From the Outback to the Outhouse

You've got to be careful about transferring your personal likes and dislikes to your investment decisions. For instance, I'm a big fan of Old Navy, but I'm not the least bit interested in the stock of parent company Gap (NYSE: GPS  ) . Vice versa for American Eagle Outfitters (Nasdaq: AEOS  ) -- I've never made a single purchase there, but I'm a happy owner of the equity.

So what, then, to do with Outback Steakhouse (NYSE: OSI  ) ? I know this company has many fans in Fooldom, including my friend Nate Parmelee, but I'm certainly no fan of the namesake restaurant. But what about the stock? Well, let's take a look.

It looks like this was a tough quarter. Sales were up more than 11%, but net earnings fell even when you adjust for hurricane-related expenses. What's more, both numbers fell short of Wall Street expectations (the earnings per share were lower than the Street's low estimate), and margins didn't impress me too much.

On the same-store-sales front, the picture was mixed. Bonefish Grill, Fleming's, and Carrabba's all did well, but the namesake chain was down 0.6%. What's more, for all of management's talk about improved marketing and positioning for the Outback Steakhouse chain, those same execs are calling for less than 1% same-store-sales growth in 2006.

Making matters worse, or at least more annoying, the company didn't include a complete balance sheet or cash flow statement. Consequently, I can't really give Outback the benefit of the doubt on metrics such as return on invested capital or structural free cash flow growth.

Now, I realize it sounds as though I've been digging a nice little hole in which to bury this stock. And it's true that I'm not going to be looking to buy these shares anytime soon. All that said, I can see some real potential here. Whether you want to call it a turnaround is up to you.

Around here at least, the restaurants are busy and popular, and I don't know that there's anything fundamentally different about the chain that would prevent it from eventually achieving margins and ROIC more along the lines of those at Cheesecake Factory (Nasdaq: CAKE  ) , Darden (NYSE: DRI  ) , or Applebee's (Nasdaq: APPB  ) .

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Fool contributor Stephen Simpson owns shares of American Eagle Outfitters but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares). The Motley Fool has a disclosure policy.


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