Steak n Shake's Flip Side

In its television ads, Steak n Shake (NYSE: SNS) tries to distance itself from other quick-service burger flippers. These are steakburgers, not hamburgers. These are handspun milkshakes, not stuff oozing out of a machine.

Unfortunately, after watching Steak n Shake's stock close 11% lower Thursday after a horrendous second-quarter report, maybe the company should look into rolling out hamburgers and shake machines.

Yes, it was that bad. Revenue fell by 6% to $190.5 million, weighed down by a 6.3% slide in same-store sales, or comps. Margins were slammed, with the company swinging to a net loss of $0.10 a share this time around from last year's profit of $0.21 a share.

The numbers are laughably disappointing when compared with chains like Burger King (NYSE: BKC) and CKE Restaurants' (NYSE: CKR) Carl's Jr., which Steak n Shake's ads aim to belittle.

Even the companies that posted uninspiring comps for the quarter, like Jack in the Box (NYSE: JBX), Wendy's (NYSE: WEN), and McDonald's (NYSE: MCD), managed to hold up better and whip up a profit.

The grim news on Steak n Shake is that comps could have been worse. Like most eateries these days, Steak n Shake is down to offering steep promotions to win over the hungry. The deals included a popular promotion in February offering double steakburgers with fries for $2.99 in a dozen core markets. Like Sonic (Nasdaq: SONC), which offers half-priced drinks during its Happy Hour from 2 p.m. to 4 p.m. daily, Steak n Shake now has its own weekday Happy Hour promo for $1.99 milkshakes.

The deals may sound great to you as a penny-pinching diner, but they're margin killers when you consider rising food costs.

The company also teamed up with Seattle's Best Coffee to drum up breakfast sales at its 24-hour restaurants, offering items like bagel sandwiches and breakfast smoothies. It was a hit, with breakfast sales up 17% during the typically moribund morning hours, but breakfast items still account for just 4% of overall sales.

So just imagine how bad the comps would have turned out if it weren't for the breakfast initiatives and the margin-munching promotional pushes. Yes, Steak n Shake has problems.