OSI Weighs Its Options

The earnings announced on OSI Restaurant Partners' (NYSE: OSI  ) first-quarter conference call have already been absorbed by the market, and they weren't anything spectacular. However, the call contained a few other items about the parent company of Outback Steakhouse that I think are worth discussing.

Disclosure
The company is making a commitment to better disclosure -- a move we Fools wish all companies would emulate. None of the many possibilities here is set in stone, but there's a chance that the company will be providing a full balance sheet and cash flow statement in future earnings releases. Few companies provide all three statements, and looking at OSI's competition, I see that BrinkerInternational (NYSE: EAT  ) and Cheesecake Factory (Nasdaq: CAKE  ) could also improve here. The company is also considering disclosing operating profitability by concept, and rethinking the timing of same-store sales and earnings releases.

Operating expenses
In its move toward better disclosure, the company explained the breakout of its restaurant operating expenses, as requested by many investors. On the income statement, it includes 65% for rent, utilities, advertising, and supplies, with another 12% for repairs and maintenance. The remainder comprises taxes, insurance, and restaurant start-up costs, among other items.

Unrelated to the disclosure of its operating expenses, the company also mentioned it will consider ways to improve the efficiency of labor costs at its Outback concept. Those costs have been increasing rapidly, especially in Florida, because the state has hiked its minimum wage. OSI also expects some slight favorability in its cost of goods sold because of lower dairy-related costs.

Land, buildings, and leases
One of the secondary -- or tertiary -- reasons I purchased shares in OSI last November is that the company has some hidden value on its balance sheet in the form of real estate. On its conference call, the company confirmed that for about one-third of its restaurants, it owns the land and building; for the next third, it owns the building but not the land; and for the final third, it completely leases the site. I have no expectation that the company plans to do anything with its land or buildings in the near future; I bought the shares primarily because the market underestimated OSI's ongoing free cash flow generation. But the land and buildings do provide an additional margin of safety to the value of the shares, should the need ever arise (e.g., an operational stumble).

The company reiterated that it will continue to consider all of its options for unlocking shareholder value. However -- and this is important -- it may not act on any of them. These options include spinning off higher-growth brands, taking on leverage and repurchasing shares, and possibly leveraging the aforementioned real estate. Whether or not the company pursues any of these options, I'm pleased as a shareholder to know that it's considering them. Judging by management's language in the conference call, OSI is seeking options that offer the best long-term benefit.

I had originally expected a slightly better performance from the company this year, but what it's delivering isn't a large disappointment. More importantly, management continues to be up front about where it can improve, aware that it has multiple options to reward shareholders, and apparently is leaning toward more carefully allocating capital in the future. Given this frankness and willingness to consider various options, I'm a bit optimistic about OSI's future.

For more Foolishness in the outback:

The Motley Fool Inside Valuenewsletter also recognized OSI as a bargain. That's why it's a recommendation. To find out what other great bargains Inside Value has come across, simply click here for full access free for 30 days.

This article was originally published on May 1, 2006.

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At the time of publication, Nathan Parmelee owned shares in OSI Restaurant Partners but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.


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