Outback: It's What's for Dinner
By
Richard McCaffery (TMF Gibson)
February 18, 2000
Outback Steakhouse (Nasdaq: OSSI) capped off another strong year this morning, reporting that fourth-quarter income (before one-time charges) jumped 28% to $33.5 million, or $0.43 per share, compared to $26.1 million, or $0.34 per share, a year ago. The Tampa, Florida king of the casual steakhouse beat estimates by a penny.
Same-store sales at Outback restaurants and Carrabba's, the company's upscale Italian dining franchise, increased 5% and 8.7%, respectively. The company, which operates 72 Carrabba's locations, plans to accelerate rollout of additional stores next year. Sales and margins have shown consistent improvement since the company started locating the restaurants in upscale areas. Though I don't find the concept, or the food, nearly as compelling as Outback's steak restaurants, it's hard to argue with the kind of same-store sales returns Carrabba's is posting.
In addition, management said the company is benefiting from the supply and demand situation in the restaurant business, which means that restaurants in general aren't drowning the market with excess capacity. This is one of the key issues in the restaurant business, as industry analysts pointed out in a recent issue of The Wall Street Transcript.
At any rate, Outback Steakhouse is one of the strongest brands in the business. The company has a return on equity approaching 20% and a squeaky-clean balance sheet. Few companies in the restaurant business provide investors this kind of return. Rival Lonestar Steakhouse (Nasdaq: STAR), for example, has an ROE in the low single digits.
The Wall Street Transcript interview pointed out one of Outback's greatest assets: Its management retention rate is above 90%, unheard of in an industry that eats managers for breakfast. At Outback managers participate in the store's stream of cash flows in return for a stake in the operation. It's an aggressive formula that's paid off for Outback. Also, Outback isn't open for lunch. This keeps costs down and keeps the chain from having to hire too many managers.
Outback's stock has taken a pounding despite strong results. Shares are down almost 40% since July when investors got spooked about cyclical stocks in general and restaurant stocks in particular. Long term, however, the fundamentals look positive. Outback is the franchise name in the steakhouse business and management has been disciplined about controlling expansion and expenses. Additionally, Carrabba's is on its feet and new concepts such as Roy's, an upscale restaurant that serves Pacific Rim food, and Flemings, an upscale steakhouse started by one of the founders P.F. Chang's China Bistro (Nasdaq: PFCB), are testing well in new markets.
Investors looking for a quality meal at a good price should look closer at Outback.
