Like many other restaurants right now, Steak n' Shake (NYSE: BH) is struggling to stay afloat as the coronavirus pandemic continues to "shake" the food and beverage industry. The company, which was already on rocky ground before the start of COVID-19, was on the verge of filing Chapter 11 bankruptcy at the start of 2021, having $220 million in debt due March 19, 2021. However, Biglari Holdings, the parent company for Steak n' Shake, skated bankruptcy for now after repurchasing and retiring the debt at a discount for $153 million in late February.
Steak n' Shake had been in negotiations with its debtors for some time as it prepared for the possibility of Chapter 11 bankruptcy. Fortress Investment Group, one of the creditors paid off this spring, was recently sued by Steak n' Shake for allegedly scheming to take control of its assets using confidential information.
A sinking ship stays afloat a bit longer
This debt retirement is good news for investors in Steak n' Shake, but the company is hardly in the clear. The company went from operating 610 restaurants in 2019 to 276 by year-end 2020 and continues to close company-operated facilities, selling restaurants to recoup capital as it makes the transition to quick-service only and franchise-partnerships. Eliminating in-house seating should improve the company's bottom line but will take and cost an estimated $100,000 to $200,000 per restaurant.
More closures means bad news for retail landlords
In the meantime, the company will likely focus on closing more stores, which doesn't help the already oversupplied retail space. Single net retail real estate investment trusts (REITs) have fared slightly better than other retail competitors like mall REITs, but inevitable oversupply as restaurants in particular continue to close or file bankruptcy isn't good for the industry as a whole.
Right now, an estimated 10,000 retail stores are set to close in 2021. There is a chance we'll see other companies, including retail REITs, use the strategy of repurchasing and retiring debt at a discount as Steak n' Shake did, especially if the company or REIT is on the brink of bankruptcy. But only time will tell if the strategy will pay off for the company in the end.