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Outback braces as profits tumble again

A share price fall to its lowest point since 2002 suggests a lack confidence in plans to fix the chain.

By SCOTT BARANCIK
Published July 28, 2006

TAMPA - OSI Restaurant Partners saw its stock sink 11 percent Thursday after reporting another disappointing quarter at its Outback Steakhouse chain and predicting still more rough times ahead.

Worried investors pushed the Tampa company's shares down $3.40 per share to $28.50 on Thursday, the lowest price since October 2002, after it disclosed a 27 percent decline in second-quarter profits and a 3 percent drop in Outback's same-store sales. OSI also cut back on its 2006 financial forecast, citing higher costs and depressed traffic. The company's stock is down 31 percent since Dec. 31.

"I don't view this as a significant overreaction," said Bryan Elliott, a restaurant analyst at Raymond James & Associates. "The earnings were very, very weak and the forward guidance was well below market expectations, so the company is significantly less profitable than it was perceived to be Wednesday."

Thursday's selloff suggests investors are not terribly confident about plans to fix the ailing Outback chain. Neither are they reassured by the argument that Outback is just struggling with the same problems facing the entire casual-dining segment of the industry, nor sure that several strategic options being explored by investment bank Wachovia Securities will ultimately boost OSI's sagging stock price.

During a conference call with Wall Street analysts Thursday morning, OSI executives warned that healing the company's problems would take many months, but said they appreciated the investment community's sense of urgency.

OSI's board rejected a proposal by shareholder and hedge fund Pirate Capital to spin off one or more of its growth chains, which include Bonefish Grill, Carrabba's Italian Grill or Fleming's Prime Steakhouse and Wine Bar. Management will present to the board their recommendations on other strategic options by late September, a quarter ahead of schedule. "We just don't see that that's the best lever to pull," Outback CEO Bill Allen said of the proposed spinoffs.

Company executives also expounded on the ever-widening plan to revive sales and profitability at the Outback chain, which has seen consistent reductions in store traffic and market share over the past year.

Most of the proposed fixes are responses to concerns that women have cooled to Outback's appeal over the years and that consumers in general consider it too pricey. Many proposals have been disclosed previously, including renovations aimed at airing out the restaurants' dank decor, smaller but less "utilitarian" buildings, a new radio and TV ad campaign, a slowdown in companywide store growth to no more than 100 new locations worldwide this year, and the testing of a more affordable and healthy menu in November.

But Allen unveiled several new details, including the possible relocation of certain underperforming Outback stores to more upscale and trafficked sites, and a plan to cut expenses by two percentage points. He said OSI customers have begun to consider Outback a place to go on special occasions rather than a regular hangout.

As for Outback's declining sales and profits, OSI laid part of the blame on external factors such as rising gas prices and new internal costs, such as a revised equity plan for store managers.

Elliott, the Raymond James restaurant analyst, agrees its not entirely the company's fault. Among restaurant sectors, casual-dining chains appear to be hit hardest by the recent consumer pullback. Even LongHorn Steakhouse, Outback's top competitor in the eastern U.S., reported a slight reduction in same-store sales this week, its first in many quarters. Many casual chains have suffered sizeable stock-price declines recently.

But Elliott - whose boss, Raymond James chairman and CEO Tom James, sits on Outback's board - still rates Outback's stock a "hold."

"From a business standpoint, Outback is suffering more" than its competitors, he said.

Scott Barancik can be reached at barancik@sptimes.com or (727) 893-8751.

[Last modified July 28, 2006, 01:08:16]