Biglari Raises Valid Points in Restaurant Reporting

Activist investing is the hottest thing since passive investing. And few investors have a bigger reputation for it than Sardar Biglari of Biglari Holdings (NYSE: BH  ) . The value investor has gone after many companies in his career, but his latest battle has been with everybody's favorite roadside restaurant, Cracker Barrel (Nasdaq: CBRL  ) . While Biglari has technically been unsuccessful in leveraging his influence into board seats, his investment has already netted 70%, which is a win in most books. In its latest shareholder meeting, the company struck down yet again the attempts of Biglari, but has his mere presence shifted the course of the formally troubled company?

Quick history
For those unfamiliar with the Biglari-Cracker Barrel saga, let's do a quick recap. In May 2011, Biglari's holdings company began building an eventual 17.6% stake in the interstate diner. The value activist has a history of investing in beleaguered restaurant chains and forcing change, as he did with Steak 'N Shake and Western Sizzlin.

Facing headwinds from Cracker Barrel management, who believe that Biglari is trying to take the company under his control and rob shareholders of additional potential value, Biglari has filed complaints ranging from poor strategy planning to erroneous reporting. He is still pushing his arguments, perhaps harder than ever, even while Cracker Barrel stock is trading near all-time highs. So why is the fund pushing Cracker Barrel to change even after it's made such a killing on its investment?

Reporting
At the end of last week, Biglari filed a statement to Crack Barrel shareholders alleging that the company's recent earnings report is full of errors and sub-par reporting standards. Specifically, he claims that the information provided by the company regarding return on capital for new stores is flawed. In the company's report, it states that 116 new stores earned an ROI of 16.2%. Biglari believes that number is very misleading. According to his firm, the number should be closer to 3.7%  after depreciation and general expenses are incurred. 

"Cracker Barrel is going to continue to spend $155 million to open new stores based on a faulty assessment of return," the fund's release said. "It is clear this capital allocation will destroy value based on the aforementioned analysis. We are also concerned about new stores cannibalizing old stores."

These are pretty strong allegations, and one would imagine shareholders would be curious to investigate further. Yet at the recent election, the vote went overwhelmingly away from Biglari in favor of current management.

Even without a board seat, though, Biglari has arguably had a tremendous impact on the company's trajectory and subsequent performance. The company's stock, as mentioned, has done incredibly well even in a tepid economic environment that has not been friendly to family restaurants. During the time that Biglari has been a shareholder -- though not technically by his doing -- the company has named a new chief executive officer and appointed many new independent directors to the board, as well as initiated cost-cutting plans that have certainly been effective.

Biglari may want to sit in the boardroom and enact further change, but in many minds he has already accomplished much within the company and should consider it a victory.

Rejected
Cracker Barrel management was quick to point out that the shareholder vote favored the current team, and shot down Biglari's allegations as an effort to sneakily gain control of the company, similar to what happened with Steak 'N Shake. The company also claims that the Steak 'N Shake acquisition did not give shareholders any premium and was a solely a move to enrich Biglari and his holdings company.

The vote was overwhelming, and much more so than the previous year, when Biglari had also attempted to gain a board seat. In 2011, he lost the vote 36% to 64%. This year, the vote swayed to more than 70% of shareholders against Biglari.

The argument, at least for now, should not be whether Biglari earns a seat, but whether Cracker Barrel management is in fact misleading shareholders. With an ROI in the low single digits on new stores, the investment isn't covering cost of capital and is ultimately hurting shareholders. Current investors are likely thrilled given the fantastic stock performance, but this good fortune could easily turn sour if the company is burning up cash in poor expansion practices.

Biglari will no doubt come back to the table after this rejection, and investors need to keep an eye on the situation. Whether you support the activist or not, corporate transparency and shareholder rights need to be put first.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2012, at 10:48 AM, LeKitKat wrote:

    can you post in the comments section the basis numbers for his share purchases? He has made a lot of buys and I have lost track of his average cost. Last time I calculated it, returns were in the mid-20% range. Also do you have the break down between what Lion holds and what BH holds?

    Since you have the 70% figure I am guessing you have the numbers from the filings

    Thanks a bunch--this would be very helpful

  • Report this Comment On November 16, 2012, at 4:31 PM, rob24601 wrote:

    Great article. The only one taking money away from CBRL shareholders is the board of directors. They own no stock, and have done nothing to improve the company over the 10 years prior to this one. They were making the same net income with hundreds more stores!

    It is sad but not surprising to see Biglari, whose arguments were based on facts and evidence, be taken down by a CBRL executive team who used personal attacks and claims that somehow steak and shake and cracker barrel are competitors? I'm pretty sure Western Sizzlin and Steak N Shake are "competitors" under that logic and it hasn't harmed either company to my knowledge.

    Biglari has added value time and time again. Look at the friendly ice cream HBS case study, Western Sizzlin, Steak and Shake, etc. He owns 20% of the stock, and they can't give him a seat on the board. What are the CBRL executives trying to hide? Are they scared that he will actually be the catalyst for a dramatic improvement similar to SNS and make them look bad?

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