Exactly.

Whether it was being poorly received while presenting at the HR Tech Shootout or his aggressive compensation (which continued with his severance package), I don’t think the market thinks he’s the man to lead Salary.com to the next level.  Which is a little saddening since he’s the man who founded the company and built it to where it is today.

So what does it mean that he stepped down so suddenly?  There was nothing on the recent earnings call that implied he would be leaving.  The press release pointed out the 35 straight quarters of revenue growth, if that was coming to an end, they probably wouldn’t mention it.  There were no disagreements (according to the 8-k) and he’s staying on as Chairman of the Board of Directors, so they didn’t want to completely get rid of him…

It’s definitely a strange situation, and I’ll be interested to see who they get to replace him.  Paul Daoust, the interim CEO while they search for a successor, appears like he would make a very good replacement, however part of me wonders if they’ll need to name a permanent CEO.  In my research I got the impression that Kent, in his role as founder of the company, couldn’t let his “baby” be sold to someone else.  So maybe they’ve been approached and he doesn’t want to be involved.  Of course, this is usually territory for the BOD and not the CEO, so staying on the Board wouldn’t make sense.  Not to mention his change in control agreement would have provided even more than the separation agreement did.

But back to that separation agreement.  It basically provides what his employment agreement says he is due if he is terminated without cause by the company or he resigns for good reason.  Looking at what constitutes good reason, about the only think that applies is if the company wanted to demote him and he refused.

So something doesn’t seem right;  either he was going to be fired and wanted to resign instead, or the company is just being nice with shareholder funds.  Plunkett receives a golden parachute consisting of a cash payment of $925k (or about 2% of the market value of the company), his pro-rated bonus for Fiscal 2010 of $148k, and immediate vesting of 191,250 (my count) unvested restricted stock worth $478k at $2.50/share.  Add all this up, and it’s over $1.5m. Not bad for a company with $45m in revenue.

Disclosure: Long SLRY.

• Record revenues of $7.8 million, up 8% year over year and 14% from the prior quarter.
• Record transactional revenue of $6.2 million, up 7% year over year.
• Net profit for the quarter increased 32% to $1.2 million compared to $0.9 million in the first quarter of Fiscal 2009.
• Cash expenses fell 1% to $5.0 million for the quarter.
• Non-GAAP adjusted EBITDA of $2.7 million, an increase of 28% year over year.
• Non-GAAP adjusted EBITDA margin of 35.4% vs 29.8% year over year.
• Repaid the $937,548 short-term loan outstanding.

So while all that is good, I was expecting a little better.  Transactions were only up 16% to about 61.5k per day, I had been expecting closer to 64k or 65k per day.  Organic growth has slowed, and while they still are targeting 20% growth from existing partners, I think that may be a little aggressive.

Management is trying to monetize their network, but adding new “on ramps.”  They have 3 planned for the next 12 months, those being Mobile, Business Printing, and Social Stationary.  On Mobile, they have a contract signed, but can’t disclose it (this never sits well).  Business Printing “needs to be better than the initial pilot” with Walmart Canada which did not meet expectations.  And they are still working on a strategy for social stationary.

The good news is that management is keeping a handle on expenses, so while revenue may not be as strong as I had hoped, they should still have positive EBITDA.  Analysts are expecting $9m in EBITDA for 2010 and $12m for 2011, my estimates are not that far off.  The current market value is about $55m, they’ve got net cash of between $3m and $5m after adjusting for working capital needs, leaving an EV of about $51m.  Assuming they generate about $9m in EBITDA in Calendar 2010, it’s trading at a forward EV/EBITDA of only 5.5x (and only 7.6x trailing).  At this time next year, if the stock price doesn’t change, the forward EV/EBITDA will fall to 3.5x.

Clearly the stock is cheap, and management agrees.  They announced an intent for a share repurchase agreement, stating on the conference call:

We continue to be frustrated by our share price as it relates to the fundamentals of our company.  We believe the robust platform that we have built and the additions we are adding to it merit a higher consideration than we are currently seeing.  We are demonstrating our ability to scale and to generate greater revenues and profits, but our stock price has not moved accordingly.  With PNI now working capital positive, and starting to put a decent buffer of cash in the bank, we believe one of the best investments in the market are our own shares.

I couldn’t agree more.

Disclosure: Long PNDMF.

They had great news for sequential growth, in that the level of activity was picking up, and December was a great quarter for the company.  Comp data remains soft, however software is very strong (they said on the call the were seeing 30% declines in the comp data, which they did not see last recession because they were so small and growing faster — a 33% decline means customers are only buying data every third year).  They had 4 deals over $250k in the quarter, including one over $500k with Sallie Mae and a $350k win with a global gaming company.

The one big flag in the quarter was the loss of a large payroll client.  This caused a large increase in receivables.  Unfortunately they didn’t provide a lot of details as they were advised against it for legal reasons.  I can only speculate, however the initial thought that comes to mind is they may try to reduce the Genesis purchase price or recover some cash from the sellers as the loss of this deal materially negatively changed the value of Genesis.

They provided guidance for Q4 revenue of $11-$12m, which seems quite wide and puts them in danger of ending the quarterly sequential revenue growth string of almost 9 years.

On the call, management stated, “People look to us as the best in the world on compensation.  Deals start with compensation.”  This is the thesis behind my owning the shares, it’s good to realize that management still believes that as well.

The good news is that software is still growing over 30%, retention is over 90% on revenue, and when the job market improves, SLRY should see a large portion of their business come back very strong.  They don’t provide a revenue breakdown, but even a 30% growth rate on $5m in quarterly comp data revenue would be $1.5m per quarter in revenue, and with SLRY’s business model, most of that will flow to operating earnings.

Disclosure: Long SLRY.

So Friday after the close Steak n Shake issued their Q1 results and also announced that they would change the name of the holding company to Biglari Holdings, Ticker BH.  And no, this is not Berkshire Hathaway, although anything that makes investors conjure up images of Berkshire Hathaway when thinking of Steak n Shake is sure to make Sardar Biglari smile.

So the question is, after spending money outfitting restaurants with pictures of himself as Chairman and CEO of Steak n Shake (see above), will he spend the money changing the wording to Chairman and CEO of Biglari Holdings?

I believe this is an unfortunate choice of name, I would have preferred something like SNS Holdings, but I will agree that it makes sense to change the name of the parent holding company.  But a change like this gives more credence to those who do not want to invest with Mr. Biglari.

I will point readers to an exchange on realmoney.com’s columnist conversation (the paid version of thestreet.com) that occurred today:

		Scott Rothbort
		Berkshire’s B Shares Are Grade A
		2/1/2010 3:06 PM EST

In what may be the ultimate act of hubris, Steak ‘n Shake (SNS) is changing its name to Biglari Holdings. The company posted a modest fourth-quarter profit of $3.82 per share, which is reflective of the post-reverse-split-stock outstanding share count. I think this company is a rollup that will eventually end up in a disaster. As a restaurant company, it also leaves much to be desired. I certainly don’t desire the stock, which was rated an avoid in my December newsletter. Caveat emptor. If you want the real thing, buy Class B shares of Berkshire Hathaway (BRK.B).  Position: Long BRK.B

		Jonathan Heller
		Biglari: Hubris or Moxie?
		2/1/2010 4:08 PM EST

With all due respect to Scott Rothbort, I find it entertaining that Sardar Biglari wants to change the name of Steak n Shake to Biglari Holdings. Definitely shows some moxie, not always a bad thing. As a shareholder, I will vote against the name change, but the truth is the current name Steak n Shake no longer fits. This is now Biglari’s capital allocation vehicle, right or wrong, and anyone holding shares, or contemplating taking a position, better understand that. The proof will ultimately be in the pudding, but I for one am hanging on to the shares. Position: Long: SNS

And that in a nutshell is the discussion over Steak n Shake as an investment. Do you choose to invest alongside Mr. Biglari, or do you choose to avoid him?  We won’t know for a while, likely years, whether investing with Sardar is a smart thing to do.  But we do know his partnership has had acceptable returns even if Western Sizzlin didn’t turn out to be a great investment.  But what about Steak n Shake the restaurant?

I have little doubt that Sardar likely paid too dear a price for it when he started buying, as his average cost is approximately where it is trading today.  But I also have little doubt that he’s done a heck of a job turning the business around.  Same store sales increased by 14.4% at company owned stores and 7.6% at franchised restaurants.  As a percentage of sales, both cost of sales and G&A were down.  Owner earnings (loosely defined as CFO – Capex, but modified for one time items)  came in around $12m, up substantially from last year (after backing out one time items that juiced last year’s number, and including more capex than last year, which is a positive sign).

Using simplistic, back of the envelop math get me a fair value for SNS shares around $360 per share.  I arrive at this by annualizing the owner earnings number (gives about $48m in FCF), applying a 10x multiple ($480m), adding in cash, investments, and assets held for sale ($62.2m, $9.2m, $13m), subtracting debt ($18.5m), which yield about $515m in market value.  Dividing by the 1.4m shares outstanding and you get approximately $360 per share.

Disclosure: Long SNS, BRK.b, WEST.

“There were new product initiatives that we decided not to continue to pursue,” Haahr said. “We decided that it made more sense to stick to our core in payment systems rather than spending more money to expand into some new areas. We expect our payment systems to continue to grow with this re-emphasis on our core business and the new emphasis on the cost reductions.”

via Layoffs at Meta Financial | argusleader.com | Argus Leader.

So, if we believe him, it appears that they are refocusing the company on the core business, instead of expanding into new lines of business.  There could be many reasons for this, from not wanting to compete with customers to not having enough resources to do it successfully.  One of my nits with Meta has been the bloated overhead at MPS, it has been growing just as fast as the business.  Now it appears they are focusing a little more on profitable growth and not just growth, so this could be a positive, for all except those that are laid off.

So what is a little troubling is that this announcement coincided with a capital raise.  What is most worrisome is that they may have been forced to do this by regulators after they saw the 12/31 numbers.  They raised $5.65m by selling 265,000 shares to Cash America.  They managed to do this at $21.33 per share, which was approximately where it closed the day before and above the book value of $17.97, and didn’t pay any commissions to do so.  However, it still dilutes the future earnings for current holders, despite book value increasing to my estimate of about $18.25 before any write-downs from Q1.

As I mentioned before, a capital raise would not surprise me and I reduced exposure to the stock in September.  If I get another meaningful discount to book, I may buy back the shares that I sold, as this puts the bank in a stronger position to weather any commercial real estate storm. I’m not sure why they didn’t cut the dividend as that costs about $1.5m per year, but that’s a story for a different day.

We should get a look at the 12/31 numbers in a few weeks, hopefully I’ll be back with an update then.  In the meantime, please switch your TV to Direct TV or AT&T U-Verse and get some rebate cards.  Or buy Symantec products with a rebate.  Or choose rebate cards instead of a check if your Staples Easy Rebate will allow it!

Disclosure: Long CASH.

That’s a great analogy, however there is one problem with that analogy, you need to have a bat to swing.  If you don’t look at a company, your hands will be empty when Mr. Market, the pitcher, throws you a “fat pitch.”  And that’s the case with me when it comes to Kirkland’s (KIRK).  You see, it was about 14 months ago when I first saw the idea, and to this day I’ve only done cursory research on the company.

Kirkland’s was written up on Value Investors Club in September, 2008.  Non members got access to the idea in early November, 2008.  At that point, the write-up seemed interesting, but I couldn’t imagine buying a housing related retailer in the middle of a recession caused by housing.  The stock had declined about 20% from the time of the write-up, which made me think that it wasn’t as good an idea as it seemed (boy, was I wrong).  And it had doubled from the lows already, so greedy me wanted to buy it under $1.  By not being prepared, and not buying, I missed an almost 10 bagger in a year.

Once in a while when I completely miss a golden opportunity, I like to go back and see what the situation looked like at the time, to make sure that when the situation presents itself again, I’ll be ready to swing.

Basically, KIRK was a retailer trading at about 1-2x EBITDA which had been forced down due to selling by large holders.  While this is generally enough in itself to get me interested, the story was even better.

KIRK had spent 2007 restructuring and the benefits of the changes were already evident.  As part of the restructuring, they’d replaced some management and stopped new store expansion.  They made the decision to get out of mall based stores and focus on the strip mall locations (with lower rents and where customers were more likely to buy a mirror and take it to their vehicle as opposed to walk through a mall with it).  Same store sales went positive in Q108 causing gross profit to increase.  Operating Margin expanded as well as expense were down.  The momentum continued throughout Q2 and Q3, however margins were still only a fraction of what they were before the company decided to expand the store base aggressively.  There was still plenty of operational improvement to be had.

So while the business had already turned, the stock price didn’t reflect it, most likely due to a turnover in the shareholder base.  Two funds, Vardon Capital and Endowment Capital, who had owned over 20% of the stock began selling in 2007, driving the price down.  To make matters worse, Advent International, which had brought the company public and still owned 30+% of the company, also started selling.  Most PE funds have limited time periods, investors want their money back after 10 years or so.  So the Advent fund that held KIRK was winding down, they just wanted to exit their investment as they had started a new fund.  And since KIRK has such a low float, all this selling held the price down despite the cheap metrics and turn in performance.

So who was buying all these shares that were flooding the market? Integrity Brands, which had a successful return with a similar situation in United Retail Group (URGI) a few years early owned 5% of the company by June 2008.  But the pièce de résistance of the story is who was buying Advent’s remaining 19.6% stake.  On 9/22/09, 5 members of management and the board of directors spent about $7.5m to acquire almost 20% of the company.  This isn’t Salary.com (SLRY) insider buying of $5k per month by the CEO.  This is real insider buying that removed an overhang that was keeping the stock down.

And I missed it.  Never again, if I see massive insider buying like this, will I let a company go un-researched. So while this may not have been a called strike, it was definitely a fat pitch, slowly tossed down the center the plate, that I definitely should have swung at.

At the current ~$16.50, the stock is down 15% from the highs and still could have a ways to run.  It’s traded up after every earnings announcement as results continue to get better and better.  However, management has started selling some of the shares they bought from Advent, so the easy money has definitely already been made.

Disclosure: Long SLRY.  No position in KIRK, unfortunately.

Like Buffett gives shareholders a discount on GEICO auto insurance (which I’ve never found to be anywhere near reasonably priced, but I guess that’s why they make so much money), Sardar is giving SNS owners coupons for free shakes with their annual reports.  Don’t worry, Sardar hasn’t suddenly become charitable since turning 32 and becoming a father; he’s just trying to drive traffic to Steak ‘n Shake restaurants.  He says that if each restaurant can serve 20 more customers per day, or get $130 more in sales per day, it would be $20m more in revenue, and with low marginal cost due to leverage, almost all of this would be free cash flow to the business.

It’s this type of heavy promotion that has driven Steak ‘n Shake’s traffic to be up 20% in the September quarter (I’ll admit to going there three times in the quarter vs only once last year!!).  While same store sales growth was not as strong at only 10.1%, it’s still 10.1% growth during a recession.  And even against “easy compares,” as the analysts say, it’s still pretty impressive.

The final piece of news is that he is implementing a 20-1 reverse split of the stock, which will make the price about $240 per share.  While this means nothing in the short term, it will have the effect of being a small share repurchase, and hopefully, according to Sardar, “attract knowledgeable long-term owners” of the stock.

Disclosure: Long SNS, BRK/B.

The main negative to me was that average orders per day came in at only 38,000, compared to the 42,000 I had been expecting.  However, counteracting this decline was an increase in transactional revenue per order, from $1.26 last year and $1.27 last quarter to $1.43.  As a result, transactional revenue was up 26.6% to $4.95m and represented 72.6% of total revenue.

Other revenues also increased nicely, as installation, membership, archive, and professional fees all came in higher than I expected.

Gross margin (after deducting network delivery costs) increased to 80.1% from 77.7% last quarter and 62.9% last year.  The company started to leverage other costs as well, as sales and marketing declined, however G&A and R&D increased more than I had expected.

The end result was a profitable quarter, with EPS of $0.02 (taking everything, including foreign currency, into account) and EBITDA of just over $2m or $0.06 per share. EBITDA margin came in at 30.4%, a record high quarterly level.

For the full year the company saw $6.1m in EBITDA on $24.8m in revenue, an 24.7% margin.  This is about $0.18 in EBITDA per share, which means the company is trading at about 10x EBITDA, while I expect EBITDA to grow at a faster rate.

For the current quarter, while the company didn’t give any guidance, they did say that on the peak day they processed 150k orders, with over 2m prints, 5m photo uploads, and 2.5m greeting cards.  As a comparison, the peak day last quarter saw 150k orders.

They did warn that that recent decline in the US Dollar could hurt future results as revenue would have been only $23m had the exchange rate been where it is today for the full year.  Expenses, however, are in Canadian dollars so margins could suffer.

Doing some quick numbers, for Q1 I expect 65k orders per day on average leading to $7m in transactional revenue.  I expect total revenue to come in just shy of $9m, expenses just over $7.65m, for $1.3m in earnings, or $0.04 per share.  EBITDA should be around $3.2m, which comes out to about $0.094 per share, so we’ll see if they manage to round that up to $0.10.  My estimates could be high with the currency issue, but this is about 50% higher than last year on a 24% increase in revenue, the beauty of operational leverage.

That’s it for now, I’ll likely have more after reviewing the results more.  This quarter seemed much “cleaner” than the last quarter, however, as there wasn’t the strange marketing expense hurting revenue growth.  We’ll see how the market responds tomorrow.

Disclosure: long pndmf.ob.

During September and October 2009 the Company made advances against salary to its Chief Executive Officer totaling $298,146.91. It also loaned $160,000 to the Chief Executive Officer’s former wife. The CEO believed the advances and loan were permissible after he consulted with the Company’s General Counsel. In the latter part of November 2009, the Company reviewed these matters with its auditors. It also informed members of its Compensation and Audit Committees and outside counsel. The Company concluded that the advances and loan may be deemed extensions of credit and violative of the Sarbanes-Oxley Act. The CEO immediately repaid the remaining balance on the advances with interest. The loan to his former wife was repaid in October before the review had begun. The Audit Committee is reviewing the Company’s policies and procedures regarding payments to or for senior management, as well as the Company’s overall internal control procedures. The Audit Committee adopted changes which require that its prior approval be obtained before any extraordinary payments may be made to or at the request of management. It also directed that management undergo governance training pursuant to a program approved by the Audit Committee.

Really? How can you not know that loans to management are no longer permissible?  And what does the CEO suddenly need $460k more for anyway?  He made almost $1,000,000 last year as CEO.  He owns over 1M shares, so with the recent $1 per share special dividend he was just paid $1m from his stock.  He’ll be getting another $250k next month when ARKR pays it’s regular dividend.  I wonder what’s such a good deal, inquiring minds want to know.

This move makes the recent special dividend and resumption of the quarterly dividend make a little more sense.  It’s nice to participate alongside management when they’re paying themselves.

Disclosure: Long ARKR.

At some point before the end of the year, the WEST shares currently at ~$8.60 will be converted into SNS debt at 14% interest with a $8.11 face value.  As previously discussed, the debt is callable in 1 year (based on the filing the first call date would be 12/31/2010.).  So if it is called on that date, which I do not believe is likely, it will pay $1.135 in interest but lose $0.49 in principle.  This nets out to $0.645 in return on a $8.60 cost, or a yield of 7.5%.  This is over 13.5 months so an annualized yield is 6.6%, which is inline with other BBB rated debt of restaurants.  Now if Mr. Biglari doesn’t call it at that time, then the yield to maturity increases.

Disclosure: Long SNS, WEST.