Aug 8, 2008
Steak N Shake and Earnings Psychology
This weekend I had the privilege of reading the new Robert Cialdini book Yes!: 50 Scientifically Proven Ways to Be Persuasive. I first learned about the book from reading and watching a few talks with Charlie Munger, Warren Buffett’s right hand man. Yes! is a great book, it showed me a lot of different ways that we see psychology being used – especially when businesses are trying to sell to us.
One of the chapters which stood out to me discussed an experiment on how companies report their earnings.
Fiona Lee and colleages suggest that organizations that attribute failures to internal causes will come out ahead not only in public percetption but also in terms of profit line.
They also suggest that the public response to an organization’s internal focus to explain failures might be to assume that the organization has a plan to modiy the internal features of the organization that may led to the problems in the first place.
So what does it look like when a company does not attribute failure to an internal cause?
From the Steak N Shake (NYSE: SNS) 10-Q:
During the second fiscal quarter, same-store sales declined 6.3% primarily as a result of a decline in guest counts of 8.8%. Our same store sales and guest counts were negatively impacted by multiple factors, including further deterioration in the consumer economic environment and increased promotional activity from competitors…
Rising unemployment rates, steadily increasing gasoline prices, continuing housing related issues and declining levels of consumer confidence resulted in decreased guest traffic for us and many of our peers in the restaurant sector.
The researchers controlled variables and looked at companies which blame internal factors (strategic decisions, the release of new products) for poor earnings versus companies that blame external factors (the economy).
The results:
They discovered that when these companies explained failures in their annual reports, those that pointed to internal and controllable factors had higher stock pries one year later than those that pointed to external and uncontrollable factors.
This got me thinking to a quote I saw from Sardar Biglari at the Western Sizzlin meeting:
Steak N Shake is not declining because of the economy … almost everything that could go wrong with Steak n Shake has gone wrong.
We should be in for good things now that we have a CEO who is willing to blame our current woes on internal deficiencies, instead of writing them off as problems outside of management’s control.
Seems like the public probably feels that if it is outside factors, the company has no direct control and that the company will continue to decline. Logic would dictate that if it is internal, the upper management has located the problem or problems and is doing something to fix them. I also feel that blaming it on outside factors is a very shallow and unorganized way to do business. The best thing to do is to realize you have a problem or that you have failed in certain area, admit this to yourself and the shareholders and figure out how you are going to prevent this from happening again. A good CEO takes responsibility for the company’s actions and does what he/she can to make the company profitable. A bad CEO blames it on outside factors thus removing the problem from his immediate control and washes his hands of any obligation to do anything about it. One CEO earns his paycheck the other does not. In my opinion Steak and Shake realized this and got a new CEO.