Biglari Holdings Inc.’s efforts to franchise its subsidiary Steak ‘n Shake concept led to higher expenses in the third quarter and lowered earnings, the company said Friday.
San Antonio, Texas-based Biglari, which also owns the Western Sizzlin chain, reported that profit for the third quarter, ended July 4, slipped to $4.9 million, or $3.63 per share, from $8.7 million, or $6.49 per share, in the same period last year. Revenues increased to $175.8 million from $170.9 million in the prior-year quarter.
“Expenses were higher for several reasons, one of the most significant arising from our efforts to franchise the Steak ‘n Shake concept,” the company said in a statement. “Steak ‘n Shake's revenue from franchise fees was up 20 percent in the third quarter in part because we devoted resources to the franchising business.”
The company said the 496-unit Steak ’n Shake concept saw same-store sales increase by 2.9 percent in the quarter, with customer traffic growing by 2.2 percent.
Despite the increase in same-store sales, the company said expenses were higher because it had “devoted resources to the franchising business.” Earnings before interest and taxes at Steak ‘n Shake fell to $9 million from $10.1 million in the quarter, the company said.
Earlier in the year, Steak ’n Shake introduced a smaller-footprint Signature store in New York’s Times Square and said it was freezing prices in 2012 to enhance its value messaging. The company said franchise fee income increased 19.9 percent in the quarter with the addition of five new franchised units over the comparable quarter last year.
Biglari Holdings noted that the earnings comparison of third quarter 2012 to the same period of 2011 was “distorted because in the prior year there was a non-cash accounting gain, not an economic one, of $1.3 million, tied to the disposition of Mustang Capital.”
Biglari Holdings and affiliated companies have increased investment in Lebanon, Tenn.-based Cracker Barrel Old Country Store and now hold more than 17 percent of its shares.
In a press release, the company advised investor caution on reading earnings results for a given quarter. “The company has $52.7 million of pre-tax unrealized investment gains,” the statement said, “which if harvested in any given quarter can materially impact and thereby distort net income figures, as well as comparisons between time periods.”
In regulatory filings, Biglari reported third-quarter cost of sales at 28.9 percent of net sales, compared with 28.8 percent of net sales in the prior-year quarter, adding that commodities inflation was offset by cost savings. Restaurant operating costs were 47.2 percent of net sales in the third quarter, up from 46.9 percent in the same period last year.
Of Biglari Holdings’ 496 Steak ’n Shake restaurants, 82 were franchised at the end of the third quarter, and 87 of its 92 Western Sizzlin units were franchised during the quarter. During the third quarter, Steak ’n Shake opened four franchised units and closed one. In addition, one Western Sizzlin franchised unit was closed and no new units were opened.