Steak 'N Shake Surges on Promos

Promotions Drive Surge in Traffic, But Margins Likely to Suffer Discounts

Steak ‘N Shake Co. (SNS - Snapshot Report) shares jumped 10% today after reporting that same-store sales grew 5% in the company’s fiscal 3Q09 ended July 1.

Comps surpassed recent domestic sales of the competition: McDonald’s Corporation (MCD - Analyst Report), Burger King Holdings Inc (BKC - Analyst Report), Wendy’s/Arby’s Group (WEN - Analyst Report), Jack in the Box Inc (JACK - Snapshot Report) and CKE Restaurants Inc (CKR - Snapshot Report).

Customer Traffic Surges 13.4%, Prices/mix Falls 8.4%.

Cash-strapped customers flocked to the fast-food burger chain for its deeply discounted promotional menu items. The company celebrated its 75th anniversary on February 13th by offering steakburgers for 15 cents -- the same price they were when the chain started in 1934. From that time through March 29, the price rose only to 75 cents.

While a proven way to draw new customers into the stores and boost short-term sales, the steep discounts are unsustainable longer-term without severely squeezing margins. To be sure, Steak ‘N Shake differentiates itself from the competition by using premium ingredients, including real cuts of steak in its burgers.

In the midst of a turnaround, shares of Steak ‘N Shake have more than tripled from their November low and now trade at 22x the Street consensus EPS estimate for 2010 – lofty at a time when the company has low earnings visibility, a spotty track record and pays no dividend.