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Archive for January 2009

The Chick-Fil-A Owner/Operator Model

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On Thursday, Chick-Fil-A reported unbelievable 2008 sales figures including record system-wide-sales of nearly $3 billion, a 12.2% increase from 2007 and a very impressive same-store-sales increase of 4.6%. 2008 was its 41st consecutive year of system-wide sales gains.

In case you are not familiar with Chick-Fil-A, it is the second largest U.S. quick service chicken restaurant chain with nearly 1,425 locations in 38 states. They are known for being the first fast food chain to offer boneless chicken breast sandwiches and chicken nuggets and the first to locate inside of shopping malls. To learn more about the history and the guiding principles of the company, I recommend reading Eat Mor Chikin Inspire More People: Doing Business the Chick-Fil-A Way by company founder, S. Truett Cathy.  You will learn that the values espoused by Cathy that makes the company the success that it is today are simple, but not easy to execute consistently day in and day out (except Sundays!).

What really makes Chick-Fil-A different from its competitors is its Operator model. Most restaurant companies have minimum net worth requirements for their franchisees, usually exceeding $1 million, of which up to $500,000 of liquid net worth is needed just to get the first restaurant up and running. From there, the franchisee must pay the franchisor an ongoing royalty fee of around 4-6% of gross sales and around 3- 5% of gross sales for an advertising fee. If the franchisor owns the land underneath the restaurant, another fee is charged to the franchisee for rent which is usually in the neighborhood of 6-9% of sales. This percentage of sales arrangement makes franchising a fantastic business. A pure franchising model can produce up to 50-60% EBITDA margins with very little capital required.

Chick-Fil-A does things a bit differently.  In fact, Chick-Fil-A really doesn’t really franchise restaurants in the traditional sense since they retain the equity in its restaurants. What they really do is recruit young, hungry entrepreneurs that embody the Chick-FIl-A values, then offer them an attractive profit sharing program. The company gives the Operator all the tools it needs to succeed, but from there the Operator is the “CEO, manager, president, and treasurer of his or her own business.” At the Steak n Shake Investor Day in November of 2008, Sardar Biglari commented that he loves the Chick-Fil-A owner/operator model. I suspect and hope this admiration will eventually lead to emulation.

You don’t have to be worth millions to be a Chick-Fil-A Operator, instead you have to pay an upfront fee of $5,000 (just to prove you are serious I guess). From there, Chick-Fil-A pays for everything to get the restaurant up and running including real estate and equipment which they then sublease to the Operator. Chick-Fil-A charges 15% of gross sales, and then splits the net profit 50/50 with the Operator. Under this arrangement, most Operators are able to make over $100,000 per year. The company doesn’t do too shabby either. They have a disciplines growth strategy, building only 75-100 new stores per year, reportedly taking on only modest amounts of debt to build each location. I can’t see how the company could be doing anything but printing cash.

This system produces entrepreneurial owner/Operators that are both emotionally and financially committed to the business. As Cathy said, “the bottom line depends on the Operator’s honesty, integrity, commitment, and loyalty to customers and to us. We trust our Operators to make good decisions – and they do.”

Below are the tenets Operators are expected to adhere to (from Eat Mor Chikin: Inspire More People):

  • People want to work with a person, not for a company
  • Each new Operator is committed to a single restaurant
  • Operators will hold no outside employment or other business interest
  • We choose Operators for their ability and their influence, so we want them in the their restaurants
  • We expect quality interaction between Operators and team members
  • We expect quality interaction between Operators and customers, both in the restaurant and in the community
As shown by the sales figures reported on Thursday, the Operator model (and great food and marketing of course) is clearly working for Chick-Fil-A. I am not aware of anyone that has successfully copied this Operator model on a large scale.



Written by sdinvest

January 31, 2009 at 10:29 pm

Buffett Partnership – Part Two

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Warren Buffett is frequently asked about a comment he made in a 1999 Business Week article to the effect that if he was managing $1 million or $10 million he would guarantee he could make a 50% annual return.  In fact, I was lucky enough to have the chance to ask him about it a few years ago during a q & a with my university.  He basically said that with a small amount of money under management, he would do exactly what he did in the 1950s after he got out of college and formed his partnership. In other words, he would probably not be looking at Coke, Burlington Northern, etc. He used his 1951 Moody’s Manual to discuss Western Insurance Securities which he discovered was selling for less than 1x earnings. He also had a 2005 Korean stock guide that was given to him by a friend. On a Sunday afternoon, he found 20 or so companies selling for 2-3x earnings. He put $100 million of his personal portfolio in these ideas.

In an earlier post ( I discussed Berkshire Hathaway circa 1962. Here is a company named Grinnell Corporation. They made sprinkler systems, industrial humidification systems and plumbing materials. According to the 1962 year-end statement, the Buffett Partnership held 3,727 shares of Grinnell worth $277,697 at $74.50 per share. It was the 12th largest position in the portfolio of about 50 stocks, accounting for 2.8% of assets. So why did Buffett own this stock? I have no way of knowing when he purchased the Grinnell shares, but the image below is from the 1962 Moody’s manual which is possibly the information Buffett studied before purchasing the shares. Grinnell seems to fit the Benjamin Graham description of a statistical bargain. At year-end 1961, the company had a tangible book value of $168 per share and a net current asset value (current assets – current liabilities) of $101 per share. So assuming the shares were purchased around the year-end 1962 price of $74.50, Buffett probably purchased the shares due at least in part to the fact that it was selling for about 26% below net working capital.



Written by sdinvest

January 26, 2009 at 6:29 pm

Mid-Continent Tab Card Co.

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On November 6 & 7, the University of Virginia hosted its first annual Value Investing Conference. From its website: “The mission of the Value Investing Conference is to annually assemble the investing public, professional investors, scholars, and students in the field of value investing for the purpose of highlighting and disseminating best practices, honoring best practitioners, and revealing new trends and developments in the field.”

One of the conference speakers was Alice Schroeder; author of the authorized biography of Warren Buffett entitled The Snowball. The video of the presentation can be found at the link below:

During her presentation, Schroeder provided a fascinating case study of a private investment Buffett made in 1959 in a company called Mid-Continent Tab Card Company. At the risk of sounding technical, tab cards were something used in computers back in the day. At any rate, with over 50% profit margins, selling tab cards was IBM’s most profitable business in the 1950s. As a result of a settlement with the Justice Department, IBM was forced to divest of its tab card business. A couple of Buffett’s friends, Wayne Eaves and John Cleary, had started a tab card company themselves in the mid-to-late 1950s. It was an extremely profitable business. Tab cards were made on what was called a Carroll press. They were turning their capital over 7x per year while earning 40% net profit margins. In 1959 they were looking to grow this profitable business which required buying more carel presses.

So, in 1959 Eaves and Cleary approached Buffett to see if he had any interest in investing in the company. This is where Schroeder’s presentation gets interesting as she describes the process Buffett went through in deciding if he wanted to invest in the business and the return criteria he desired for putting up the money. I suspect the first thing that most analysts would do when presented with such an investment opportunity is to ask for management’s financial projections and then create a discounted cash flow model. According to Schroeder, Buffett did none of this. In fact, given complete access to all of Buffett’s files, she never once saw anything remotely resembling a financial model. Instead, he analyzed on a quarter-by-quarter and plant-by-plant basis, the historical profit and loss statements for both Mid-Continent and all relevant competitors. From there he acted like a horse handicapper figuring out which one or two factors would make the horse succeed or fail. In the case of Mid-Continent it was sales growth and cost advantages.  When presented to Buffett in 1959, the company had $1 million in sales, was growing at 70%+ per year and earning 36% profit margins. According to Schroeder, the ultimate decision to invest came down to the question, can I get a 15% return on $2 million of sales. The answer in his mind was yes, so Buffett invested $60,000 of his non-partnership money representing 20% of his net worth. This investment gave him 16% of the company’s stock plus some subordinated notes.

As one would expect the Mid-Continent investment turned out quite well for Buffett. Over time he put another $1 million in the company, which would later be renamed Data Documents. The company was sold in 1979 to Dictograph. Buffett held the investment for 18 years earning a 33% compounded annual return…sign me up!

What was interesting to me from this case study was that he did not seem to bother himself with projecting revenue and profits out five years, did not grind over whether to use a 10% or 12% discount rate, nor worry about which terminal multiple to use. There certainly was no investment banker’s “book.” Instead, he approached the investment wanting a 15% “equity coupon.”  From there, he had to decide for himself whether it was a cinch to get such a return while relying solely on analyzing historical profit and loss statements.

Discussion of this investment did not make it into The Snowball because it was deemed too technical for the general public. Let’s hope that Schroeder publishes a follow-up book with more stories similar to that of the Mid-Continent Tab Card Company.

Written by sdinvest

January 19, 2009 at 11:58 pm

Posted in Warren Buffett

The Stock Wall Street Hates the Most

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Quick, name the stock Wall Street hates the most. Surely it must be either one of the large financial institutions like AIG, Freddie, Fannie or Citigroup, or one of the domestic auto manufacturers right? Wrong. According to Bloomberg, the average Wall Street analyst rating on a scale where 1 equals “sell” and 5 is a “strong buy,” Sears Holdings (SHLD) had an average rating of 1.29. This gives SHLD the worst score among 2,678 U.S. stocks with market caps over $250 million (GM was #2 incidentally). Therefore, using the collective genius of high-paid analysts, GM (or any other large U.S. company) is a better investment than SHLD. In short, I don’t get it.

Now, I read the news. I understand that consumers are collectively tying up their purse strings. People are losing their jobs, not buying Kenmore washing machines, etc. This showed up in SHLD’s December sales figures as Kmart’s sales were down 1.1% year-over-year (yoy) while Sears Domestic was off by 12.8%. Total retail sales (ex auto) were down a record 3.1% yoy in December.

Luckily the Chairman of SHLD, Eddie Lampert (whose investment vehicle is the largest shareholder owning nearly 54% of the company) has put the company’s balance sheet in a relatively strong position to weather the current economic storm. At the end of last quarter, SHLD had $4.48 billion of debt ($3.8 billion if you back out capital lease obligations). Recently, the company reported that it expects to end the fiscal year with $1.3 billion in cash and about $2.6 billion in debt ($1.9 billion ex cap. lease oblig.), down significantly from $4.86 billion at the end of fiscal 2005. The strategy over the past three years to reduce debt, keep capital expenditures under control and return excess cash to shareholders via share purchases was prudent in my view. (Note: I do acknowledge that the company did repurchase shares at what have proven to be rich prices over the past couple of years).

What was the competition doing while SHLD was getting its balance sheet in order? Home Depot’s debt balance went from $2.2 billion in 2005 to about $10.3 billion as of last quarter. Macy’s debt went from $3.9 billion to about $9 billion over the same period. What were these companies doing with this cash? In some cases (such as Home Depot) it was used to repurchase shares. However, over the last 5 years, SHLD’s retail competitors spent $140 billion on capital expenditures, opened 4,904 new stores adding 5 million square feet of new retail space. We now know that we have been extremely over-retailed. Retail industry investors, net, have basically seen no return on the $140 billion invested in building new stores or improving existing locations. Fortunately for SHLD shareholders, the company chose not to make similar large commitments to capital expenditures. Now, I agree that both Sears and Kmart are not the most beautiful stores around and this is partly attributable to the fact that the company simply has decided not to invest much cash to drastically improve store appearance. However, I know of many Circuit City and Linens n Things stores that were well-kept, bright, well-stocked and frequently busy, but both share the same fate…liquidation. A company doesn’t go bankrupt because its same-store-sales are down; it does so if it runs out of cash thanks to a heavy debt burden. It’s times like these where companies with ample cash and manageable debt should be applauded.

What does SHLD look like in 3-5 years? The short answer is that I have no idea. I’m agnostic on the future success of Sears/Kmart retail operations. Both have shown negative sales growth for quite some time now. Ultimately, this trend must reverse course. I do know, however, that there is plenty of value in Sears’ exclusive brands (Craftsman, Kenmore, Diehard, Lands End), the largest auto repair operation, as well as the largest appliance retailer and servicer. In addition, they own 810 stores in the U.S. and Canada, or approximately 96 million square feet of real estate. The following link contains an excellent analysis of the potential value tied up in SHLD’s owned real estate:

Finally, you have Eddie Lampert as Chairman. Through his hedge fund, Lampert controls nearly 54% of the stock (this figure increases every quarter has shares are repurchased). Reportedly, Lampert has basically all of his liquid net worth invested in his hedge fund and SHLD is one of its largest holdings (AutoZone is the other). Therefore, no one is more directly affected financially by the ups and downs of SHLD stock price than the Chairman. I like it when I can get an owner/operator who lists Warren Buffett as one of his heroes and whose interests are completely aligned with fellow shareholders/partners. Good things tend to happen over time.

As of today, SHLD sells for $49.21 per share. With 123.6 million shares outstanding as of 11/28/08, the company has a market cap of $6.1 billion. Net debt should be around $1.5 billion by the end of this month resulting in an enterprise value of around $7.6 billion. [Admittedly, the balance sheet always looks best right after the holiday season. The company will likely increase the debt balance gradually throughout the year based on working capital needs]. The company is expected to report fiscal year 2008 earnings of between $163 million and $243 million. Yes, the most hated stock is profitable. So for about $7.6 billion you get a profitable retailer which has produced on average $1.2 billion of free cash flow per annum from 2005-2007, real estate worth anywhere between $2.4 billion and $14.5 billion (note: the second largest shareholder, Fairholme Capital, conservatively values the real estate at $90/share or about $11 billion), four great American brands, and a highly incentivized and shareholder-oriented owner/operator. In my view there are many ways to create value for owners with the assets SHLD has at its disposal. I look forward to seeing exactly how it’s done over the next few years.



Disclosure:  I am long SHLD

Disclaimer: This article by no means should be considered investment advice. I am not an expert (you probably figured that out already) and make plenty of mistakes. Please do your own research before buying any stock.

Written by sdinvest

January 17, 2009 at 1:46 am

2008 Sears Holdings Annual Meeting

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I had the opportunity to attend the 2008 Sears Holdings annual meeting held in Hoffman Estates, Illinois.  It took place the Monday following the Berkshire Hathaway annual meeting (which I was also fortunate to attend) at Sears’ headquarters. There were approximately 150 people in attendance. Part of my reason for attending was to make sure that Eddie Lampert actually exists as he never does any print or television interviews.  You can find my notes from the meeting below:

2008 Sears Holdings – Annual Meeting Notes

Monday May 5, 2008 – Hoffman Estates, IL

Courtesy of

1.) Bruce Johnson, interim CEO, opened the meeting with a brief presentation.

– Disappointed with 2007 performance caused in part by excess inventory, higher markdowns

2008 Priorities

         Improve margins

o   Selling and promotional prices

o   Purchasing

         Tightly control expenses

         Focus on cash generation

         Implement new operating model

o   Better sense of ownership, accountability for results

o   Improved speed of decision making

o   Attracting top talent

o   Improving productivity of brands and stores

         Expand online, multi-channel capabilities

         Invest in off-mall formats

o   Sears dealer stores / Hope Appliance Showroom

o   Sears Outlet

         Introduce new products/brands

o   Piper & Bule (Kmart clothing brand-doing well so far)

o   Wckd (Kmart clothing brand)

o   Snapper (Sears)

2.) Eddie then gave a 15-20 minute presentation beginning with a brief overview of 2007 results including net income, EPS, and adjusted EBITDA. He used slides throughout this presentation taken mostly from the annual letter to shareholders including competitor’s trends in debt, capex, etc. 

            – 8 straight quarters of negative comp store sales

– Retail competitors over the last 5 years have spent $140 billion on capex, opened 4,904       new stores and added 5 million square feet of new retail space. **Eddie really emphasized that there is nothing that SHLD can do when their competitors build new stores. He seems to think that 5 million added square feet was overdone and irrational.

– SHLD domestic debt is down 47% since 2004, compared to competitors like WMT and TGT that have piled on debt, partially to fund store expansion.

– Discussed long term performance of other retailers and how it relates to their capital spending over the last 5 years. Ex. WMT has spent X on capital spending over the last 5 years, stock price is basically flat.

– Eddie sees no evidence of an economic turn around

– Sears & Kmart together cover more US population than any other retailer, including WMT.  He makes this point to prove that SHLD does not need to expand and build new stores, rather to increase productivity of existing assets.

– Discussed a pitfall in same store sales figures in that there is a built in upward bias when new stores are built and the subsequent ramp up in sales in the first few years. For example a typical Target store may do $20 million in sales per year.  A new TGT may do $10 million in year 1 on its way to ramping up to the normal $20 million, the percentage increase in years 2-5 may distort what can be considered a normal same-store-sales increase.

– Further hints that there might have been some over expansion in retail square footage over the past five years that will cause some pain and dislocation among SHLD competitors.

– So far SHLD has not been able to big money behind big new ideas.  They test new ideas on a couple of stores at first before making large scale changes.

– Starting to see some retail behavior changes (uses chart showing store closings)

– Commented on the many changes in how people live and shop and how SHLD needs to be aware of and adapt to these changes.  He uses an example of Kmart’s photo development business and how quickly it faded.

            * Entertainment (Tivo, Netflix, Apple, YouTube)

            * Communications (Blackberry, Apple Iphone)

            * Shopping (Amazon, Ebay)

            * Information (Google)

            * Social Interaction (My Space, Facebook)

– Wall Street Journal, NY Times as a product, are the best they have been, but the performance is worse than ever.  The point here is that a great product does not necessarily mean great results.

-Talked about reduced debt. Eddie says that he feels comfortable with SHLD’s financial position.


1.)    David Silger (NARS – Retired Sears Workers…

·         More of a comment than question that with thousands of retired Sears workers, why not use them more because they want to see Sears reclaim its position as an important retailer…..Eddie gives a stock response that he appreciates it and they will try to use them, etc.

2.)   Republican vs. Democrat economic policy and its effect on the retail environment

·         Not a great macro prognosticator

3.)   A few years ago you said you didn’t have a 5-year master plan…do you now with discretion of cash flow how do you think about cash spend on equities versus capex?

·         Acknowledged opportunity with capital – balance sheet strength

·         Want to make sure they secure Sears’ future first

·         You want to be able to zig while everyone else is sagging

·         Circumstantial whether to lever up to acquire whole businesses or equities

·         First priority is to stabilize the core business

4.)   Thoughts on providing additional shareholder interaction

·         Press releases, 10-qs are enough to attract the long-term shareholders they want

·         Earnings guidance is not possible to predict accurately, distracting to management and can lead to poor decisions just to meet quarterly earnings

·         Annual meeting is a better forum than quarterly calls

5.)   What can you do to reach the hourly worker to act/perform better? What can be done to stop poor worker attitude. Commented that he has witnessed cat fights between workers in the middle of the store.  Recommended tracking sites like to watch for abuse of gift card bonus policies that could cost SHLD millions of dollars.

·         Eddie hopes the questioner didn’t cause the cat fight, he has never seen anything like that during his store visits.

·         You like to think you can trust the goodwill of your customers and employees, but bad things will happen when you have 300,000 employees.  In a town of 300k, not everyone will be behaving properly.

6.)   Ken Shubin Stein (Spencer Capital) – Real Estate value over time?

·         Several factors involved with commercial real estate values

·         As inflation increases, replacement value is higher

·         Can cost $20-$30 million to build a big box store

·         Recent store closing phenomenon is a factor

·         Lack of financing is a factor

·         Goal is to make the operating business worth more than the real estate

·         A mix right now whether the real estate is worth more than the operating business

·         The environment has changed recently

7.)   Question basically asking about ESL investing in AutoNation while Sears is buying back stock…trying to get to why SHLD doesn’t invest in AutoNation.

·         Eddie won’t comment on specific investments

8.)   Branding and Inventory question…why the inability to market and capture audience?

·         Test advertising before running a campaign

·         A lot of money lost last year in apparel inventory

·         Tough to get inventory planning correct because you make buying decisions 6-9 months in advance…long lead times make it difficult to react quickly to changes in the macro environment.

·         Questioner comments further on inventory problems….like seeing coats in a Phoenix store in the summer

o   Eddie acknowledges they have analytic problems

9.)   Bill Ackman –Pershing Square – How to pay/incentivize the new category heads, possible conflicts of interest…for example the real estate person deciding to sell a store that may negatively affect the profitability of the lawn and garden person.

·         Want a framework in place so that decision makers to act independently

·         Some stores are 4-wall EBITDA negative

·         Ackman gives an example of what happens when the head of Craftsmen decides to sell tools in Target…how does this affect Sears’ business?

o   There will be conflicts

o   Craftsmen could decide they want to sell tools in Target which might make the lawn, home and garden division upset

o   Productivity of store space may be worth more to someone else

o   Trying to get to a free market system for square foot usage (I am not sure of this, but I think the home and garden, apparel, etc divisions will pay rent to the real estate division…again I could be misunderstanding this)

10.) Thoughts on time/energy spent with ESL vs. SHLD

·         ESL is doing something different than Sears

·         The private equity business has a much bigger problem with this than SHLD…meaning portfolio company investment vs. pe firm investment

11.)  Question about share repurchase program getting close to complete…will they extend it?  Also a comment that Eddie should disclose how much of ESL he owns so the market can realize just how much he personally has invested in SHLD to which Eddie replied, why so everyone can see how much I lost last year? (Laughter)

·         No direct answer on whether or when they will authorize another share repurchase program

·         They have received several offers from large mall companies to buy some stores….they basically have not responded because Eddie didn’t take the offers/price seriously

12.) Student from Wisconsin-Oshkosh – How can you reassure shareholders that the reorganization is good for shareholders?

·         Thinks it is good for shareholders

·         Example that GE and GM have finance businesses that may be more important, certainly more profitable in GM’s case, than the core business.  Though probably not intended these finance divisions are becoming ever more important.

·         Will the business perform better over the next 3-5 years is the question

13.) I can’t remember the question asked here, but here is Eddie’s answer…

·         Compared telco industry to today’s retail industry in terms of excess capacity

·         If 500 million sq. ft. of retail space are built over the next 5 years, everyone will struggle including SHLD

·         Can’t prevent competitors from building new stores

·         There are lots of ways to create value even with brick & mortar (Blue Nile, Amazon)

·         How Craftsmen creates value may be different than Sears/Kmart

·         Eddie seems worried about inflation, Wal-Mart and China may not be able to sustain keeping prices down

·         Would have gone to everyday low prices if he had to do it all over again

14.) Keith Trauner – Fairholme Capital – How do you protect operating cash flow…working capital management vs. keeping operating margins high?  (note: I love the way Fairholme thinks….it is all about the free cash flow yield)

·         Unfortunately I don’t have good notes or recall the answer for this question but I think Eddie dodged it quite well

·         Will look to have more productive ad spend, not reduced ad spend

·         Will consider spinning off business units but no plans for now

15.) Recommend two books

·         Jump Point

·         Currently half way through: From Third World to First

·         Also mentioned The Breakthrough Imperative earlier in the meeting. It is about a company’s options being determined by its competitive position

·         Eddie reads on an Amazon Kindle

16.) What were two probabilistic decisions you made last year that were mistakes?

·         Inventory decision was a mistake

·         People mistakes

17.) It is hard to find SHLD shares to sell short…possible to make up to $50 million lending shares out of treasury stock to shorts…..Why didn’t you raise the RSTO bid?

·         Eddie right away says…how much should we have bid for RSTO?

·         Ultimately it was a board decision at RSTO….sounds like they are done with RSTO

·         Didn’t speak directly to the lending shares question but he had a look on his face like he hadn’t thought about that before

18.) Bill Ackman – Pershing Square – Thinks that SHLD is undervalued because there is no breakdown of unit profitability. He gets the sense that some unites are very profitable and would like to see more detailed unit figures.  (Ackman was cordial in his questioning and mentioned that he thought SHLD was undervalued and that he was there and involved in the stock because of Eddie).

·         Eddie did not say yes or no, only that the board will consider the request

19.) Ken Shubin Stein – Spencer Capital – We have studied retail turnarounds in depth and have found that IT problems are the most significant roadblock in retail turnaround situations…are the IT projects described in the 2007 meeting complete?

·         IT manger spoke saying that all IT project goals are now complete

·         They are happy with the improvements made in IT…it was a mess at the time of merger

20.) Address the conflict between growing $ sales per sq. ft. growth vs. putting Craftsmen tools in Target

·         Captive distribution is not great for brands….i.e. Apple is spreading out of Apple Stores into other places like Best Buy, etc.

·         Able to drive awareness of products by putting them in Target, the increased awareness may actually increase sales at the Sears stores

·         Keeping things bottled up sometimes inhibits performance

·         Brands, brand distribution change over time

21.) How do you allocate your time between ESL and SHLD

·         SHLD is a very important investment for ESL

·         Trying to reengineer the culture of Sears by understanding how large organizations work

·         Sears is a large ship and will be slow to turn

·         Read Why Things Fail about how it is hard to see around corners

·         Trying to find executives that want to change the company




Written by sdinvest

January 17, 2009 at 12:48 am

Posted in Sears Holdings

Selling Steakburgers – Part 2

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Here are my notes from the rest of the book, Selling Steakburgers: The Growth of a Corporate Culture. 

  • Belt was active in the Democratic Party….led to friendship with Indianapolis banker named Frank McKinney, Sr. who convinced Belt to open and SNS in Indianapolis which Belt did in 1954 (company now headquartered in Indianapolis)
  • From 1934-1954, SNS offered only counter and curb service (no tables)
    • Table service first offered in 1956 (Indianapolis)
  • Gus Belt died in 1954, Mrs. Edith Belt took over
    • The company then had 26 units in operation
  • “Gus Belt was one of the true geniuses of the American restaurant business. His formula was simple but true: provide and charge for the best drive-in or dine-at-the-counter food in the business, cook it expeditiously and in the sight of the customers, treat your people well and play to the public taste. And – don’t experiment unnecessarily when you reach success.”
  • In January 1969, the Belt family sold their 53% controlling interest  for $25/share or $17 million to a NY restaurant chain named Longchamps
  • During Longchamps’ ownership (1969-1971) sales increased from $17.1 million to $23.5 million….EPS went from $.71 to $1.02…but the parent company ran into issues with its bank after spending too much  money on acquisitions
  • Bob Cronin’s company, the Franklin Corporation, acquired control of SNS in 1971…paid $9 million for 52% of the stock
  • Cronin: “When I mentioned my new association, people said, “I love Steak n Shake – don’t change it.” You heard it all the time. What a wonderful asset to a company – to be loved. It certainly wasn’t a common thing…That sort of reinforcement, which I heard out loud when I went into the stores I visited early on, was a morale booster for the employees too. It was nice to be loved.”
  • Cronin: “The only real problem with Steak n Shake is that there aren’t enough of them…The problem was that the company wasn’t organized to expand at any substantial rate. It just hadn’t operated that way.”
  • Things Cronin did:
    • Added breakfast, a super steakburger, cottage cheese, pineapple and desert items to the menu
    • Emphasized quality, cleanliness and service (a la McDonald’s)
    • Brought back “only the best” Heinz ketchup
    • Added some touches of red to the traditional black and white interior of the stores
    • Began a company newsletter called Food for Thought
    • Located headquarters in Indianapolis (even though 60% of sales at the time came from St. Louis stores)…decentralized and departmentalized the corporate structure
    • Established a manager training center in Indianapolis
    • Began the company’s first major advertising campaign in 1972 with $500k, 2% of sales
    • From 1971-1976, sales tripled, net earnings increased at 19.1% per year…driven mostly by 68 new store openings
    • Decided not to go the route White Castle and McDonald’s went…did not look to invest in locations near major interstates
    • Mid-70s – opened first stores in Louisville, Atlanta, Cincinnati, Houston
    • From 1971 to 1976…the average sales per SNS store increased from $366k to $610k….half of the increase was due to price increases which incidentally were below the increase in CPI…the other half was higher customer traffic counts and from opening larger restaurants
    • From 1971-1977, store count went from 57 to 141…sales increased at a CAGR of 22.7% per year, earnings at 13.4% per year…paid a dividend every year since 1948
  • Cronin: “Steak n Shake never did need to compete with McDonald’s and the other fast-food places. It hits a higher note, makes the customer rise, rather than go down the speedburger level”
  • In the 70s, one of the lowest sales stores was in Gainesville, FL (home of Univ. of Florida)…to boost sales the company bought a Volkswagen to deliver food to the college campus…offered athletic scholarship…and bought a double-decker bus from London so students could ride to the store from campus….sales went from $5,000 per week to over $10,000 per week.
  • Mid-70s: Louisville store was the first to stay open for 24 hours…it increased the store’s profitability….soon all the stores were open 24 hours
  • SNS ran into sales and earnings problems beginning in 1977 (blamed partly on harsh winters! which Cronin said cost them $3 mm per year in lost sales) in the midst of rapid expansion (similar to what happened in the past few years – 2006-2008 – under previous management’s watch)
  • E.W. Kelley acquired control of the company in 1981

Written by sdinvest

January 14, 2009 at 12:30 am

Selling Steakburgers: The Growth of a Corporate Culture

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A few weeks ago I purchased a book detailing the history of what is today a 490-store, $175-million market-cap company named Steak n Shake (SNS). My interest in the company stems from the fact that the Chairman and CEO of SNS, Sardar Biglari, is also the Chairman, President, etc. of Western Sizzlin’ (a company discussed in a separate post). I think exciting things are in store for the company as Biglari improves store-level profitability and eventually initiates a growth through franchising program. Oh, and they have top-notch chicken strips, french fries and Genuine Chili….check it out for yourself.  

The book, written in 2000, is only 110 pages. I hope fellow SNS owners find these notes useful in understanding the values that Gus Belt instilled in the organization that made the company what it is today.


The author, Bob Cronin, served as the company’s President from 1971 to 1981 and Chairman from 1971 until 1984. He oversaw the company’s growth from 57 stores in four states to 150 stores in seven states during the 1970s.

From the inside cover:

            No one is better suited to tell the story of Steak n Shake in its early years than Bob Cronin. He became president of the company in 1971, only two years after the founding Belt family had sold its interest. The pioneers who knew and worked with Gus Belt, the legendary man who opened the first Steak n Shake in 1934 in Normal, Illinois, where still active in operations.

            Cronin has recorded literally hundreds of memories of Belt’s life and methods in creating a unique American institution based on the steakburger. He has analyzed what it took to create a culture which today has thousands of adherents who would not eat anywhere else. Then he has told the story of the rapid and interesting growth of the company in the seventies, when the original dream in Illinois, Missouri, Indiana, and         Florida reached out across all of mid-America to form the basis of what is a phenomenon in both the business and pop culture history of America.

            This is not a “corporate history.” It is the personal story of the founding and rapid growth years of one of America’s best-loved eating establishments, told by the people     who lived it.

Here are my notes and various “fun facts” from Chapters 1-4 (notes from the rest of the book to follow soon):

  • After unsuccessful stints as a tire salesman among other things, Gus Belt acquired a Shell Oil station on Route 66 in Normal, Illinois
  • Gus Belt, founder of SNS, is described as “one of those men who grab and hold you, figuratively, by the force of their characters and their strong, individualistic personalities.”
  • “Fill ‘em up outside, then fill ‘em up inside” was Belt’s motto as his Shell station would offer chicken, fries and coleslaw (all for $.45) and beer for $.09
  • Belt came to realize that even though hamburgers and hot dogs had become American staples by the turn of the century, no one had really invented the perfect hamburger. Belt decided he would offer the highest quality hamburger for $.10, which in those days was twice what everyone else was charging.
  • In 1934, Belt took out the gas pumps and the Shell station became the first drive-in SNS.  The interior was, as it is today, white and black which was meant to symbolize “cleanliness and sanitation.”
  • The store achieved early success mostly on word-of-mouth advertising.
  • The second SNS location was opened in Bloomington, IL in 1936 (financed partly by an advance from Mrs. Belt) with 11 stools and about 50 parking spots
  • “In Sight It Must Be Right” – One of the first SNS slogans…it came from the fact that Belt believed in grinding the meat for steakburgers in open view so the customers could see how their burger is made (this was during the days when Board of Health standards were spotty at best)
  • Belt recognized the importance of quick service – pushed the cooking line time down to five minutes
  • With a limited budget in his first few restaurants – Belt made his own ice cream to use in shakes…(funny story how he obtained his first freezer to store the ice cream….Belt became an ice cream freezer salesman, used his first commission as a down payment for a freezer to be used at SNS, quit salesman position soon after)
  • By 1939, there were 8 SNS locations (Normal, two in Bloomington, two in Champaign, one in E. Peoria, one in Decatur and one in Danville)
  • 80% of sales were from curb service – the exterior of the stores were designed to have a “carnival feeling…which brought a little happiness into the dark Depression time.”
  • By 1943 there were 15 stores
  • Belt made all decisions on who would own or manage a SNS….reluctant to franchise, “wanting to own all the stores himself to reduce complications and increase his own revenues”
  • In the early years of development, Belt would undertake sale/leaseback transactions to finance his expansion plans….this method of “off balance sheet” financing still used by the company today albeit for less appealing reasons
  • In 1941-2, WWII posed a large threat for SNS…due to government rationing, SNS was short of beef so Belt got a 600-acre farm, bought his own cows and essentially bootlegged beef for SNS.
  • Built the first St. Louis store in 1948…9 more would be built there in Belt’s lifetime…would become one of the most successful markets for SNS
  • Sold stock in 1948 to fund growth…paid a dividend (as much as 50-60% of earnings) every year until late 70s
  • Early reason for success: “Gus appreciated his people, and they stayed with him. One reason was that management in the actual stores was so sound, so founded on practicality and excellence of performance.”
  • Belt used to look through the trash and plates returned from table service to see what people weren’t eating





Written by sdinvest

January 13, 2009 at 12:20 am