10-Q: Biglari Holdings Swings to Profit on Investment Gains

Biglari Holdings Inc. reported a significant swing to net earnings in Q2 2025, primarily driven by substantial gains from its investment partnerships, alongside revenue growth in restaurant and brand licensing segments.

Summary

• Net earnings for the second quarter of 2025 were $50.9 million, a significant improvement from a net loss of $48.2 million in the second quarter of 2024.
• For the first six months of 2025, net earnings were $17.7 million, compared to a net loss of $25.6 million in the same period of 2024.
• Total revenues increased to $100.6 million in the second quarter of 2025 from $91.1 million in the second quarter of 2024, and to $195.7 million for the first six months of 2025 from $180.6 million in 2024.
• Investment partnership gains were the primary driver of the earnings swing, reporting $58.5 million in the second quarter of 2025 compared to a $79.9 million loss in the second quarter of 2024.
• Restaurant operations revenue grew by 11.7% in the second quarter of 2025 to $72.0 million, with Steak n Shake same-store sales up 10.7%.
• Brand licensing revenue surged to $2.3 million in the second quarter of 2025 from $0.3 million in the second quarter of 2024, driven by new digital contests.
• Oil and gas revenue decreased to $7.5 million in the second quarter of 2025 from $8.7 million in the second quarter of 2024, impacted by lower crude oil prices.
• Net cash provided by operating activities significantly increased to $57.9 million for the first six months of 2025, up from $20.9 million in 2024, largely due to $35.0 million in distributions from investment partnerships.

Sentiment

Score: 7

Explanation: The company demonstrated a strong financial turnaround, primarily driven by significant investment partnership gains and solid revenue growth in its restaurant and brand licensing segments. Operating cash flow improved substantially, and debt was reduced. However, concerns remain regarding the ongoing material weaknesses in internal control over financial reporting, the volatility of investment gains, and declining unit counts in the restaurant segment, which temper overall positive sentiment.

Positives

• Significant swing to net earnings of $50.9 million in Q2 2025 from a $48.2 million loss in Q2 2024, primarily due to investment partnership gains.
• Total revenues increased by 10.4% in Q2 2025 and 8.3% for the first six months of 2025.
• Steak n Shake reported a strong 10.7% increase in same-store sales during Q2 2025.
• Franchise partner fees increased despite a decrease in the number of franchise partner units.
• Labor costs at company-operated restaurants decreased as a percentage of net sales (from 31.8% to 29.9% in Q2 2025), primarily due to a decrease in management labor.
• General and administrative expenses decreased as a percentage of total revenue (from 20.2% to 17.7% in Q2 2025) due to lower legal and professional fees.
• First Guard, an insurance subsidiary, produced an increased underwriting gain of $3.3 million for the first six months of 2025, up from $2.1 million in 2024.
• Brand licensing revenue significantly increased due to the launch of various new digital contests.
• Net cash provided by operating activities increased by $37.0 million for the first six months of 2025, largely due to $35.0 million in distributions from investment partnerships.
• Reduced line of credit balance from $35.0 million to $19.0 million on one line and from $10.0 million to $0 on another line.

Negatives

• Overall restaurant unit count decreased from 458 at December 31, 2024, to 449 at June 30, 2025.
• Traditional franchise royalties and fees decreased due to a lower unit count (100 units open on June 30, 2025, compared to 120 units on June 30, 2024).
• Impairment charges of $1.3 million were recorded in Q2 2025 for underperforming restaurant stores.
• Oil and gas revenue decreased in Q2 2025, and gains on sale of oil and gas properties significantly declined to $0.8 million in Q2 2025 from $16.2 million in Q2 2024.
• Southern Pioneer, an insurance subsidiary, reported an increased underwriting loss of $1.4 million for the first six months of 2025, up from a $0.7 million loss in 2024.
• Brand licensing segment (Maxim) continues to operate at a net loss.
• Interest expense on borrowings significantly increased to $0.9 million in Q2 2025 from $0.04 million in Q2 2024.
• Net cash used in investing activities increased by $7.6 million for the first six months of 2025, primarily due to reduced proceeds from asset sales.
• Net cash used in financing activities increased by $26.1 million for the first six months of 2025, primarily due to payments on the company's line of credit.

Risks

• Disclosure controls and procedures were not effective as of June 30, 2025, due to previously identified material weaknesses in internal control over financial reporting.
• The oil and gas business is highly dependent on volatile oil and natural gas prices, and prolonged declines could lead to future impairments of oil and gas properties.
• Investment and investment partnership gains/losses are subject to market volatility and are considered non-operating, causing significant fluctuations in periodic earnings.
• Actual future results and trends may differ materially from forward-looking statements due to various factors, many beyond the company's control.

Future Outlook

Management expects continued volatility in oil and gas commodity prices, which will impact financial results. The company is continuing remediation efforts to address previously identified material weaknesses in internal control over financial reporting. The recently signed One Big Beautiful Bill Act is expected to make certain favorable tax provisions permanent, including 100% bonus depreciation and the business interest expense limitation.

Management Comments

• Biglari Holdings management system combines decentralized operations with centralized financial decision-making.
• Operating decisions for the various business units are made by their respective managers.
• All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr. Biglari.
• We believe that investment and derivative gains/losses are generally meaningless for analytical purposes in understanding our quarterly and annual results.

Industry Context

Biglari Holdings operates a diverse portfolio spanning restaurants (Steak n Shake, Western Sizzlin), insurance (First Guard, Southern Pioneer, Biglari Reinsurance), oil and gas (Southern Oil, Abraxas Petroleum), and brand licensing (Maxim). The restaurant segment shows resilience with strong same-store sales growth for Steak n Shake, contrasting with a declining overall unit count, indicating a focus on profitability per unit rather than expansion. The insurance segment shows mixed performance, with First Guard improving while Southern Pioneer faces increased underwriting losses, possibly reflecting varied market conditions or underwriting strategies. The oil and gas segment remains highly sensitive to commodity price fluctuations, with lower gains from asset sales impacting overall performance. The brand licensing segment is experiencing significant revenue growth through new digital initiatives, suggesting successful adaptation to digital trends in media.

Corporate Governance

Legal Proceedings

• Involved in various legal proceedings and have certain unresolved claims pending, but management believes the ultimate liability, if any, is not likely to have a material effect on results of operations, financial position, or cash flow.

Related Party Transactions

• Service agreement with Biglari Enterprises LLC (owned by Mr. Biglari) for business and administrative services, with fees of $5.7 million paid during the first six months of 2025.
• Incentive Agreement with Mr. Biglari for a performance-based annual incentive payment equal to 25% of net profits above an annual hurdle rate of 6% over the previous high-water mark, contingent on growth in adjusted equity attributable to operating businesses.
• Biglari Capital Corp., solely owned by Mr. Biglari, is the general partner of the investment partnerships and earns an incentive reallocation fee.

Stakeholder Impact

• Shareholders: Significant increase in net earnings and earnings per share, driven by investment gains, could positively impact shareholder value. However, volatility from investment gains and internal control weaknesses present risks.
• Customers (Restaurants): Steak n Shake's 10.7% same-store sales increase suggests strong customer demand for its offerings.
• Employees: Decreased labor costs as a percentage of net sales, partly due to reduced management labor, could imply efficiency gains or potential staffing adjustments.

Next Steps

• Continue remediation efforts to address material weaknesses in internal control over financial reporting.
• Steak n Shake plans to sell or lease eight of its ten closed company-operated locations and refranchise the balance.
• Abraxas Petroleum will not be required to fund exploration expenditures on undeveloped properties sold, but may receive future royalties.

Key Dates

Recommendation

While Biglari Holdings reported a substantial swing to profitability and improved operating cash flow, largely driven by volatile investment partnership gains, the underlying operating businesses show mixed performance. Restaurant unit count is declining, and the oil and gas segment is sensitive to commodity prices. The ongoing material weaknesses in internal control over financial reporting also present a notable risk. Given the reliance on non-operating investment gains for the significant profit swing and the internal control issues, a 'hold' recommendation is prudent for a seasoned investor, suggesting observation of sustained operational improvements and resolution of control weaknesses before a more aggressive stance.

Keywords

Biglari Holdings, BH.A, BH, Steak n Shake, Western Sizzlin, First Guard Insurance, Southern Pioneer Insurance, Biglari Reinsurance, Abraxas Petroleum, Southern Oil, Maxim, Restaurant Industry, Insurance Industry, Oil and Gas, Brand Licensing, SEC 10-Q, Quarterly Report, Financial Results, Investment Partnerships, Corporate Governance, Risk Factors, Internal Controls