In the grand scheme of things, missing a couple of press releases about a company you own is not a big deal. Annual reports, proxy statements, and other SEC filings are ultimately more important. But there are times when press releases can truly help you decipher whether management is sticking to its strategy or changing directions. Last week, Outback Steakhouse (NYSE:OSI) put out two press releases, both of which helped confirm my optimism in the company's business prospects.
The first, issued last Thursday, announced that same-store sales for January were up at every restaurant concept, with the fastest-growing concepts, Bonefish and Carrabba's, turning in another month of solid gains. Even the company's namesake concept turned in a slightly surprising 2% increase. However, it's a little too soon yet to get excited about the Outback brand's performance, because comparable sales were aided by 1.8% to 2.4% by last year's severe winter weather. Furthermore, one month's worth of data is just a single data point -- not enough to draw conclusions about a trend. Even taking into account last year's bad weather, the flagship restaurants sported flat same-store sales, which is still an improvement over Outback Steakhouse restaurants' recently negative comps. A little cautious optimism seems fair here.
The second interesting development is the company's decision to sell its 50% ownership stake in Paul Lee's Chinese Kitchen to founder Paul Fleming. Outback CEO Bill Allen has been outspoken about when the company will expand a restaurant concept. At Outback's Q&A session last June, Allen mentioned four main hurdles that a concept needs to clear to warrant expansion.
- Is the concept a compelling brand in the category it competes in?
- Is it a large enough opportunity ($0.5 billion for high-end, $1 billion for casual)?
- Are the economics right (margins, investment requirements)?
- Does Outback have the leadership and talent to expand the concept?
It will be interesting to hear the company's commentary on the sale of Paul Lee's when it reports earnings a week from Tuesday, and whether failure to satisfy one of the above four items is the reason for the sale. The company had taken its time with the Paul Lee concept, opening relatively few stores. But regardless of Paul Lee's future, it's one less concept to consume the company's resources and attention. While I haven't seen any direct communication from the company that it will cut other concepts, I wouldn't be surprised if a similar announcement happens later in the year for Lee Roy Selmon's, either.
Ultimately, I think Outback will outperform competitors BrinkerInternational (NYSE:EAT), Applebee's International (NYSE:APPB), and Darden Restaurants (NYSE:DRI). But deciding whether the stock is a buy requires analyzing the company's current valuation. At its current price of $45.85 a share, Outback is near where I peg its valuation through a discounted cash flow analysis. Furthermore, it's tough to call Outback a bargain at a P/E multiple of 22. However, if the company has a soft month of same-store sales or there's another downdraft in the stock market, there may be a chance to pick up Outback shares around $35 to $40 again, which I believe would offer enough of a discount for shareholders to benefit from the company's long-term potential.
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Nathan Parmelee owns shares in Outback Steakhouse but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
