Steak n Shake slows growth, expands ad, credit-card efforts

Nation's Restaurant News, Dec 9, 2002 by James Peters

INDIANAPOLIS -- The Steak n Shake Co. is continuing to slow growth as it takes the first steps in a long-term plan aimed at reversing recent negative same-store-sales trends.

The 400-plus-unit operator and franchisor, which recently hired a new president, lowered its fiscal 2003 expansion plans to a range of 15 to 16 new restaurants from its previous target of at least 20 units, company officials said during its fiscal 2002 conference call with analysts and investors.

Attributing the reduced growth plan to sluggish same-store-sales performance and an uncertain economy, Steak n Shake executives said the company planned to roll out technology that would allow diners to use credit cards at all of its restaurants. The chain, which includes more than 55 franchised restaurants, also is boosting its TV advertising efforts in select markets and introducing TV advertising to other markets in an aim to generate stronger sales.

For the periods ended Sept. 25, Steak n Shake's same-store sales declined 3.2 percent and 0.7 percent for the fourth quarter and full year, but the company still managed to post improvements in its bottom and top-line performances for fiscal 2002.

The company's annual earnings rose 11 percent, to $24.1 million, on a 3-percent revenue rise, to $460.8 million, vs. fiscal 2001. Fourth-quarter profits climbed 7 percent, to $6.2 million, on a revenue increase of 0.9 percent, to $110 million.

In September the company named Peter Dunn president and chief operating officer, assigning to him posts relinquished by chief executive Alan Gilman, who was named to the additional role of co--chairman where he will serve along with E.W. Kelley. Dunn, formerly president of Borden Foods Corp., will spearhead the company's plans to develop comprehensive measures over the next nine months to a year.

"The main focus will be around initiatives to make the consumer proposition more exciting and attractive," Dunn said. "Some of that has to do with improving our degree of customer feedback and therefore degree of hospitality."

Dunn said there are a number of opportunities for improvement and new initiatives in the areas of operational execution, menu development and advertising messages.

Steak n Shake has pulled back the reins on expansion in recent years as it has sought more productive sites and has acknowledged problems in properly staffing its stores. The chain added 40 new units in 1999, 37 restaurants in 2000, 21 in 2001 and 15 locations in fiscal 2002.

Unit growth has slowed from 17 percent in fiscal 1999, 13 percent in fiscal 2000, 6 percent in fiscal 2001 and 5 percent in fiscal 2002, Dennis Joe, a restaurant analyst with New York City-based Sidoti & Co. LLC, pointed out.

As of mid-November, Steak n Shake had opened three new company-operated units in its first fiscal quarter. The company said its cash on hand and cash generated from operations would provide ample funding for planned capital expenditures and purchases under its stock buyback program through fiscal 2004.

"We think slower unit growth is helping [Steak n Shake] address its labor-shortage problem and bolstering same-store-sales growth," analyst Joe stated in a research report. "However, this has not yet had a positive effect on the company's profitability because same-store sales have been hurt by the slow economy."

To that end, Steak n Shake plans to roll out on a market-by-market basis systems that enable diners to use credit cards at most of the chain's restaurants during the holiday shopping season, said Victor Yeandel, vice president of marketing and investor relations. The test of credit cards in 27 Steak n Shake branches generally resulted in a higher average check and helped attract new guests, company officials said.

Allowing customers to use credit cards will enable the company, which had an average check of $5.97 in fiscal 2002, to better capitalize on its significant dine-in sales. Steak n Shake, which employs wait staffs at its restaurants, generates roughly two-thirds of its sales from counter and dining-room sales, according to the company's filings with the Securities and Exchange Commission. Off-premise dining accounts for roughly one-third of sales.

The chain also will begin TV advertising in the Cleveland and Kansas City, Mo., markets and will increase TV advertising efforts in the Tampa, Fla.; St. Louis and Indianapolis markets, Yeandel said.

For the month of November the chain introduced a "Melt n Fries" promotion at all of its restaurants, which featured any of the chain's seven melt sandwiches with fries for $3.99. The company supported the program with television ads, direct mail and in-store marketing, Yeandel said.

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