Tuesday, April 24, 2012

Biglari Holdings Annual Meeting

So I did something unusual and went to an annual meeting last week.  I am usually not interested in annual meetings as they seem to be sort of love fests or promotional events and most of them seem to be rubber stamp events with no real substance.  Of course, the glaring exception is the Berkshire Hathaway (BRK) annual meeting.

I have been following Biglari Holdings (BH) recently and heard that he sits there and answers shareholders' questions for four or five hours.  I thought this would be an interesting event to attend.   So I did and it was interesting.

I didn't take detailed notes like BRK shareholders do, trying to capture every question and answer.  I just jotted down things I heard that I thought were interesting and here it is.

First of all, I should mention that this took place at the St. Regis Hotel in midtown and started at 1:00 pm and went on until a little before 6:00 pm.

Here are some random notes (some of it is off the top of my head so it may be off):

Intrinsic Value Growth Goal of 15%/year
BH seeks to grow intrinsic value by 15%/year.  This was mentioned in the annual report, but I don't know if that is before or after his incentive compensation.  It's not that important to me as this is just a number that people have to come up with; high enough to be interesting but not so high as to be silly.

Value of Activism
One chart Biglari showed at the beginning of the annual meeting was what happens to an investment if bought for 50 cents on the dollar and comparing that to what happens to this investment if they can participate on the board of a company and help it grow value to $2.00.  Now you are talking about turning $0.50 into $2.00 instead of $1.00. 

So if they can buy $1.00 of assets for $0.50, the return in 5 years would be 15%/year.  But if they can participate in value enhancement to get the value up to $2.00, that would boost the return to 32%/year instead of 15%/year.

A key point is that even if the activism doesn't work out, they should do well.

SNS Doing Well
Biglari announced at the annual meeting that SNS had same store sales and traffic growth of 4.8% and 5.2% in the first quarter of 2012 continuing the trend in improvement.   The Signature store in Times Square is doing very well.  He showed a video of the opening and a couple of clips when the Steak N' Shake Signature store was featured on the Letterman show.  Letterman did spend a lot of time talking about how it was an important thing in his early life to be able to go to the SNS on his bicycle to get shakes.

Sales are doing well at the Times Square store but he said that they do need some work on operations; there is room for improvement.   Someone asked him what lesson he learned or is learning from the Time Square store and he said they need more space (the Time Square store is only 1300 or 1400 square feet; it's a nice store but tiny).

He also said that SNS is the only national hamburger chain (or national fast food chain, not sure which one he said) that offers an organic hamburger, even though it's just in one store (Times Square).  He did say it is selling well and they are working on getting it to more stores.

Why Not Sell/Lease Back or Spin Off the SNS Real Estate?
Someone mentioned that SNS owns the land under many stores; why not sell the real estate and lease it back or split/spin off the real estate?   This would free up capital and improve returns. 

Biglari's response was that if you sell the real estate, you lose optionality.  When you own the real estate, you have choice.  When you sell the real estate, the landlord can raise rent or decide it can be more profitable as something other than an SNS restaurant.  You lose control.  If you own the real estate, rent can't rise and a landlord can't kick you out.

He said the cost of a sale-leaseback would be 8%, so after taxes and expenses, they would have to earn 10% with the proceeds of a sale-leaseback for it to make sense.

Biglari mentioned that they actually went backwards; they BOUGHT real estate recently.  They bought $9 million of real estate and lowered rent expense by $900,000 for a 10% return.

He also mentioned that a lot of this financial engineering stuff is done by managements that can't or don't turn around the operations.  They shuffle assets but things don't improve because they don't turn the operations around.  So turning the operations around is more important than financial engineering.

Why Not Refranchise Stores to Free Up Capital and Boost Returns?
Someone asked why BH wouldn't want to sell and refranchise SNS restaurants.  Biglari had an interesting response.  He said they are working on franchising the business, but it is taking time because they want to do it right.  They don't want to sign up a bunch of franchisees and open up a bunch of stores only to have to close them.  They want to do it right and that takes time. They want to find the right partners, set up the infrastructure and systems etc...

As for selling/refranchising stores, Biglari says that there is so much room for improvement in the existing, owned store base that it makes no sense to refranchise at this time.  For example, the average sales now is around $1.6 million.  If there is a clear path to get that to $2.0 million, then it makes much more sense to work on getting that to $2.0 million rather than selling the store and franchising it.

If sales moves up to $2.0 million from $1.6 million, Bigari says that they can earn conservatively a 40% incremental margin.  That means the $400,000 increase in sales per restaurant would increase pretax profits by $160,000/store. 

If the store were franchised, they would earn 5.5% royalty on sales.  So at the current $1.6 million, BH would earn $88,000 in royalty fees.  He said that at best, the franchise business would have a margin of 50%, so that implies pretax profits of only $44,000.

(He didn't mention what the cash generated from the sale of the restaurant sale would earn, so this may not be apples to apples (because we don't know what price the restaurant would fetch either)).

Anyway, it is an interesting response and compelling as it does seem that there is nice returns to be earned going forward in the existing restaurant base.

I have mixed feelings about franchising as I personally tend to think that the best businesses are owned (Starbucks, Chipotle Mexican Grill) and franchised operations are 'trashy' (YUM Brands U.S. operations and countless others; MCD being the notable exception that has really gotten the franchising thing down to perfection)).

In any case, at this point I don't have any strong feelings about whether any of this financial engineering is a good idea or not.  Biglari seemed really passionate and serious about turning SNS into a great business; better products, lower prices etc...  

(Just as a note, he said maintenance capex for SNS in 2011 was $6 million and won't change much in 2012)

Cracker Barrel
Not surprisingly, he made some comments about Cracker Barrel.   Most of the comments were similar to what he said in his letters to CBRL shareholders.

He offered two examples of the waste and mismanagement at CBRL.  He said that he spends a lot of money on billboards.  I forgot why he knows this, but he said that CBRL spends $1,400 per billboard per month (that's what I think he said, but again, this is off the top of my head so I may be wrong), and he said that is way too high a price.  He said that he pays for a lot of billboards so knows the market and this level is just way too high.

He also mentioned that CBRL restaurants have a separate bathroom for employees.  He said this is incredibly wasteful as space is very important in the restaurant business.  Why do employees need their own bathroom?

He said this is just two examples and he is sure there are many, many more.  But he will need access to information to find more waste and that can only be done by getting on the board.

He insisted that he is at CBRL for the long term and is not there for a quick profit, and that contrary to claims by the CBRL board (that don't stock in CBRL), BH's interest is aligned with the shareholders of CBRL.  BH owns so much CBRL, how can the interest not be aligned?

He said more than once, as if speaking to the CBRL moles in the audience that he is not going to go away.  It may take years and he will be there.  One failed proxy contest is not going to make him go away.  What's right will prevail.

Anyway, Biglari really seemed determined and serious about this.

Questions were asked about the opportunity cost of owning so much CBRL without making much headway in terms of getting board seats.  He said that they are long term investors and they are concentrated investors. This is the way they work. 

If you look back to what Biglari said in the beginning about the difference between turning $0.50 into $1.00 and $2.00, having it turn to $1.00 is not bad at all.  So BH will presumably do well even if nothing happens on the proxy contest.

He reiterated the value that can be realized at CBRL if they can get store productivity back up to where it was when the founder ran it. 

Biglari sent a letter to CBRL shareholders on the day of the annual meeting and he said that CBRL should be able to grow traffic by at least 3%/year and should be able to target 5%.  Someone asked where that number came from.  The answer was that after years of traffic declines, it shouldn't be too difficult to turn traffic around.  He mentioned SNS.   He mentioned that it was getting harder for SNS to grow traffic as they have been growing for many quarters in a row.  But after declining for so long, Biglari insists that it won't take much to turn it around a modest amount.

Incentive Compensation
So someone stepped up to the microphone and asked Biglari about his compensation.  He said that if Biglari cared about the shareholders, why not reduce his $900,000 salary and incentive compensation and use it to invest and enhance value for shareholders?

Biglari mentioned that the compensation was overwhelmingly approved by shareholders.  He said that if he didn't like the compensation package, he shouldn't own BH stock.  Biglari asked that if you invested in a hedge fund, would you ask the hedge fund manager to lower his management and incentive fees?  (my comment:  a lot of investors *are* actually asking hedge funds, private equity funds etc... to lower fees!).

But I understand Biglari's point. 

At some point, Biglari said that this is an unintelligent question so he doesn't want to respond any more to it or some such thing (I'm pretty sure "unintelligent" was the word he actually used).  Of course, Biglari is not known for, say, the folksy charm, wit and humor of Warren Buffett.  I thought to myself, hmmm...   I would not answer a shareholder question like that even if I did think it wasn't the best question (you know what he's gonna say).

Of course, it only took seconds for someone to notice the 'hypocrisy' of the comment "if you don't like it, don't own the stock".  So someone jumped up and said, hey, that's not a stupid question and you can't tell people not to own the stock when BH also owns shares in CBRL and complains about compensation there.  Why not just sell CBRL stock if you don't like it? 

I knew this sort of question would come right when Biglari said "if you don't like it...". 

But Biglari's response made sense too.  This is different because you are looking at a compensation package at BH that is based on results.   If BH doesn't succeed and make money for shareholders, it will cease to exist.

At CBRL, management is failing and trailing the industry on many measures.  The complaint against CBRL is not so much the compensation but the (non) performance of the business.

So that is a fair distinction; he's not trying to get on the board of CBRL to cut compensation (even though that may be part of the plan), but to create value for shareholders by improving the operations of the business. 

I agree with Biglari that this is a different thing altogether. 

This is not to say that people shouldn't complain about what bothers them.  They could bring it up and leave it up to other shareholders.

Other Things
Someone asked him what he's learned from other financiers taking over businesses and trying to run them. What has he learned from watching Eddie Lampert, for example?  His answer was that he learned that retail is a hard business.

He went on to talk about how the restaurant business is full of horrible operators that make really bad decisions all the time.  He made it sound like an easy business to do well for that reason.

He talked about Sam Walton and Walmart and about Henry Singleton/Teledyne and knew the important metrics of his management tenure (book value growth, sales, earnings or whatever it was... he just threw out a bunch of numbers off the top of his head).

It is clear that Biglari loves business and is deeply passionate about it.  He is no fool.   You can tell he is a voracious reader and knows what he is talking about.  He seemed to answer questions well.  I didn't have any problems with anything he said that I remember.

He doesn't have any of the charm that you see from a Buffett, of course.  There aren't many of those.  He does have this intensity about him, though, which give you the feeling that Biglari will be spectacularly successful or flop miserably.  But my sense is that he won't flop miserably.

He does have an incredibly arrogant vibe about him. He is definitely not the warm and friendly type.  But you know, that's OK.  When I look at investments, I look for people who are passionate about succeeding, works hard and loves to do what they do; I'm not looking for friends.  I really did get that sense from him after watching him for five hours.  He is there for the money, of course. But it seems to me that he really loves it too (unlike many highly paid people I've known on Wall Street over the years).

I think this is an interesting situation.  I understand many people don't like Biglari for many reasons but I think it would be a mistake to write him off.  I think there is a bit more substance there than people seem to think.

But then again, I could be totally wrong!  If I am, I apologize in advance.


  1. Was there any discussion of BH's investment in CCA Industries? Messrs Biglari and Cooley have now been Board members for over 1 year. I am curious if they have been able to achieve any value enhancement at that company.

    1. Someone asked about it and he said they don't comment on specific holdings, except for CBRL for obvious reasons.

  2. Great work. Very interesting write up for those who are not able to attend these meetings.

  3. Thanks for sharing the meeting notes. I agree that Biglari is an interesting person, despite the fact that he may come off arrogant at time. Just curious, was there any discussions around pursuing insurance companies or diversifying away from restaurants?

    1. Yes, he did say they are looking at various industries and he did say insurance companies are cheap now.

  4. Shareholders voted for it?? Doesn't he own well over 50% of the stock?

    1. No, less than 20% even including Lion Fund holdings (which he has voting control over). I understand that the compensation thing turned off a lot of people. I totally get that. I come from the financial industry so maybe have more tolerance for that sort of thing. The key is if he can perform or not. If he can, great. If not, then it's not going to matter (he won't get paid unless he earns the hurdle, and unlike at private equity/hedge funds, he has no catch-up provision so he only gets 25% of what is earned above the hurdle). I do admit it's highly irregular for someone to try to set up a hedge fund structure out of a restaurant business; of course former restaurant stockholders are shocked...

      He could've taken a different path but he didn't.

  5. I own BH and CAW and I appreciate your attendance. Did anyone ask him about catching more flies with honey? It seems to me that if he is always aggressively pushing management and board members, they will fight him just out of human nature. I like his disruptive approach but I also like it when a pitcher has more than 1 pitch that the hitter can not just its and wait for.

    1. Yes, someone did ask him and his response was that only some in management don't like him or whatever... I forget the exactly what he said, but the gist of it was that he doesn't care what people think or say, he is only doing what's right, and besides the people that are pissed are the inept managements that he is moving against. This is true with Ackman and most other activist investors. There are more friendly ones, like Valueact (?) and maybe some others, but I think it's just part of the game.

  6. Great read. Will be interesting to watch how he turns out over the next couple of decades.

  7. If Biglari were fired, with no change in his compensation agreement, what would the stock price be?
    What would Biglari Holdings Inc. then be worth?
    (Assume he would get what the current contract says he is entitled to up to the date of his dismissal.)
    This is somewhat of a rhetorical question; I think most analysts would agree on the range of values.

  8. Do you plan on attending the next BH AGM?

    1. Hi, I don't know yet. If I do, I might make it a post. We'll see. Thanks for reading.

    2. This comment has been removed by the author.

    3. Would be great if you do! I unfortunately can't make the BH meeting this year.

      Will you be at the berkshire meeting in may?

    4. Hi,

      No, I don't do the BRK meeting.

      Thanks for reading!

  9. kk, quick thought question: why doesn't Cracker Barrel buy out BH. They get their own shares back at market prices and they also get SnS (the low trading volume of BH probably doesn't allow for easy accumulation of the stock)

    1. Hi,

      Interesting idea. Why don't you ask them? Maybe we can get a Herbalife-like battle going on except both sides trying to buy each other out...

      But CBRL is clearly in the restaurant business so probably wouldn't want to deal with the headache of dealing with BH.

  10. Usually I am not regular to read article on blogs, but I would like to say that this write-up very pressured me to check out and do it! Your writing taste has been surprised me. Thank you, quite nice article.

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  11. Thoughts on Biglari's latest maneuverings? Looks like he has put over $300m of Bigalri Holding's money into his personal hedge fund and he purchased the hedge fund back from the company for $1.7m. In addition, the board approved a poison pill of sorts where Biglari personally gets a 2.5% royalty on Steak N Shake sales for an extended period if he is fired from the company.

    1. Hi,

      Yes, he seems to be a busy guy. It looks like a clever way to get over the incentive bonus cap. It's not as drastic as it sounds as he is paid 25% of increase in book value over 6% hurdle. Now he will take that incentive fee out of the investment fund and he did adjust the incentive bonus plan to exclude gains in book from investments to eliminate getting paid twice.

      But it is good for him, nonetheless, as it removes that incentive bonus cap, at least on the amount that will come from investments.

      As for the purchase price of $1.7 mn that seems cheap given how much it can be worth to Biglari, but then again, most of that is just a shift from BH incentive bonus to investment fund incentive fee (BH will be paying the amount either way).

      As for the 2.5% royalty, I think it may be academic. I only read through it quickly, but it seems to suggest that if the name is not used after change of control or 'firing' of Biglari then no payment would be due. Why would someone take over BH, fire him and then continue to use the name? I may have missed something but I would think the name would be scratched from everything in that scenario.

      I think Biglari is trying to create a 'brand' under his name, like Trump or Virgin or whatever, and he may be protecting himself for when that happens. I think Martha Stewart and others have similar things to prevent people from gaining 'ownership' of their name.

      But maybe there is a long term contract that requires BH entities to continue to use the Biglari name in which case the royalty would be burdensome.

      To the extent that people own this stock because of Biglari and faith in his abilities, then it also may be academic... why would you own this if Biglari doesn't work out?

      Anyway, interesting development. We'll see how this pans out.

    2. Oh never mind my comment about the license agreement. There are examples in the last paragraph of that section; even the use of the name is ceased immediately after a triggering event, there is still payments to be made, so it is onerous.