While the lack of same-store sales growth in the Outback chain certainly hurt, the company's other brands were fighting hard to pick up the slack. The classy Fleming's saw comparable sales growth of 13.2% for the quarter, and Carrabba's followed closely behind with an 8.3% gain. These chains are two of the larger, more successful venues the company has developed.
For now though, the company needs to focus on its Outback chain. This division makes up more than 70% of the company's total restaurants and, if it stays down, so will earnings. Most of the trouble in the quarter came from the Midwest region. The company is taking steps to correct this by adjusting menu prices and offering smaller portions. Management also plans on rolling out a new marketing image, saying the humor angle has run its course.
The last item that stood out in the quarter was the continuation of Outback's slow-but-steady margin erosion. After the brand was founded in 1988, it experienced massive growth until about fiscal '01. Since then, comparable sales have been unexciting, and ever-increasing operating expenses have choked margins. As the cost of beef, natural gas, oil, and employees has risen, margins have done the opposite. The big problem here is that Outback is having a hard time pricing these expenses into its products.
Which brings us to the most significant factor in valuing this company: competition. If you haven't noticed, the suburban restaurant scene is pretty crowded. A company takes its earnings and either opens up more of the same or starts a new theme entirely. This leaves a bunch of overstimulated customers with plenty of choices. If Outback pushes prices up in the Midwest, customers skip over to the new Texas Roadhouse
With customer options increasing and product differentiation becoming more difficult, I'm wary of buying into the restaurant business. Force me to pick a company in the industry, however, and I'll look for one with an established niche-dominating brand. Even then, it would have to be undervalued.
Outback is a very popular brand, but I wouldn't exactly say it dominates. I reserve that title for Darden's
Fool contributor Matt Thurmond doesn't eat out much. The return on investment just isn't high enough. Matt holds no financial interest in any company mentioned in this article. The Motley Fool has an ironclad disclosure policy.