's a great investment thesis for Biglari; not so good for Cracker Barrel. Hence why they've initiated a poison pill to keep Biglari from gaining a control position.
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The Bottom Line
As if Sardar Biglari's ego isn't big enough, he's managed to convince the board that his last name has real value; should he be pushed aside through a change of control or some other involuntary termination, he would receive from the company a royalty of 2.5% on all revenues generated from products and services bearing his name for a minimum of five years. It's not enough that shareholders have been seriously let down by his financial machinations, but now he wants an additional perk in case he's shown the door.
This man is the anti-Buffett. Owning its stock will continue to be a major disappointment.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.