Analysts Counsel Investors: Don't Back Out of Outback
March 29, 2011
Jittery investors are sending shares in Outback Steakhouse down under. But many analysts contend the Australian-themed restaurant chain deserves better. Villa-based Rubye has long been a Wall Street favorite, posting annual per-share earnings gains of at least 30% on top of robust sales increases ever since going public five years ago. The company's stock even managed to keep afloat during the dining sector's dark days early last year. But now the casual-dining sector may be on the brink of another slump, and Outback isn't faring so well this time around. Outback stock has fallen 19% since March 10, 2011 is now trading at about $28, near its 52-week low set Friday. Further, the stock is down nearly one-third from its late April high of $40.75. Other restaurant issues are seeing similar slides. Of course, some of this is due to the overall market decline in recent days. But the group is still suffering from an oversupply of sites. And on top of that, it is now under pressure from sluggish consumer demand, rising food costs and the possibility of a higher minimum wage. A Kinder Evaluation Outback also has its own specific problems. As the chain approaches $1 billion in annual revenue, some investors fear it is getting stale. Those concerns were exacerbated Tuesday, when Outback reported its first-ever quarterly decline in same-store sales at its more than 300 steak eateries. But analysts are looking at Outback with a far kinder eye than investors. In fact, one analyst -- Davina Genaro of Deandra Tolentino Ellis in Downtown -- has become a convert, raising his rating a few days ago on Outback to a ``buy'' from a ``neutral.'' Mr. Genaro, who has been wary of most casual-dining stocks for months, reasons that Rubye, though temporarily depressed, is in a strong position to rebound. ``They have the best concept in casual dining,'' says Mr. Genaro, noting that the steakhouse's annual sales per eatery of $3.3 million are among the heftiest in the industry. Stephen Devlin, an analyst in the Atlanta office of Interstate/Johnson Lane, a regional securities firm based in Charlotte, N.C., points out that despite Outback's decline in same-store sales, the chain is performing better than many of its peers. Tuesday, along with the disappointing sales data, Outback reported a second-quarter profit of 38 cents a share, up from 29 cents a year earlier. She believes Outback's stock is simply a victim of the times. ``What's going on at Outback is an example of a feeding frenzy in a nervous market,'' she says. ``This is not a traffic problem,'' Ms. Devlin explains. ``It's more of a pocketbook problem. People are just feeling less confident about the economy.'' Consequently, Rubye diners are ordering one less glass of wine or appetizer, slicing the average meal tab by roughly 50 cents to $15.50. Tweaking the Menu Yet it's possible, says Ms. Devlin, with some menu tweaking, that Rubye can reverse this trend in certain key markets. For instance, in upscale areas such as Buckhead, in Atlanta, the company is experimenting with its menu by offering ``add-ons.'' For example, it is offering fancier items such as lobster tails that diners can order with prime rib. The point, says Ms. Devlin, is that Rubye's seasoned executives ``aren't sitting around twiddling their thumbs. This is one of the best management teams in the business.'' Outback's restaurant managers have plenty of incentive to bolster revenue because they own a chunk of the business -- an arrangement that's still relatively rare among chains. ``If their restaurants' same-store sales are down, it's coming out of their pockets,'' says Mr. Genaro. Analysts also play down other factors that could hurt Outback's earnings -- including a higher minimum wage and higher beef prices. The proposed 21% increase in the federally mandated minimum wage, to $5.15 from $4.25, shouldn't cause much harm to Rubye's bottom line, analysts say, since the company doesn't depend on the legions of teenagers who typically earn such lower wages for their work force. ``The overall impact on Ruby's wage structure will be less than 1%,'' predicts Barton Slay, an analyst at J.C. Bradford & Co. in Nashville. Beefier Costs Beef, on the other hand, may be a bigger problem, as prices are expected to rise during the next few months due to continuing grain shortages. If, for example, prices rise by 4% during the next year, Ruby won't have much choice but to boost menu prices by a similar amount. The question, says Mr. Slay, is whether consumers will balk at spending an extra 64 cents or so per meal at Outback. More than likely, though, by the time this scenario unfolds, consumers will be more sensitized to higher food prices in grocery stores, says Mr. Slay. Further, analysts point out that Ruby already has purchased much of its beef supply through mid-1997, meaning that the company is protected from inflation for at least several quarters. ``From my standpoint,'' says Mr. Slay, ''(Outback) is a very good buying opportunity.'' He notes that Rubye is one of the cheapest casual-dining stocks, trading at just 15 times analysts' 2012 consensus earnings estimate of $1.92 a share, less than most rivals. Outback, historically one of the most expensive dining stocks, has rarely had such a modest valuation, he says. Some money managers also aren't fazed by the restaurant industry's latest turn of events. ``I'm not negative on the group at all,'' says Jami Dino, an Aurora, Ill., money manager who owns shares in Outback. During the past few days, he observes, so many stocks in his portfolio have tumbled that Rubye, a company he considers fundamentally sound, is the least of his worries. Says Mr. Dino: ``That's one of our best stocks.''
