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Earnings Transcript for BH - Q1 Fiscal Year 2008

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Steak ‘n Shake Company first quarter fiscal 2008 earnings conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that today’s conference is being recorded and now I would like to turn the conference over to Mr. Jeff Blade, Executive Vice President and Chief Financial Officer of the Steak ‘n Shake Company. Please go ahead, sir.
Jeffrey A. Blade: Thank you. Good afternoon and welcome to the Steak ‘n Shake Company’s conference call and webcast to report results for the fiscal 2008 first quarter. Before we proceed, I would like to remind everyone the comments you are about hear contain various forward looking statements which represent the company’s expectations or beliefs concerning future events. These forward looking statements involve risks and uncertainties and although the company believes the assumptions on which these forward looking statements are based are reasonable, any of these assumptions could prove to be inaccurate. Investors are referred to the full discussion of risks and uncertainties associated with forward looking statements contained in the company’s filings with the SEC. With me today is Alan Gilman, Chairman and Interim President and Chief Executive Officer who will begin today’s conference call with opening remarks. I will then present the operating and financial review after which we would be glad to answer any questions you may have. So with that I would like to turn the call over to Alan.
Alan Gilman: Thanks, Jeff. Good afternoon. As previously outlined in our first quarter preannouncement and our press release issued earlier today, our fiscal 2008 first quarter was a very challenging period for the Steak ‘n Shake Company. We are clearly disappointed with our operating results and view them as unacceptable. Today we will focus on the key drivers of the same store sales weakness, the aggressive near term actions we are taking to rectify this weakness, and why we continue to be optimistic about the long term future of the Steak ‘n Shake Company. During the first quarter, same store sales declined 9.5% as guest traffic was impacted by deterioration in the consumer economic environment, aggressive promotional activity throughout the restaurant sector, a prior year incremental coupon that was not repeated in the current year, unfavorable weather in the month of December, and ongoing challenges with store level execution. The same store sales results were similar for both company-owned and franchised restaurants. I would like to discuss each of these drivers in somewhat more detail. During the first quarter the consumer economic environment continued to deteriorate which impacted our customer traffic along with many of our peers in the restaurant sector. We continue to be concerned about the current state of the consumer as rising unemployment, higher gas prices, continuing housing related issues, and the declining levels of consumer confidence could continue to adversely impact our guest counts. Our current assumption is that the near term consumer environment will continue to be very challenging. During the first quarter, we also experienced an increasing level of aggressive promotional activity from competitors in both the QSR and casual dine segments. We view this significantly increased level of price promotion, meal deals and day part promotion as more intensive than has been experienced in any recent year. This level of promotion has directly impacted our Saturday and Sunday lunch and dinner day parts where same store sales are tracking two percentage points worse than other day of week comparisons. Same store sales were further impacted by a prior year incremental coupon in November that was not repeated in the current year and in this highly sensitive price environment that proved not to be the right decision. The impact on the quarter of not repeating the prior year coupon on same store sales was approximately two points, or a little over 20% of the negative performance. First quarter results were also adversely affected by the unfavorable weather in December with a snow storm occurring during a crucial holiday shopping weekend that negatively impacted sales in several of our Midwest major markets. We believe these weather events had a same store sales impact of approximately minus 1% during the quarter. During the quarter we also continued our focus on intensifying store level dining room execution, which as previously discussed, has negatively impacted our value perception with guests. While we are encouraged by the early progress being made to improve the guest experience, it is not yet being executed at a level that offsets other factors contributing to guest count weakness. Before I turn the call over to Jeff, I’d like to reemphasize that all of our current efforts remain focused on simplifying initiatives, intensifying focus on field leadership, and critically managing the company’s cost structure. Now let me turn the discussion over to Jeff to review specifically what we are doing to address these challenges.
Jeffrey A. Blade: Thank you, Alan. I would now like to outline for you the steps we are taking to address the challenging same store sales environment. The Steak ‘n Shake management team has developed and is executing an aggressive set of near term initiatives to reinvigorate same store sales. These initiatives include advertised price promotion on core menu Steakburgers, incremental couponing, accelerated timing and market reallocation and media spending, launch of a new breakfast program, and several key operational efficiency initiatives. I will review each of these initiatives in more detail. Before I do that, to provide some context for our near term initiatives, we find ourselves operating in an environment with an extraordinary level of value priced initiatives in both the QSR and casual dining segments of the restaurant industry as Alan just mentioned. In order to retain guests and reverse same store sales trends, it is imperative that we operate in an aggressive but prudent manner that provides the best possible competitive response that will enable us to address our current guest count situation. On February 3rd we will begin promotion of a limited time offer of a double Steakburger and fries value offer priced at $2.99. This compares favorably to the everyday menu price for the same items of approximately $5.35. Because of the strong value message this promotion should send, we will promote this offer through television advertising as well as an incremental February coupon in twelve of our larger DMAs. These marketing efforts will cover approximately 60% of our sales base. Stores not covered by the television advertising will also promote the offer through bounce back coupons in both the dining room and drive thru. We believe this promotion will have three positive results. First, it provides an opportunity to address aggressive promotions from competitors. Second, it allows us to stay focused on our core Steakburger sandwiches, and three it provides a price point that we believe will communicate a value message and drive incremental guest traffic. This limited time offer is planned to run through early March and depending on the success in driving incremental guest traffic, it may be repeated or followed by additional value promotions focused on core Steakburger and milkshake categories. In addition to this specific promotion, we are accelerating the scope of media advertising during February and March in our largest markets to support the February double Steakburger promotion and provide additional media wake during March. This should increase brand awareness and messaging for an eight to ten week period in our core markets. Media is being shifted from later in the year from smaller markets with the intent of addressing the current same store sales issues. The media shift will approximate $1.4 million out of a total annual media working budget of approximately $14 million. As part of our efforts to shift marketing forward in the year, we will ship our traditional March co-op coupon into the market at the beginning of March, approximately three weeks earlier than prior year. Our intent is to bring in incremental guests earlier and throughout the promotional window. Aligned with our efforts to provide more appealing and value oriented offerings, at the beginning of March we will launch our new breakfast menu. The new menu will emphasize our new hand-held breakfast sandwich offerings and our new coffee Seattle’s Best. The new breakfast menu includes improvements to our current bagel breakfast sandwich and the introduction of three breakfast melts that leverage the Steak ‘n Shake melt heritage. We are also upgrading our hash browns, introducing a new breakfast smoothie drink utilizing our successful frozen yogurt milkshake platform and simplifying, importantly simplifying the overall breakfast menu and reducing breakfast execution complexity by eliminating several slow moving breakfast items. In conjunction with the new breakfast menu, we will simultaneously launch improved coffee with the debut of Seattle’s Best Coffee in all corporate Steak ‘n Shake locations. We are excited about our relationship with Seattle’s Best Coffee, which provides us with an opportunity to leverage the expertise of a recognized leader in coffee with a strong brand name that is complimentary to the Steak ‘n Shake brand heritage of a cut above. The breakfast re-launch will feature introductory price bundled advertising, including a $3.99 bagel sandwich, hash browns, and premium Seattle’s Best Coffee bundle. Introductory television advertising for breakfast will be paired with or tagged onto core Steakburger and milkshake advertising so the focus on our core equities will continue during the launch of the new breakfast menu. In addition the new breakfast menu will be supported with creative in store bounce back coupons which will utilize dine in placements, place mats, and drive thru bags to communicate the new breakfast offering message and educate consumers about our breakfast day part. As we have previously discussed, breakfast food items represent only 4% to 5% of our current sales and therefore will provide an opportunity for incremental sales given the continued industry growth in the breakfast day part. Our consumer research has indicated that many of our consumers do not know that Steak ‘n Shake serves breakfast, so we believe our efforts to promote this day part will be effective in not only increasing frequency with current guests, but an increasing trial among new guests. The new breakfast program was cost efficient to develop, reduce the store level complexity by eliminating thirteen current menu items, provides consumers with improved offerings, and should enable better utilization of labor and productive assets during the breakfast day part. On our efforts to increase operational efficiencies, several things have resulted in further testing of our improved milkshake fountain design that we’ve previously discussed. This design reduces variation in production time without changing the hand dip uniqueness of our milkshakes. The new process automates milk and syrup dispensing in controlled portions, improves mixing speed by a third, and provides better temperature control for the ice cream. Based on the success of the initial test store in Indianapolis, we are expanding the project to approximately twenty additional company-owned and franchised stores beginning in February and in early March. Assuming continued successful results of this test, we will begin system-wide implementation later in this fiscal year. Investment per store is approximately $7,500 with a very high return on invested capital given significant improvements in consistency and speed that are possible with this upgrade, and the fact that milkshake incidence is approximately 50% of all of our guests. We are also continuing our work on menu simplification with the goal of continuously evaluating all menu items for relevance, sales potential and enhancing executing consistency. We are currently evaluating all menu items that have sales less than $1.5 million, sell less than three units per week per restaurant, use a unique ingredient or add to overall production complexity. Based on this criteria, ten to twelve items have already been identified for deletion with our next menu printing in June with more items still under analysis. During the quarter we continue to make progress on our top priority of improving store level execution. This work includes the implementation of an integrated store plan which contains several elements, leading from the front which emphasizes manager visibility in the dining room to ensure execution of the seven steps of guest service, full utilization of the recently completed company-wide roll out of the guest recovery 800 number that enables us to resolve customer issues promptly, satisfactorily to promote guest retention, enhance success routines for general managers and district managers which are focused on accountability including sales based labor schedules, restaurant visit processes, store level management coaching and weekly communication protocols. And lastly, simplified store level performance score cards including merit and pay scales that are integrated. We have seen these efforts beginning to make a difference as measured in our guest satisfaction scores which have improved as these success routines have become institutionalized over the past several months. In addition, we have completed a major effort to audit the cleanliness of all store locations and improve the awareness and execution of our high standards. Improvements are already being reflected in the cleanliness scores of our guest satisfaction surveys. Further on store level execution and our effort to provide outstanding service to support our improved offerings we will begin next week to implement our program titled Personalized Service which includes an updated dining room service process and improved selection and orientation processes as part of the program. The integrated selection orientation and service training processes will enable the deliberate evolution and improvement in guest service experience critical to executing the Steak ‘n Shake brand promise and addressing the current guest value equation gap. We believe that aligning our hiring practices with our service proposition will enhance the customer experience, decrease turnover as we focus on hiring people who are a better fit for our positions. Over the next 60 to 90 days, all of our store general managers will be fully trained on personalized service and improved selection orientation process. In this difficult operating environment, we continue to aggressively review our cost structure and are on track to fully deliver the $8.1 million of general and administrative cost savings outlined on our Q4 conference call. In addition we continue to execute against aggressive productivity initiatives and supply chain to help offset commodity costs and the impact of minimum wage increases. On new store development, we have opened six of the nine stores contemplated during this fiscal year. The class of fiscal 2008 new stores were already in various stages of development prior to the beginning of this fiscal year and represents sites that we believe are prudent to complete as we review our overall new store program and begin the testing of a new store prototype. The new store prototype design is nearing completion and we anticipate testing this new design with four to six remodels of existing stores later this fiscal year, understand consumer acceptance and sales lift of the evolved design. As previously discussed, the new prototype is an evolution of our current design that will reduce the cost of new units by at least $200,000 and provide an economic remodel option in the range of $250,000 to $350,000. We still anticipate building our first new unit prototype sometime during fiscal 2009. We do not however anticipate any acceleration of new unit growth until we have a proven new prototype with improved unit economics. This is also consistent with our primary focus during the remainder of 2008 and fiscal 2009 which is improving store level execution and driving same store sales. Now I would like to review with you briefly our fiscal 2008 first quarter financial results as outlined in our press release. Total revenues for the first quarter which include net sales from company owned restaurants as well as franchise fees were $136.4 million, a decrease of 7.4% from prior year revenue of $147.3 million. As previously indicated, same store sales declined 9.5% during the first quarter consisting of a decline in guest counts of 13.3% offset by a 3.8% increase in average guest expenditure. The increase in average guest expenditure was due primarily to a 3.7% menu price increase. Approximately three percentage points of the same store sales decline as previously discussed was attributable to the prior year incremental coupon and inclement weather in December. The remainder of the same store sales shortfall was attributable to a combination of the worsening economic conditions, aggressive competitor promotional activity, and store level execution issues. First quarter cost of sales was $32.7 million or 24.1% of net sales compared to $33.1 million, or 22.6% of net sales a year ago. The unfavorability as a percentage of net sales includes one percentage point related to new menu items with higher percentage food costs including new entrée salads, chicken sandwiches and fruit and frozen yogurt milkshakes, as well as operational inefficiencies in preparation are better being addressed. Half of a percent of increase in food costs was related to increased commodity costs, specifically higher dairy and pride products, primarily french fries. We anticipate the food cost percent trend versus last year to improve throughout the remainder of the year as targeted efforts to improve food cost control are fully realized. On restaurant operating costs for the first quarter they were $75.8 million, or 55.9% of net sales compared to $75.5 million or 51.5% in the prior year. The unfavorability was due to higher minimum wage rates, higher utility costs, the timing of repairs and maintenance expense, and the impact of negative same store sales on fixed costs. First quarter G&A expenses decreased 25.2% to $10.1 million, or 7.4% of total revenues compared to $13.5 million or 9.2% of total revenues in the prior year. The decrease of G&A is due to reductions in outside consulting services, bonuses and stock option compensation expense and additionally salaries and wages due to head count reductions executed as part of the plan reduction of G&A spending announced at the end of fiscal 2007. We are currently again currently on target to meet our goal of reducing G&A spending by $8.1 million during fiscal 2008. First quarter marketing expense was relatively flat to prior years, a percentage of revenues at 4.4%. Interest expense for the quarter was $3.3 million or 2.4% of total revenues compared to interest expense in prior year of $3.1 million or 2.1% of total revenues. The increase in interest expense was due to increased borrowing under the revolving credit agreement partially offset by lower average borrowings under leases. First quarter depreciation expense was $7.6 million or 5.6% of revenues versus $7.2 million or 4.9% of revenues last year. This increase as a percentage of revenues is due primarily to the effect of negative same store sales on fixed costs. Rent expense for the quarter was $3.2 million or 2.4% of total revenues compared to $3 million or 2.1% in the prior year. The increase as a percentage of revenues is due to the decline of same store sales and increased rental rates for new unit leases. Reopening expenses for the first quarter were $400,000, or .3% of total revenues compared to $900,000 or .6% last year. During the quarter, we opened four new restaurants versus the opening of five stores in the first quarter of fiscal 2007. Income tax expense for the first quarter was recorded and an effective tax rate of 50.8% versus 14.6% in the same quarter last year. Income taxes for the quarter reflecting impact on the decrease of pre-tax earnings and federal income tax credits. Income taxes for the prior year you may recall include a benefit of $650,000 related to the retroactive extension of the work opportunity and welfare to work tax credits. The resulting first quarter net loss was $1.2 million or $0.04 per diluted share versus net earnings of $4.2 million or $0.15 per diluted share in the prior year. Now I would like to turn to fiscal 2008 guidance. As previously communicated in our press release today, given the first quarter performance and the high level of uncertainty surrounding the current consumer and macro economic environment, the company is suspending its 2007 full year diluted earnings per share and same store sales guidance until visibility into future results improve. With regard to new units, the company reaffirms previously announced guidance that it anticipates the opening of approximately nine company owned and six franchise restaurants during 2008. We lost a rebuild of two older units and remodeled four to six of the units utilizing the updated restaurant design that I previously mentioned. With regard to our annual shareholder meeting we are planning to have our annual meeting of shareholders in early March with proxy materials being sent in early February. Specific information will be provided as those dates near. Before closing I would like to provide an update on the actions of the special committee of the board of directors appointed in August. As we have mentioned in prior calls and releases, the board of directors appointed a special committee of independent directors to examine all potential strategic opportunities to increase shareholder value. The special committee continues to actively work with Merrill Lynch & Company as its financial advisor. One of the tasks of the special committee has been to advise the full board of directors on the process for hiring a permanent CEO. To this end the company has retained a search firm and is proceeding with evaluating qualified candidates. The company continues to pursue a parallel process in conducting its search for a new CEO while working to evaluate strategic opportunities to enhance shareholder value. We look forward to providing an update on the work of the special committee including the progress of the CEO search when there’s additional information to be shared. In closing, I would like to emphasize that the management team of the Steak ‘n Shake Company remains intensely committed to reversing the current negative same store sales trend. We are confident about our aggressive near term plans to address the current operating environment realities and look forward to continuing our work toward unlocking the full potential of this great brand. We remain confident in the long term future of Steak ‘n Shake as we intensify our efforts to improve store level execution and fully realize its role in delivering a great consistent guest experience and value proposition that brings customers back. We would like to thank you for your continued support and interest in the Steak ‘n Shake Company as we work through the current business challenges. At this time we would be glad to answer any questions you may have.
Operator: Thank you, Mr. Blade. The question and answer session will be conducted electronically. (Operator Instructions) We’ll go first to David Tarantino with Robert Baird.
David Tarantino: Hi, good afternoon.
Jeffrey A. Blade: Hi, David.
David Tarantino: Question on the more aggressive promotional strategy, is this something that you’re thinking about as a near term tactical approach, or something that you might need longer term to improve your value equation?
Jeffrey A. Blade: We are primarily thinking about it as a near term tactical initiative to respond to the current competitive environment. So, if you look at the longer term history of Steak ‘n Shake, couponing has always been some part of the mix at some level of promotion but we have traditionally not played in deep discounting arenas, and buy one, get one and more deep discounting. So, some of the near term tactics do represent a specific competitive response to the current marketplace realities.
David Tarantino: Okay, and then just a follow up to that, what do you think the risk is of damaging the long term position of the brand given that you’re overall approach has been to be a premium price point and a premium position brand, how does the short term promotional strategy play with that approach?
Jeffrey A. Blade: Well, we think that some of the near term promotion is actually very consistent with it, so in arriving at the $2.99 double Steakburger and fries promotion we evaluated a lot of potential options and alternatives and the thing that we did not want to do was anything that would specifically damage the long term health or perception of the brand. So, we are discounting a specific item that remains one of our most popular items and we believe it’s an opportunity to do several things, to reinforce the core equities of Steakburgers, so true to what we’ve been saying for the last several months. Secondly, even at the $2.99 price point, it’s a little bit deeper discount than what we traditionally do on our coupon sets; our coupon sets typically have a discount in the 30% range. This is more like the 40% range. But, it still gives us the opportunity to have some average ticket benefit from the fact that folks will complement it with a soft drink or milkshake, etcetera. So, we do expect that while the absolute discount is a little deeper, it’s consistent with the overall brand, it doesn’t stray too far from the couponing that we’ve done and it still does not in any way shape have a string into the dollar menu item battle of McDonald’s and Burger King and Wendy’s and others.
David Tarantino: Okay, that’s helpful. And then how should we think about the returns on capital related to this, or the return on investment when you consider what type of traffic lift might you need to offset the additional discounting?
Jeffrey A. Blade: Yeah, the way to think about it is that we would not knowingly embark on any promotion if we thought we were going to lose substantial money. So the intent here was not to attempt to capture market share regardless of cost. That is not the intent. So the intent would be that any promotion we do would be break even at worst and have the opportunity for driving incremental traffic and profitability at levels that will enable us to do that. So that’s the basic design of what we’re doing here. We have not specifically identified publicly what the lifts are but suffice it to say we think that it’s very consistent kinds of lifts that we would traditionally see from our coupon set offer. So in terms of being able to get to break even or better, we feel optimistic about our ability to do that.
David Tarantino: Okay, that’s helpful. Thank you.
Operator: Thank you. We’ll go next to Barry Stouffer with BB&T Capital Markets. Go ahead, please.
Barry Stouffer: Good afternoon, gentlemen. Any comment about sales the first month of the second quarter?
Jeffrey A. Blade: Yeah, so the question is sales for the first month of the second quarter. So we exited the first quarter obviously consistent with where our quarter was overall in the down 9.5% range. The first month or so it has stayed consistently in that range, give or take three points here or there. The issue related to it is we did have some holiday timing; we also had a January coupon that from a circulation standpoint was a week behind prior year. So given the timing of the holidays, the insertion was not available the week that we wanted it because of the timing, so we’re actually a week behind in terms of coupon circulation. So there’s a little bit of noise still in that system and we believe that as we’re beyond that and our couponing is now consistent against prior year and in the next week or so we begin some of the more aggressive promotions that were outlined in the conference call script, we’re optimistic that we will see some improvement in the same store sales.
Barry Stouffer: Okay and can you clarify or add a little color on G&A. I thought I heard you were expecting $8 million in G&A savings. Is that relative to the full year total for ’07?
Jeffrey A. Blade: Yes, so year over year, in ’08 we expect net G&A to be down by $8.1 million versus prior year and those were all actions that were taken prior to the start of this year. So they are all identified and in place and that’s part of the reason you saw G&A reduce sharply in Q1.
Barry Stouffer: If you assume Q1 G&A is a reasonable run rate you get a much greater reduction than $8 million year over year, so…
Jeffrey A. Blade: You do. You have some timing in there so you can’t necessarily take Q1 and just extrapolate it for the full year, though. And optimistically, we are continuing to focus very aggressively on the cost structure so while we’re very comfortable we’re going to deliver the $8.1 million, we also have not stopped looking into the extent that we can over deliver on that number given the challenging environment we have we will do so.
Barry Stouffer: Okay and can you update us on current over figures for store management and also staff?
Jeffrey A. Blade: Yeah, they’re relatively flat. So if you look at manager turnover we’ve been hovering right in the mid-20s, sort of 25 to 27 range, no material difference in that so they’re not coming down dramatically but they’re not increasing. Some of the reason they’re somewhat flat right now is one, they’re at a relatively low level overall and secondly as we are more aggressive about intensifying our focus on the field, we have some additional turnover that’s favorable to what we’re trying to accomplish. On associate turnover, we continue to track in a similar place to where we’ve been, which is in the 120 to 130 range where we have traditionally been and again that sort of leveled off so we’re not seeing dramatic declines but we have stabilized that. And one other just editorial I would add, even though you didn’t specifically ask it, I would say that overall field morale has continued to be very good and we have a field organization that is very focused on doing whatever it takes to turn around same store sales and very proud of this brand and doing a great job of executing against our enhanced field initiatives.
Barry Stouffer: Okay, and then last question, with respect to store operating costs, it looks like they are pretty stable on a dollars per store basis. Is there any reason to think that they will go up or down the balance of the year?
Jeffrey A. Blade: I think that for the most part assuming they will stay relatively flat would be the right assumption with the assumption of our focus on food costs. So when we introduced some of the new premium products last year, especially salads, we are still fine tuning the exact preparation of salads, the order quantities and some of the other things related to a highly perishable product. So I think in the food cost arena you should expect us to see it to continue to get better. On the others, I think it would be safe to assume that they will be relatively constant.
Operator: Thank you. We’ll take our next question from Steve West with Stifel Nicolaus & Company. Go ahead please.
Steve West: Hey Jeff, how are you guys doing?
Jeffrey A. Blade: Hey, Steve.
Steve West: Just a couple of quick questions. I don’t want to beat the coupon thing down anymore, but how many coupons did you guys drop last year in the Q2 versus what you think you’re going to do this year, including the $2.99 promotion and the breakfast launch?
Jeffrey A. Blade: Give us a minute Steve and we will give you some dimensionality on that.
Steve West: Okay, and another question I have, did you guys talk about 24/7 or did I miss that?
Jeffrey A. Blade: We did not specifically talk about it, but I can give you an update on it.
Steve West: Yeah, where it’s at, are you still looking at that, when do you think you’ll have a go or no go decision on that.
Jeffrey A. Blade: Yeah, we’re continuing to look at it, so it’s currently being tested in 30 stores so about 3 of our markets, Grand Rapids, Charlotte, a few stores in Tampa and Dallas. And what we’ve found so far is that, and again if you’ll recall in those markets where we’re testing, we did not close all stores 24/7, we only closed those that had traditionally had very little sales in the overnight and breakfast day part. So overall what we’re finding in those stores is that the sales loss on the shoulder periods before you close and after you open, sales loss has been about what we expected, nothing that exceeded it, and there is some cost advantages in terms of labor primarily and operating costs that we are seeing favorable. So overall we continue to feel good about the test and what I would say is that it’s early so before we would make a major decision like because of the strategic implications that it has we want to make sure we fully understand it before we would expand it and also complementary with that, what we would also want to understand is the potential of a new breakfast menu that we’re launching is because that could also change the dynamic on stores being opened 24/7.
Steve West: Okay, how much menu price increase did you have in your system this quarter?
Jeffrey A. Blade: We were a little over 3.5%, about 3.7%.
Steve West: Okay, and finally I know you probably don’t want to answer it, think about this study you guys are going through, I know you guys are working hard on it, but, I know there’s no time frame, but is there something in mind that you could kind of help us out with is when can we expect a decision. Are we talking months, still a year, it seems like this is taking awhile and some of the things we’ve talked about and a lot of us have written about, some of the ideas of what you could do are no different really than what Lion Fund is talking about and I guess I’m wondering why can’t you guys just pull the trigger on some of these initiatives that would take some of the heat off or is that something you’re even thinking about?
Jeffrey A. Blade: Sure. Well, a couple of things that I can say. First of all the process started at the end of August when the special committee was formed and Merrill was hired, but I can say is that it has been a very actively worked process since that time. So it’s not that we formed the committee and haven’t been active, or haven’t been continuously working it, we have. All of the things that you might imagine in a traditional strategic alternatives review are part of the review. We have specifically not given a time frame only because these processes as you know are dynamic and some of them are quicker than others and some take a long time and there’s a number of factors that we’re looking at strategically, there are external factors in terms of the current conditions in the financial markets and other things that have led us to believe that trying to give a time frame or specific thoughts on where we’re at just wouldn’t be prudent. So we want to be as transparent as we can and we have to date felt like the best course of action is to be clear that we have a process that is ongoing that it is being actively worked and literally as soon as we can share something that is of substance, we will do so.
Steve West: Okay. Do you think that the whole process of trying to do it in conjunction with looking for a CEO is that having an effect on trying to find a CEO replacement? It seems like if you were going to bring somebody in he would want to have some input on that, on the way his future is going to go.
Jeffrey A. Blade: Yeah, I can’t comment about it specifically other than search is underway in parallel with the strategic alternatives review process and we continue to believe that this is a company with a long and bright future and a lot of great challenges that we think will be very appealing to CEO candidates.
Steve West: Okay, fair enough. Thanks Jeff.
Operator: (Operator Instructions). We’ll take our next question from Conrad Lyon with FTN Midwest. Go ahead please.
Conrad Lyon: Hey, Jeff.
Jeffrey A. Blade: Conrad.
Conrad Lyon: First I just want to clarify the company owned stores and the intention here. It looks like there were no company owned stores opened in the first quarter and I think in the fourth quarter you got into 9 company owned stores and at least in the text here of the new release it looks like you’re planning on opening 5 company owned stores, is that correct, a reduction there that I’m seeing?
Jeffrey A. Blade: Yeah, I think it’s a bit of technicality in the math. So we opened four new company owned stores during the first quarter.
Conrad Lyon: Oh, you did.
Jeffrey A. Blade: And we sold four stores.
Conrad Lyon: Okay.
Jeffrey A. Blade: To franchisees.
Conrad Lyon: That’s right, okay. Got you. So, long story short your CapEx plans for the year aren’t going to change dramatically?
Jeffrey A. Blade: No, our guidance on CapEx plan remains the same as what we issued during Q4.
Conrad Lyon: Okay, and that being said, and given with what’s happened with kind of EBITDA I know it’s dropped considerably here in the first quarter, almost cut in half, any color on how much they’re going to need to potentially draw down on a credit facility or is that part of the plan here to sustain operations?
Jeffrey A. Blade: Sorry, Conrad, can you repeat the question?
Conrad Lyon: Yeah, I mean given with what’s happened with the fundamentals here, and EBITDA is falling with revenue here, I’m assuming you’re probably going to need to run at a cash flow deficit and most likely need to draw down further from your credit facility. Is that correct, or is that part of your plan?
Jeffrey A. Blade: Yeah, that’s certainly obvious as we continue to manage all the aspects of cash flow and currency including CapEx so we’ve been given guidance on CapEx, we do have some flexibility on it.
Conrad Lyon: Okay.
Jeffrey A. Blade: We do have, as you recall we have a revolver in place with Fifth Third that we certainly have a fair amount of room on and then we have a shelf facility with Prudential. So in terms of capacity if we do need to do that we are fine.
Conrad Lyon: Okay. And how much is left on that?
Jeffrey A. Blade: Approximately $75 million.
Conrad Lyon: Okay great, thanks. Let me move towards cost of sales. I believe that for this year you said that it was going to improve sequentially throughout the year is that correct?
Jeffrey A. Blade: Yes.
Conrad Lyon: Okay. Now given what you talked about with kind of the comp trends to date, is it fair to say that it probably won’t happen so much in the second quarter but more so in the latter half of the year?
Jeffrey A. Blade: Yeah, I think that’s right and the primary improvement is really going to be at store level in our variance in theoretical food costs.
Conrad Lyon: Okay.
Jeffrey A. Blade: So, at store level food cost usage it has been higher than what we traditionally see has been attributable to some of the new menu items that we’ve introduced and we’re still in the process of fine tuning.
Conrad Lyon: Okay. Rough operating costs, probably will roll out at the same rate that we saw this quarter you think?
Jeffrey A. Blade: Yeah, that’s a safe assumption.
Conrad Lyon: Okay. That’s fair enough. Let me move over to some of the new products, like the breakfast products. Was that tested at all to gauge the likely success for that?
Jeffrey A. Blade: Yes it was.
Conrad Lyon: Okay.
Jeffrey A. Blade: And just to clarify the new program, so the platform for it and really the intent was an item menu that could be very focused towards drive through which is obviously the channel of the breakfast day part that has experienced most of the growth over the last decade. So we have had one of our top selling items for a long time has been a bagel sandwich so we have taken that, we’ve done some reformulation, improved that, we’ve expanded that to three combinations and then we also created three breakfast melt sandwiches which build on the heritage of Steak ‘n Shake’s melt business.
Conrad Lyon: Okay.
Jeffrey A. Blade: So, it’s intended to be something that will be very drive through friendly and then that’s complemented with upgrading our hash brown in terms of taste profile and a frozen yogurt breakfast smoothie which uses the platform of frozen yogurt that we already have with some nutrient enhancements and then Seattle’s Best Coffee. So, we tried to put together a bundle that will not only work well in drive through but was relatively straight forward to do and built on some of the success we already had and some of what consumer research told us would be appealing to consumers.
Conrad Lyon: Okay. Let me ask you the last question here on marketing. Did you talk about what your anticipated marketing spend is going to be for the year?
Jeffrey A. Blade: We’ve traditionally be at about 4.5% so you should think in those terms.
Conrad Lyon: Okay, so it’s not going to creep up too much. Okay, all right, thank you very much Jeff.
Jeffrey A. Blade: Sure, before you go onto the next person, I just want to clarify the question earlier about incremental couponing currently in the marketplace versus prior years. It’s approximately $5.5 million of circulation that’s incremental.
Operator: This concludes the question and answer session today. At this time Mr. Blade, I will turn it back over to you for any additional or closing remarks.
Jeffrey A. Blade: Well Alan and I would like to thank you for your interest in the Steak ‘n Shake Company. We appreciate your time today. We look forward to talking with you again soon.
Operator: This concludes today’s teleconference. You may now disconnect and have a good day.