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OUTBACK STEAKHOUSE, INC. A Financial Analysis & Strategic Plan by

David Harold Moore

July, 1995

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• TABLE OF CONTENTS •

Title Page # EXECUTIVE SUMMARY.................................................................................................. iii THE OUTBACK’S PRINCIPLES & BELIEFS..................................................................... iv PART I: A FINANCIAL ANALYSIS INTRODUCTION............................................................................................................. 2 THE OUTBACK STEAKHOUSE, INC............................................................................... 4 THE DINNER HOUSE INDUSTRY.................................................................................. 5 THE DIRECT COMPETITION.......................................................................................... 6 Lonestar, Longhorn & Bugaboo FINANCIAL ANALYSIS................................................................................................... 8 Liquidity................................................................................................................... 9 Profitability............................................................................................................... 10 Solvency.................................................................................................................... 12 OPERATIONAL ANALYSIS............................................................................................. 14 FINANCIAL ANALYSIS FOR SPECIFIC USERS................................................................ 15 FINANCIAL ANALYSIS CONCLUSION........................................................................... 16 PART II: STRATEGIC PLANNING PROBLEM STATEMENT & STRATEGIES........................................................................ 18 STAKEHOLDER ANALYSIS............................................................................................. 19 S.W.O.T. ANALYSIS...................................................................................................... 21 INDUSTRY ANALYSIS.................................................................................................... 24 STRATEGY GENERATION & EVALUATION.................................................................. 26 Strategy One............................................................................................................ 27 Strategy Two............................................................................................................ 29 Strategy Three.......................................................................................................... 30 Strategy Four............................................................................................................ 34 Strategy Five............................................................................................................ 35 RECOMMENDATIONS.................................................................................................... 37 THE OUTBACK STEAKHOUSE INC. UPDATE...............................................................

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APPENDICES Horizontal Analysis of the Consolidated Statement of Income................................ A Vertical Analysis of the Consolidated Statement of Income.................................... B Graphs: Liquidity Ratios......................................................................................... C Graphs: Profitability Ratios..................................................................................... D Graphs: Solvency Ratios.......................................................................................... F Strategy Action Plans.............................................................................................. H REFERENCES.................................................................................................................. I

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•EXECUTIVE SUMMARY•

This study consists of two parts with the Outback’s Principles & Beliefs being the introduction to the two parts. The first part is a 1994 financial statement analysis which analyzes the Outback and their operation, the dinner house industry, the direct competition, and the Outback’s financial strength with direct competition and industry average comparatives. The second part takes that information and identifies a problem while considering the strengths, weaknesses, opportunities, and threats as well as analyzing the stakeholders and the industry in general. The second part ends up with strategy generations, evaluations and a final recommendation on the strategies. As the first line of the Outback’s mission statement implies, “The success of an Outback is measured by its sales and profits”. If that is the case, then the Outback is extremely successful. With a total of 230 units creating $451.9 million revenue and earning $72.8 million in 1994, you see where the Outback is coming from. Since the Outback is a visionary in the dinner/steakhouse market, they appeal to the casual dining consumer with a certain amount of price sensitivity. This visionary leadership is in the process of being copied and maybe improved upon by three major competitors -- Lonestar, Longhorn & Bugaboo. However, these competitors have not as yet proven their mettle. All in all, the Outback is in a strong financial position. The problem, however, is that due to increased competition the Outback must strengthen their leadership position in the market in order to keep a long-term competitive advantage. In essence, the Outback should intensify national expansion efforts through business format franchising with a buyback clause while investigating the international market further; they should add on a take-out/drive through section; they should create ‘secret’ healthy menu items while practicing a regional menu engineering strategy; they should intensify their related market expansion efforts through the Carrabba’s Italian Grill expansion; and they should alter their current site selection strategy. As shown in the strategy evaluations, all the strategies have excellent potential profit, they all reduce portfolio risk, and they all are relatively inexpensive. These strategies will strengthen their long-term competitive advantage -- the goal.

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•THE OUTBACK’S PRINCIPLES & BELIEFS•

“The success of an Outback is measured by its sales and profits. This success is the result of our principles and beliefs about people and the most effective way to support our restaurants. These principles and beliefs are inviolate, critical to our continued success, and shared by all who call themselves ‘Outbackers.’ We believe that if we take care of our people -- Outbackers, customers, suppliers, neighbors, and partners -- then the institution of Outback will take care of itself.”

OUR PRINCIPLES AND BELIEFS Our five most important principles are hospitality, sharing, quality, fun, and courage. HOSPITALITY is giving for the sake of giving, rather than for the sake of gaining. It is giving to people beyond what is expected of us; it is our willingness to help them in tangible ways; it is having a genuine concern and being action-oriented toward their comfort and well-being. SHARING is inviting people to participate in the fruits of our success. It includes sharing dollars, responsibility, authority, and accountability; it is “we” made it happen rather than “I” made it happen. QUALITY is having a purpose and always working to improve. It is attention to detail. It is consistently meeting and then exceeding our standards. FUN is having a sense of humor, being able to laugh at ourselves, and celebrate together. COURAGE is living our principles and meeting our standards with absolute discipline while having a “no rules” approach to consumers. It is being focused on results, sticking to the core of our business, and accommodating the individuality of our people rather than demanding that they accommodate us.

PART I A Financial Analysis

•INTRODUCTION•

“With a goal of 350 restaurants and $1 billion in revenues by the end of 1996, the Outback faces increasing competition in the expanding themed steak-house arena.” (Nation’s, 1995) The Outback is an ‘Australian’ themed steak house that is open for dinner only. It has a limited menu featuring beef, fresh fish, shrimp, chicken, ribs, pork, and pastas. This limited menu in combination with the Outback’s limited operating hours is a reflection of the company’s unconventional corporate culture. With the theme “No Rules, Just Right” emanating from the top down (or is it the bottom up?), there is no doubting that these unconventional methods are leading to profitable results. Case in point; the Outback began in 1987 with one unit located in Tampa, Florida. The Outback now consists of 230 units from coast to coast with a projected expansion rate of 70 units per year for the next half decade. The Outback has also launched a new international division which is expected to propel the company into Europe, South America, the Middle East and the Pacific Rim. Combine this with revenues of $451.9 million and earnings of $72.8 million in 1994 and you get a highly successful organization.

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Furthermore, the Outback is diversifying their organization by entering the casual Italian dinner market. The Outback currently has a 50% interest in twelve of these restaurants which are named Carrabba’s Italian Grills. They are currently in the development stage but show promise. Before continuing on to the strategic financial plan, the corporate stratification should be explained.

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System-Wide Restaurant SalesSystem-Wide Restaurant Sales 1992

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•THE OUTBACK STEAKHOUSE, INC.•

Of the 230 units only 164 are company owned. Company owned signifies an interest of 81% to 90% ownership. The other 10% to 19% is owned by the managing partner and/or the joint venture partner. This company strategy is one of the pillars supporting the Outback’s financial success. You see, a managing partner is considered the store’s proprietor. He or she puts up a $25,000 payment as a vested interest in the unit. In return, the managing partner receives 10% of the profits generated from his or her unit. This kills two birds with one stone. The managing partner now considers him or herself the owner of the store and will act accordingly, and the need for a massive corporate bureaucracy has been destroyed due to the managing partners vested interest. This one concept, in part, is what has taken Outback to where it is today. The compensation for these managing partners ranges anywhere from $80,000 to $180,000 per year depending upon the store’s profits. The obvious result is practically no management turnover, quality management, and quality food/service. The impact of this strategy has yet to be fully discovered. Although the managing partner was discussed above, the joint venture partner is similar except that he or she usually operates/oversees multiple units. Again, killing the need for a corporate bureaucracy and leaving a possible regional creativity which is needed to succeed on a vast scale such as the Outback has done. Now, with 164 units owned by the company that still leaves 66 units of which 54 are franchised and the remaining 12 are considered Development Joint Venture units. The franchised restaurants create no direct income from operations other than franchise fees and royalties, which are included in the Company’s revenues. The 12 Development Joint Venture Units are split 50/50 in costs as well as profits. Fifty percent is company owned and 40% is owned by the Joint Venture Partner with the remaining 10% owned by the managing partner. Finally, the Outback is responsible for 100% of the costs of the new Carrabba’s Italian Grills while the profits are split evenly between the Joint Venture Partner and the company. [(Annual, 1994), (Nation’s, 1995), (Investext, 1994)]

•THE DINNER HOUSE INDUSTRY•

Succeeding in the competitive restaurant industry requires the ability to adapt to, or better yet prepare for, a changing environment. The speed at which some of the changes take place along with the daily complexities of the business can obscure the significant role which long-term planning can play in success. Emerging socio-economic patterns and the resulting alterations in the demographic profiles of individual restaurant patrons, as well as the diversifying of their lifestyles, attitudes and preferences will impact the profitability of individual restaurant businesses (Dun, 1985). It is this basic premise that has foreordained the success of the casual dinner house market of which Outback is part. The dinner house market is a market targeted at those who don’t wish to spend the extra money & time for the formal environment which succeeded during the big 80’s. As the times have changed, so have the demographics of the consumer. The new consumer is looking for a casual environment with quality food at a reasonable price as well as quality service in a timely manner. It is the combination of these four wants/needs created by the consumer that have resulted in the need and success of the dinner house market. It is this need that the Outback and their direct/indirect competitors have capitalized on. In addition, for those who think that America is a health conscious society as a whole, when eating out, they are wrong. The booming success of the Outback chain and other ‘non-health’ food chains are the evidence. That is not to say that offering healthy menu items is out. On the contrary, one must diversify the menu to capitalize on the many wants of the consumer. It is only through constant vigilance that allows the strong to survive!

•THE DIRECT COMPETITION•

“Outback’s guiding founders face hostile and explosive competition in the rapidly expanding themed steak-house arena, led by such chains as Wichita Kansas based Lone Star Steakhouse & Saloon, Atlanta based Longhorn Steaks, and Bugaboo Creek Steakhouse.” (Nations, 1995) Due to the uniqueness of the Outback and their thriving market, the Outback has began in a niche where competition is coming from behind -- in essence, Outback is the industry leader. This gives the Outback a sizable edge over the competition but also allows for the competition to capitalize on the Outback’s weaknesses. Only time will tell how well the competition does this. The state flag of Texas that flaps outside every Lone Star Steakhouse & Saloon is symbolic of their ambition. They have long-term plans to open 600 restaurants throughout the world. And as amusing as it may seem, they already have two restaurants in Australia (Outback has none). (F&B Business, July/August, 1994) The Lone Star Steakhouse & Saloon is similar in design and concept implementation. However, they are open for lunch and the management compensation is not as lucrative. The image is Country/Western which is carried throughout the restaurant with the music as well as employee uniforms. Besides that image difference, much is similar except for overall financial performance, which will be analyzed on the following pages. However, with 30 new units being opened during the fourth quarter of 1994 and a total of 104 units at then end of 1994, their expansion plans are rapid as well as on track. This company is a definite long-term threat. (Smith, 1994) Longhorn Steaks is in the midst of an operational turnaround. The company has significantly augmented its management team over the last year and developed a ‘new prototype’ Longhorn restaurant, which has shown promising results in its initial markets. With its revamped concept and a network of joint venture partners, Longhorn is poised to resume expansion of its restaurant base at a 20+% rate over the next two years. The company is embarking on a remodeling plan to convert existing stores to the new format with the goal of duplicating the initial results of the first several conversions. (Raymond James & Associates, Inc. April 7, 1995)

As of 1994 the Longhorn has a total of 49 units. Their menu selection is limited but otherwise the concept is similar to Lone Star and therefore Outback. Their major problem being the fine tuning of their stores as well as growth implementation. (Robinson, 1994) Bugaboo Creek Steakhouse, based in Providence Rhode Island, owns and operates two complementary restaurant concepts. Bugaboo Creek’s Steakhouse’s Canadian Rocky Mountain Lodge atmosphere appeals to the family and casual dining segment. The Lodge offers seasoned steaks, classic prime rib, roasted chicken and various electronically animated characters which come to life as dining entertainment. Capital Grille is characterized by luxurious appointments, top-quality menu offerings featuring steak and seafood and an extensive wine list. The restaurants are clustered in hub and spoke configurations in and around New England and greater Washington D.C.. Since its inception in 1990, the company has developed an operating base of six restaurants, with expansion plans and funding in place to grow 35 units by the end of fiscal year 1997. The Springfield Virginia Bugaboo Creek that opened the first week of March 1994 is already experiencing waiting times of over two hours and is generating weekly sales volumes approaching the company average of $70,000. On April 25 1994, well ahead of schedule, Bugaboo Creek opened in Peabody MA at the North Shore Mall. Volume for the first two weeks has been significantly ahead of company average. (Hancock Institutional Equity Services, May 23, 1994.) It seems the Bugaboo Steakhouse is poised for success. However, I cannot comment on Bugaboo because I have not as yet had the pleasure of dining in it. I have been to both Longhorn (before new concept implementation) and Lonestar more than once and was not impressed with their food when compared to the Outback Steakhouse. I do believe the LoneStar to be the major long-term threat because of their site selection. However, Bugaboo sounds like a well diversified company targeting a bit higher priced consumer market. So, I believe all three combined pose a great threat to the success of the Outback’s long-term success. Then again, who knows, the three big boys who run Outback might plan on selling out to General Mills when the Outback begins to hit their maturity curve. Its either that or begin a revitalization/long-term strategy now!

•FINANCIAL ANALYSIS•

The Outback’s financial status will be based on nine ratios from the three major categories: the Current ratio and the Quick ratio for LIQUIDITY; the Asset Turnover ratio, Profit Margin before income tax, Return on Total Assets and Return on Common Equity for PROFITABILITY; and finally the Debt ratio, Times Interest Earned ratio and Debt/Equity ratio for SOLVENCY. These ratios will be compared to their direct competitors Longhorn, Lonestar, & Bugaboo as well as the Industry Average. The Industry Average for each has been included at the bottom of each chart and at the end of each graph designated by a magenta bar (see Appendices C-G). This industry average if from the 1995 Almanac of Business and Industrial Financial Ratios by Leo Troy. The industry average is from drinking and eating places with total assets ranging from $100 million to $250 million. The Outback has total assets of $228 million at the end of the fiscal year 1994 (Annual, 1994). The use of this financial information is intended to serve in making financial and business decisions critical to a company’s competitive position. Management decisions affect the durability of the enterprise, the interests of owners, creditors, and consumers. These demands on those responsible for the survival and success of the company have become even more intense as markets become increasingly competitive, domestically and in the world. With those challenges in mind, the following ratios are essential to successful financial management. (Troy, 1995)

LIQUIDITY

CURRENT RATIO

Company 1991 1992 1993 1994

Outback 2.74 3.68 1.93 .96

Lonestar NA 10.72 13.25 3.82

Longhorn .46 3.0 5.39 3.56

Bugaboo NA .91 .68 6.78

Industry Average = 1.3 • A Measure of Liquidity

This ratio, rated highest by CPA’s as a measure of liquidity, gauges the ability of a company to meet their short-term financial obligations should it be compelled to liquidate their short-term assets (Troy, 1995). It is calculated by dividing current assets by current liabilities (Gibson, 1995). Typically, the standard guideline has been a ratio of 2 to 1. However, for the restaurant industry 1.3 is the average. As shown in the graph, Lonestar, Longhorn and especially Bugaboo (who just went public) are gearing up for rapid expansion and the Outback is in the thick of it with their rapid expansion in progress.

QUICK RATIO

Company 1991 1992 1993 1994

Outback 2.47 3.42 1.52 0.57

Lonestar NA 9.92 11.97 2.98

Longhorn .23 2.16 4.63 2.98

Bugaboo NA .37 .35 6.13

Industry Average = 0.8 • A Measure of Liquidity

Also known as the ‘Acid Test Ratio’, it is often used to estimate the company’s general liquidity. The numerator is cash equivalents + marketable securities + net receivable which is divided by current liabilities (Gibson, 1995). The conclusion is similar to the current ratio when excluding inventories for the quick ratio - Lonestar, Longhorn & Bugaboo are preparing for rapid expansion while the Outback is in the midst of it.

PROFITABILITY

ASSET TURNOVER RATIO

Company 1991 1992 1993 1994

Outback 2.48 1.46 1.95 1.98

Lonestar NA .44 .60 1.00

Longhorn NA 1.95 1.37 1.59

Bugaboo NA 1.63 1.53 .74

Industry Average = 1.5 • A Measure of Profitability

This profitability ratio indicates the effectiveness of the company in the use of total assets in generating sales. Because it includes both current and fixed assets, the ratio combines the ability of the company to convert their assets into other assets as well as the ability of the company to sustain their sales (Troy, 1995). It is measured by dividing sales by total assets (Gibson, 1995). The Outback proves to be the strongest in effectiveness while the three newcomers struggle for both growth and increased effectiveness in the use of their total assets in generating sales. Lonestar being considerably lower, Longhorn being slightly higher than the industry average of 1.5, and Bugaboo being well below the industry average. Again, Outback outperforming all three.

PROFIT MARGIN BEFORE INCOME TAX

Company 1991 1992 1993 1994

Outback .11 .12 .13 .14

Lonestar .13 .25 .25 .23

Longhorn .04 .10 .07 .02

Bugaboo NA .04 .03 .10

Industry Average = .076 • A Measure of Profitability

This ratio, net income before income tax, divided by net sales, indicates the contribution of sales to the profitability of the company. Put another way, it indicates the amount of net income generated by a dollar of sales. Competition, capital structure, and operating characteristics cause the margin to vary within and among industries. (Troy, 1995)

Lonestar being well above the competition and showing considerable strength in potential profitability while Bugaboo is rising to a competitive level and Longhorn being way below the industry average of 0.7 and the Outback consistently growing stronger.

RETURN ON TOTAL ASSETS (DUPONT)

Company 1991 1992 1993 1994

Outback .27 .18 .25 .28

Lonestar NA .11 .15 .23

Longhorn .20 .19 .10 .03



This ratio combines the turnover and profit ratios (Sales/Total Assets X Profit/Sales), and yields the return on investment (total assets) (Gibson, 1995). The result is the end product of the Dupont system of financial analysis (Troy, 1995). Using this method shows that the Outback, as the leader, uses their assets considerably more efficiently than their competitors with Lonestar quickly rising.

RETURN ON COMMON EQUITY

Company 1991 1992 1993 1994

Outback .26 .16 .21 .23


Longhorn NA .16 .07 .03



This ratio shows the profitability of the company’s operations to owners, after income taxes. CPA’s ranked this profitability measure highest (Troy, 1995). It is computed by taking the net income before non recurring items - preferred dividends and dividing it by the average common equity (Gibson, 1995). The Outback shows the highest return to the shareholder by more than twice their competition!

SOLVENCY

DEBT RATIO

Company 1991 1992 1993 1994

Outback .22 .19 .18 .25


Longhorn NA .14 .09 .12


Industry Average = .454 • A Measure of Long-term Debt Paying Ability

This ratio, total liabilities to total assets, indicates the company’s ability to pay all their debts. It measures the creditors and owners of the company’s ability to withstand losses. It is an indicator of the long-run solvency of the firm. (Troy, 1995) To put it in another way, it measures the extent to which borrowed funds have been used to finance the company's assets. All the newcomers show a reduced dependence on debt financing while the Outback has increased slightly to help secure their position in the market by being the first casual steakhouse throughout the country. In addition, all are markedly less leveraged than the industry.

COVERAGE RATIO/TIMES INTEREST EARNED RATIO (EBIT)

Company 1991 1992 1993 1994

Outback 29.18 65.12 111.34 144.62

Lonestar 13.80 NA NA NA

Longhorn 20.78 NA NA NA

Bugaboo NA 2.96 4.5 13.85

Industry Average = 5.4 • A Measure of Long-term Debt Paying Ability

This ratio measures the number of times all interest paid by the company is covered by earning before interest charges and taxes. This widely used ratio uses earnings before interest paid and taxes (EBIT) in the numerator because interest charges are tax deductible (EBIT divided by Interest Expense). (Troy, 1995) The ratio indicates the company’s ability to service their debt based on their income. If the ratio is appropriate, as the Outback proves to be, then the company is not in danger of

meeting those charges and it enhances the company’s ability to roll over debt at favorable rates. Again, the Outback shows phenomenal stability.

TOTAL LIABILITIES TO NET WORTH (DEBT/EQUITY RATIO)

Company 1991 1992 1993 1994

Outback .29 .24 .22 0.33

Lonestar NA .07 .06 NA

Longhorn 31.68 .16 .10 NA

Bugaboo NA 2.75 2.46 NA

Industry Average = 0.8 • A Measure of Long-term Debt Paying Ability

This ratio is one of the most important on capital structure. This ratio indicates the extent to which the company’s funds are supplied by short and long -term creditors compared to their owners. It is an indicator of the company’s long-term debt paying ability (Total Liabilities divided by Shareholders Equity). (Troy, 1995) Although the two competitors, Lonestar & Longhorn, are showing immense promise, the Outback is remaining rather steady and definitely lower than the industry average.

•OPERATIONAL ANALYSIS•

HORIZONTAL & VERTICAL ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME (see appendices A & B)

As shown on the Horizontal analysis of the consolidated statement of income, the growth rate of the Outback since 1992 has been 238% as of 1994. In addition, from the goals of the company, the Outback will continue to grow at a rapid rate till the year 2000. There is only one falling and that is the interest income which is most likely due to the expensive growth activities. The Outback is a phenomenal company proving their worth in the United States and eventually the world. The Vertical analysis shows complete and total consistency over the last three years. Again, a stable company with rapid expansion is a rare thing. This just reinforces the strength of this company.

•FINANCIAL ANALYSIS FOR SPECIFIC USERS•

CREDITORS From the facts and figures shown throughout this financial analysis, there is no doubt that the creditors are in line to lend the Outback money. Although the liquidity of the company is slightly lower than industry averages (Current .96 compared to 1.3 for industry and Quick .58 compared to .8 for industry) the long-term solvency of the company is phenomenal. As stated earlier, the short term debt paying ability is a result of the rapid expansion currently in progress.

MANAGEMENT Of all the stakeholders, it is management and investors that should be the most pleased. Management is showing a high growth rate of 238% over the last three years and a fantastic return on common equity of 23%. Since it is management’s job to maximize shareholders wealth, I believe they have done an excellent job.

INVESTORS The combination of all these factors show that this company is a highly recommended investment. All indicators show increased profit for all as well as a steady/rapid growth over the next five years. A strong recommendation would be to buy stock at the lowest possible and hang on to it for a five year period and then unload at a peak during the fifth year. By then the Outback should be reaching the top of their maturity curve. The only risks being competition and the risky international venture, of which both I consider to be low in risk due to the many management and quality factors the Outback has instituted. However, onw must not rest on one’s laurels.

•FINANCIAL ANALYSIS SUMMARY•

Well, what is left to say about this immensely successful company. It is on the right track and is the industry leader in almost all aspects of their operation. The competition is years behind (at present) and the visionary leadership of this company will make this company a high-return investment for all the stakeholders involved. The strategic management of this company is really what makes it the winner it is. During the strategic study, much more will be discussed which will enlighten the reader further to what this company is all about and what I believe needs to be worked upon. The Outback has set the new standards for the restaurant industry and only a new visionary will knock this company off of Wall Street! And, who is to say when that will come?

Part II Strategic Planning

•PROBLEM STATEMENT & STRATEGIES•

PROBLEM STATEMENT Due to increased competition, the Outback must strengthen their leadership position in the market in order to keep a long-term competitive advantage.

STRATEGY ONE The Outback should intensify their national expansion efforts through business format franchising with buyback clauses while investigating the international market further.

STRATEGY TWO The Outback should differentiate their-self from the Dinner House market by adding a takeout/drive through section to their already successful restaurant services. (still must call ahead).

STRATEGY THREE The Outback should include more ‘secret’ healthy menu selections while practicing a regional menu engineering strategy.

STRATEGY FOUR The Outback should intensify their related market expansion efforts.

STRATEGY FIVE The Outback should change their site selection strategy from buying B-sites to buying high-end B-sites & low-end A-sites while reducing their market saturation strategy.

•STAKEHOLDER ANALYSIS•

The key stakeholders in the Outback Steakhouse are the Employees, the Consumers, the Competitors, the Government, and the Stockholders. These stakeholders represent the task environment which accounts for the greatest amount of influence on the Outback Steakhouse. The first and most influential stakeholder is the employee. Realizing that the employee is the key to any service oriented company, the Outback strives to make their employees happy. This is proven by the total loss of 10 managing partners over that last six years (Nation’s, 1995). By making the employee happy, you begin a chain reaction. This point can best be illustrated by any disagreeable experience you may have had in a restaurant. That unpleasant experience was most likely a direct result of an employee attitude. Making the employee happy is an essential cause of the Outback's success. This does not mean they have completed the loop. As far as the restaurant industry is concerned, there is much to be done with the front line employee as well as the back of house employees. The second most influential stakeholder is the consumer. If the consumer does not like the elements that are your restaurant, then you will not succeed. The atmosphere, food, service, and price are all part of making the consumer happy. And a key point that must be illustrated here is that you cannot just satisfy the guest anymore, you must consistently exceed their expectations to succeed. The Outback has done so to date, but what is their next step? The third most influential stakeholder is the competitor. The competitor insures that you do not become functionally obsolete. They do this by being extremely competitive which in turn makes you become extremely competitive. Outback's major competitors at this point are Lonestar, Longhorn & Bugaboo which were discussed earlier. Again, with the highly competitive food service industry, you can not fall behind. You must keep up with current trends and always work on exceeding the guest expectations. The fourth stakeholder is the government. With the Alcohol Tobacco & Firearms always insuring that the state and federal regulations are being followed, along with the federal government instituting new taxes and tax reforms; such as the 1986 Tax Reform Act

which lowered business related meal write offs to 80% from the original of 100%, as well as the increasing legislation on drinking and driving, there is no question that the government is a major stakeholder. Outback must be a major player in the government arena maintain their financial performance. The fifth stakeholder is the stockholder. Stockholders consist of the general public as well as the employees of the Outback; both being an asset to the companies future. With pressure from the public for greater earnings and the vested interest of the employees, the profits become a major concern. The results being shown through the 144% growth in earnings per common share from 1992 to 1994. Let us hope they figure out ways to maintain their growth. All of these stakeholders; employees, consumers, competitors, government, and stockholders play a major role in the success of the Outback Steakhouse. Without their constant pressures, the Outback would not be where it is today. However, the question still remains, where will they be tomorrow?

•S.W.O.T. ANALYSIS•

STRENGTHS

• Concept Design - the Outback appeals to a wide market with a casual Australian theme. • Managing Partner Turnover Rate - non-existent (10 in last six years). • Menu Design - diverse, moderately priced, and “prepared from substantially fresh products each day”. • Consumer Loyalty - greater than fifty percent of the consumers visit three times a month. • Relatively Quick Table Turnover - a 45 minute average • Rapid Growth - 85 to 230 units in three years. • Not Constantly Innovative - not always updating current products, services, and building design. • High Quality Food - top distributors on all food products are used. (41% food costs at Outback/ 30% industry average) • Good Service - servers have a three table station maximum. • Community Service - fund raisers, little leagues, etc. • Value - consumer perception is great value. • No Reservations - no holding tables creates higher table turnover. • Management - there are managers on the floor as well as in the hot food window expediting food at all times. • Teamwork - all food is run as soon as it comes out by the first available server. • Kid Menu - extensive and generous in portions. • Steak Cooking Procedures - steaks are undercooked which gives the consumer the opportunity to cook-up the steak rather than costing the company a whole new steak for a re-cook. • Profitability - a 14% profit margin, 28% return on assets, 23% ROE. • Solvency - 25% debt ratio, Times Interest Earned is 143.7%, & debt/equity 33%.

WEAKNESSES

• Insurance Rates - increased liability • Alcohol Consumption Decrease - Drinking laws and MADD • Economy - disposable income of the consumer is directly related to their dining out expenditures. • Not Constantly Innovative - not always updating current products, services, and building design. • Employee Turnover - three table stations may not generate enough tips for servers to stay. • Unhealthy Food - the market may discover how the Outback prepares their food (flat grilled in butter) and boycott them (Outback Special = 144 fat grams). • No Reservations - consumers do not like to wait for 15 minutes to 2 hours. • Teamwork - consumers may not like other servers delivering their food because they have not established a relationship with the other servers. • Steak Cooking Procedures - since steaks are under-cooked the consumer must be educated by the server which does not always happen. • Point of Sale System - archaic in nature leaving employee theft opportunities as well as eating up valuable server time. • Liquidity - a current ratio of .96 and a quick ratio of .58.

OPPORTUNITIES • National/International Expansion - franchising, joint ventures, corporate expansion (widening global market: the European Community, NAFTA, etc.) • Related Diversification - capitalize on their business savvy & good name and move into related markets. • Increased Menu Diversity - a market segment is making a move towards healthier foods. • Consumer Demand on Dining Out - the greatest consumer market is eating healthier at home while increasing their “unhealthy” dining out habits. • Strengthening of Long-Term Market Position - through site selection.

THREATS

• 1986 Tax Reform Act - business deduction from 100% - 80% • Increased “Sin” Taxation - the taxes created especially for pleasure products such as cigarettes and alcohol. • M.A.D.D. - Mother Against Drunk Driving: increased legislation against drinking and driving without creating an alternative such as public transportation. • Competition - coming from behind at a rapid pace. • Healthier Food Trends - the market may make a move toward healthier foods.

•INDUSTRY ANALYSIS•

According to Michael Porter’s five forces model each corporation is most concerned with the intensity of competition within their industry. The level of intensity is determined by five basic forces. The stronger these forces the more companies are limited in their ability to earn profits. (Hunger/Wheelen pg. 99) The first force is the threat of new entrants. The Outback has benefited from their market niche and has become a major visionary in the industry. Their vision and rapid growth has created a strong market position which has created a barrier to entry. The second force is rivalry among existing firms. The local and corporate competition is fierce. The restaurant industry is a very competitive arena. The major factors of competition being location, price, product, and service. However, these factors are very trend related. The market trends are fickle beasts which must be kept on top of. If you are behind the times and your competitors are quick at spotting market trends, then you become functionally obsolete and your “loyal” consumer moves next door as well as your profit oriented employees! The third force is the threat of substitute products/services. The cost of switching is not really a consideration, when it comes to the restaurant industry. For instance, if there is a similar product/service offered at a lower price to the consumer while at the same time satisfying all their needs, then it costs the consumer nothing to switch. In addition, if the economy is in a recession and the consumer has a decrease in their disposable income; the search for a substitute begins. The fourth force is the bargaining power of buyers. The consumer is the all mighty in the restaurant industry. If your patron decides the prices are too high or the food & services are not up to standards, then they have the power to either cook the food they wish at home or switch to a comparable competitor. Although one may think that a single consumer lost is no great detriment to the business, that is wrong. The power of "word of mouth" is immense in the restaurant business. Your restaurant may be "the thing" today, however it can be half "that thing" tomorrow if the consumer decides. Again, the power of buyers is great and you must strive to exceed their expectations to keep them coming back.

The fifth and final force is the bargaining power of suppliers. The bargaining power of suppliers is high when there are only a few suppliers. In the restaurant industry this is not the case. There are many suppliers to choose from and the major considerations when choosing a supplier are the services they offer, the quality of the food, as well as their competitive prices. The only power they have is the cost of switching. So, in essence, the bargaining power of suppliers is minimal. The Outback is in a good position as of 1994. The level of intense competition is still not there, but it is on its way. The Outback has created their own market niche which others are picking up on rather quickly. These new firms will give the Outback a run for their money. With companies like Longhorn, Lonestar, & Bugaboo searching for a weakness in the Outback's strategy, one must be careful. Also, there is usually a substitute when the restaurant or economy becomes lacking. The bargaining power of consumers, as stated earlier, is the essential force in the restaurant industry whereas the power of suppliers is minimal. Consequently, the Outback is in a good position to capitalize on, as well as strengthen, their market niche and must do so while their competitors strive for a better product/concept. In the restaurant industry, as with most industries, the race is always on.

•STRATEGY GENERATION & EVALUATION•

Due to increased competition, the Outback must strengthen their leadership position in the market in order to keep a long-term competitive advantage. As of 1994 the Outback has grown to 230 restaurants in twenty-nine states in only eight years - they should intensify national expansion efforts through business format franchising while investigating the international market further. A second strategy is to differentiate their self more by adding a specialized takeout section to their restaurants. This strategy intensifies the guaranteed profit center while further making the consumer aware of the Outback’s availability of to-go food. The third strategy is to offer more healthy menu items while practicing a regional menu engineering strategy. The reason behind this is simple, by offering a diverse menu specific to region, the Outback can strengthen their market position. The fourth strategy is to intensify their related market expansion efforts by increasing expansion efforts on Carrabba’s Italian Grills. The final strategy is to alter their current strategy involving site selections. The current strategy is to buy a 1.7 acre lot that costs no more than $600,000 with a total Outback Steakhouse cost of $1.5 million that promises a return of 2 to 1 per year. I believe this strategy to be in line with an extreme arrogance that is a result of short-term thinking -- to think that one is invincible and one can maintain their leadership position by maintaining all the same strategies from day one, is both arrogant and short-term. These strategies will be evaluated with three criteria in mind. The first criterion will be estimated cost; the second criterion will be potential profit; and the third criterion will be reduced portfolio risk through related diversification.

STRATEGY ONE

The Outback should intensify their national expansion efforts through business format franchising while investigating the international market further. Franchising is a dominating force in the distribution of goods and services. It is predicted to be the primary way of doing business by the year 2000 and according to the United States Congress, "franchising is essentially a contractual method for marketing and distributing goods and services of a company (franchisor) through a dedicated or restricted network of distributors (franchisees).” Under the terms of a legal franchise contract, a franchisor grants the right and license to franchisees to market a product/service using the trademark and/or the business system developed by the franchisor. The franchisor, the Outback, must provide the product, a proven marketing plan or business format, management and marketing support, and training. In the perfect franchise arrangement, everyone wins: the Outback expands their number of outlets and gains additional income; the franchisee has a business of his or her own. Franchising is no longer considered a get-rich-quick method of doing business. In fact, it is being used as a business strategy for successfully penetrating, developing, dominating, and achieving a disproportionate share of the restaurant market. (Khan, 92) Business format franchising is the type of franchising the Outback should pursue. It involves a complete business format rather than a single product or trademark. Business format is a relatively new concept of franchising and is characterized by an ongoing business relationship between the Outback and the franchisee. Business format franchising not only includes product, service, and trademark, but the entire business concept itself -- a marketing strategy and plan, operating manuals and standards, quality control, group purchasing power, research and development, and a continuous process of training, assistance, and guidance. The franchisee is required to comply with the Outback's guidelines pertaining to all aspects of the business, including operating procedures, the quality of the products and services, and the physical appearance of the business facility. There is always an ongoing relationship between the Outback and the franchisee.

A point that must be stressed is that the broad market segment the Outback is in, the Dinner House/Family/Steakhouse segment, has twenty-one percent of the dinner chain market (as illustrated below). The Outback must franchise to capture not only more of their segment, but to capture more of the entire market itself. With 230 restaurants in twenty-nine states and Lonestar quickly rising, the further expansion potential is immense as well as necessary.

The cost would be low when compared to pure company expansion and the potential profit, as stated earlier, is quite large (currently 50 stores are franchised which brought $3.6 million in revenues during 1994). Another 50 stores would more than double that amount. And, without question, you reduce portfolio risk by diversifying into new consumer markets without the tremendous capital expense. In addition, the franchise contract should include a buy-back clause so the entire Outback system can be company owned.

Top 100 Market ShareTop 100 Market Share

Steak

8%

Dinner House

6%

Sandwich

40%

Cafeteria

13%

Chicken

5%

Hotel

6%

Family

7%

Pizza

10%Other

5%

Steak Dinner House Sandwich Cafeteria Chicken

Hotel Family Pizza Other

STRATEGY TWO

The Outback should differentiate their-self from the Dinner House market by adding a take-out/drive-through section to their already successful restaurant services. By constructing and connecting a specialized take-out addition to the kitchen, the Outback enters a new market. With a takeout business unit added to the Outback you can increase profits. The Outback already offers the same menu items in a to-go package but it is not widely known or used. The proposed addition should be connected to the kitchen so as to increase speed. The addition would have a pull up window and all orders must be called-in in advance. This would add to the consumer service aspect of the strategy. The target market would be local businesses for those Outbacks that are open for lunch and local residents who wish to dine at home for dinner (there are many). The idea behind this concept is for the consumer to call ahead with the order and when they arrive at the window, the order is ready. The only costs involved in this alternative are the building costs. Although these costs would be high initially, the investment would pay off in the future due to the excellent potential for sales and therefore profits. Additionally, by entering the takeout market, you diversify and therefore reduce portfolio risk.

Guestimated cost per drive through unit addition $3,000 A guestimated increase of 70 entrees per week at a $14 per person average equals increased sales of $51,000 per store. $51,000 per store times 230 stores equals $11.7 million in increased revenue at a 14% net profit margin before income taxes means $1,642,200 in the pocket before taxes for spending only $690,000.

STRATEGY THREE

The Outback should include more ‘secret’ healthy menu selections while practicing a regional menu engineering strategy. The idea behind ‘secret’ healthy menu items is simple. The perception of many consumers is that healthy menu items do not taste good. In addition, by offering menu items that are not as bad for you is a proactive strategy. By educating the employees of the new healthy menu items which are on the menu but secret, those consumers wishing for healthy menu items need only to act like they are health conscious. For example, I am currently a waiter at an Outback and many consumers are asking for no butter on their menu selections. By doing this what else is being added to help with flavor enhancement? Nothing at this time. The Outback also offers one healthy menu item which might have a 30% repeat rate (the pasta pemberton). There are many ways to create healthy menu items without making them taste so bad and I doubt a Creole chef would have any idea how to do so. I will tell you right now, that the generation ahead of me, my generation (I am 25) and all generations behind me are health conscious. The Outback currently throws butter on everything and flat grills their steaks while ladling them in butter. As an example, the Outback Special has 144 grams of fat (Newsweek). Imagine if someone decides to target the Outback as some of the worst food for you on the planet, they wouldn’t have a hard time proving it and I doubt the publicity would be good. Before beginning with the menu engineering section, the need to implement regional menu items should be substantiated. As the Outback stands now, there are no menu differences throughout the United States. The costs of this strategy may outweigh the savings. For example, here in Las Vegas we get many spice complaints and as a reactive response the server must now warn everyone who eats at the Outback. Also, we get many requests for rice. A cheap healthy substitute to french fries, loaded potatoes, and butter filled vegetables. By catering to region, the Outback would be using a more long-term strategy. California, for example, is not very receptive to the Outback concept. Research should be done as to why that is.

By adding new healthy menu items in addition to regional menu items in certain test markets while practicing a menu engineering strategy, you can test your success/repeat rate as well as your contribution margin. Menu engineering is a marketing oriented approach to the evaluation of current and future menu pricing, design, and content decisions. The unique feature of menu engineering is its ability to classify menu items; not only based on menu selling price, but also based upon the menu sales mix. It is the incorporation of these factors that will help insure proper menu selection on the new Healthy Choice dishes as well as re-engineering certain dishes at the regional level. In essence, menu engineering requires management to orient their-self toward the number of dollars that a menu contributes to profitability, not just total cost percentage monitoring. In other words, menu engineering is primarily concerned with the achievement of target cost percentages. The menu engineering approach requires that attention be focused on three critical elements (Kasavana, 82): • Consumer Demand - the overall number of consumers served. • Menu Mix (MM) - an analysis of consumer preferences in menu item selection (related to demand elasticity). • Contribution Margin (CM) - an analysis of the contribution margin (gross profit) for each menu item (related to price elasticity). Once the contribution margin and the menu mix percentage is calculated, ranking and classification occurs (as shown in the table on this page along with the modified BCG Portfolio Matrix on the following page).

Pre-Matrix Table

CM MM% Classification

High High Star

Low High Plowhorse

High Low Puzzle

Low Low Dog

STARS These are the most profitable items on a menu and may be a restaurant's prestige or signature item. Decision action appropriate for STARS are: • Maintain rigid specification for quality, portion size, and presentation. • Locate this item in a highly visible position on the menu. • Test for price elasticity.

PLOWHORSES These menu items are relatively popular; however, they yield lower contribution margins than the menu's average contribution margin. Plowhorse items are often demand generators and are important to a restaurant's appeal to the price conscience market segment. Decision actions for these items include: • Test for price sensitivity • Relocate to a low profile on the menu • Combine with low cost items to achieve greater profit • Consider portion reduction

The BCG Matrix

PUZZLES These items yield high contribution margins but are low in popularity. The appropriate decision actions suggested for puzzles are: • Take the item off the menu • Reposition and feature the item in a more popular location of the menu. • Rename the item • Decrease the price

DOGS These items are the menu's losers - they are unpopular and provide a low contribution margin. Dog decision actions are: • Take the item off the menu. • Use tight control methods on portions and cost. • Keep item in inventory for requests only As you can see, an excellent method of insuring profit, and an even better method for evaluating the new healthy menu items as well as regional menu items. There is little cost except in training and supply acquisitions; and by having a great diversity in food items, you attract a larger consumer market. In addition, there is an excellent opportunity for profit that is practically guaranteed.

STRATEGY FOUR

The Outback should intensify their related market expansion efforts. The Outback is currently diversifying their organization by entering the casual Italian dinner market. The Outback currently has a 50% interest in twelve of these restaurants which are named Carrabba’s Italian Grills. They are currently in the development stage but show promise. By intensifying the expansion on Carraba’s Italian Grills the Outback reduces their portfolio risk. In addition, this will strengthen the company when the Outback begins to mature and needs a revitalization strategy implemented.

STRATEGY FIVE

The Outback should change their site selection strategy from buying B-sites to buying high-end B-sites & low-end A-sites while reducing their market saturation strategy. Currently, the Outback practices a site selection strategy that requires a 1.7 acre lot that costs no more than $600,000 -- a B-site. The total package for an Outback being about $1 million plus land. This total package must promise a return of 2 to 1 per year. The reasoning behind this strategy is strong but not in line with long-term thinking. The Outback believes they do not need A-sites located near down-town areas because they are not open for lunch and the suburban B-sites do quite well. I would like to argue that the suburban B-sites do quite well because of the quality of food and service the Outback offers. For each Outback, the word of mouth advertising is immense. For this reason, I believe the Outback strategy to be short-sighted. When the competition comes from behind in a fast manner and chooses A-sites while offering a similar or even better product, then the Outback B-sites have become functionally obsolete. In congruence with the site selection strategy, the Outback practices a market saturation strategy which is also short sighted. Again, once competition moves in with a strong product, the consumer is given more to choose from. As it stands now, the Outback is pretty much the casual steakhouse in every market. The combination of these two strategies gives cause to worry about one very important aspect that may have been overlooked. This one aspect is the cost of closing down an actual Outback unit. One Outback unit with boards on their windows can destroy an entire market. In fact, McDonalds will actually operate a store at a loss to prevent such a circumstance. The reason is simple, the consumer will ask him or herself how could such a thing happen and come to the conclusion that the Outback must be going downhill for some bizarre reason. That is all the consumer has to think. You see, this one image in the mind of the consumer can destroy the entire market the Outback has tried so hard to capture.

As an example, I will use the four (soon to be five) Outbacks located in the Las Vegas area. There are currently four units in operation with the Flamingo & Pecos store being only 4.5 miles away from the Green Valley location. The rest being aproximately ten to fifteen miles apart in a triangle formation. They will soon add a fifth in the Lakes area which will be similar in distance.

LAS VEGAS AREA OUTBACKS

Land Cost Location YTD sales (June 30, 1995)

$485,000 Flamingo & Pecos $1.4 million

$455,000 Sunset in Green Valley $1.5 million

$475,000 Rainbow & I-95 $1.7 million

$575,000 Flamingo across from Rio $1.9 million

By having five units in the greater Las Vegas area, there is no doubt that the market has been saturated. Secondly, by using the four units above as a basis for comparison we see that the best site, the Rio location, may be considered a high-end B-site or a low-end A-site due to its cost as well as its prominent location directly on Flamingo next to the Strip & located directly across from a prominent Hotel/Casino. By spending an extra $100,000 on land the store sales increase approximately $900,000 per year of which 14% is considered Net Profit Margin before Income taxes. So, project A will be the low-end A-site costing $1.6 million & returning $3.8 million in sales per year for five years and project B will be the B-site costing $1.5 million & returning $3 million in sales per year for five years. Internal Rate of Return over a five year period for project B is $10,299,600 and for Project A is $13,046,160. A NPV of $3 million more for project A. Enough said!

• RECOMMENDATIONS •

I believe, and strongly recommend, that the Outback implement all five strategies. The Outback should intensify national expansion efforts through business format franchising while investigating the international market further; they should add on a take-out/drive through section; they should create ‘secret’ healthy menu items while practicing a regional menu engineering strategy; they should intensify their related market expansion efforts through the Carrabba’s Italian Grill expansion; and they should alter their current site selection strategy. As shown in the strategy evaluations, all the strategies have excellent potential profit, they all reduce portfolio risk, and they all are relatively inexpensive. Each and every strategy can be initiated now, however, it would be wise to test the drive-through concept before complete implementation. The only major roadblock to implementing all these strategies is the amount of manpower and time needed. These alternatives will require a great amount of analysis and evaluation. They must be implemented with extreme care. Again, all the strategies need to be implemented as soon as the time and cash allows. All are relatively easy and all are excellent avenues for growth!

• THE OUTBACK STEAKHOUSE INC. UPDATE •

(Merrill Lynch, July 31, 1995)

Second Quarter of 1995

“Ossi’s favorable performance illustrates its sustainable leadership position in the casual dining sector. The Outback Steakhouse concept’s broad appeal and value product continues to capture market share as measured by same store sales gains (+1/4%), despite its enviable $3.3 million average unit volume. We are encouraged by the concept’s in new markets which is further evidence of its broad appeal. Management also noted that the southern California units have been improving after a prolonged period of regional economic weakness. However, rising labor (+0.8% of revenue) and food (+0.6% of revenue) costs offset the sales leverage and pressured margins. The operating margin declined 0.8% to 15.8%. Labor pressures are expected to continue due to 1) unit expansion into tighter labor markets, 2) employee health insurance and 3) Carrabba’s expansion with labor costs at 30% of sales vs. 20% at Outback Steakhouses. The favorable trend in food costs was interrupted by a relatively poor onion crop, augmented by California floods which pressured produce prices during the quarter. We believe these one-time events will not impair the favorable trend in food costs. Management has re-engineered Carrabba’s menu to generate a more competitive average check ($16.25) and offer a mix of entrees which improves labor productivity and increases table turns. Management is encouraged by the favorable customer response but there is room for improved sales and margins before the concept is as attractive an expansion vehicle as Outback Steakhouse. The recent crop of 4 units are producing $2.5 million annualized sales volumes and the cost structure (higher labor, lower food) provides greater operating leverage (vs. Outback), benefiting from employee productivity and table turns. However, a $3 million annual sales level at the current cost structure would generate comparable margins to Outback. While we are encouraged by the Carrabba’s concept, we don’t foresee a significant earning impact until 1997.”

page A

•APPENDICES•

HORIZONTAL ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME

1994 94 1993 93 1992 92

REVENUES.............................................. $451,916,000 2.38 $309,749,000 1.64 $189,217,000 1.00

COSTS AND EXPENSES

Cost of revenues................................. 175,618,000 2.39 121,290,000 1.65 73,475,000 1.00

Labor and other related expenses....... 95,476,000 2.58 65,047,000 1.75 37,087,000 1.00

Other restaurant operating expenses.. 93,265,000 2.15 64,603,000 1.49 43,370,000 1.00

General & administrative expenses.... 16,744,000 1.83 12,225,000 1.33 9,176,000 1.00

(Income) from operations of affiliates (1,269,000) - (333,000) -

379,834,000 2.33 262,832,000 1.61 163,108,000 1.00

INCOME FROM OPERATIONS.................... 72,082,000 2.76 46,917,000 1.78 26,109,000 1.00

NON-OPERATING INCOME (EXPENSE)

Interest income.................................. 512,000 .36 1,544,000 1.08 1,428,000 1.00

Interest expense................................. (424,000) 1.18 (369,000) 1.03 (360,000) 1.00

88,000 .08 1,175,000 1.1 1,068,000 1.00

Income Before Elimination of Minority

Partners’ Interest and Income Taxes

72,170,000

2.66

48,092,000

1.77

27,177,000

1.00

Elimination of Minority Partners’ Interest 11,276,000 2.76 7,378,000 1.80 4,094,000 1.00

Income Before Provision for Taxes.. 60,894,000 2.64 40,714,000 1.77 23,083,000 1.00

Provision for Income Taxes....................... 21,602,000 3.18 13,922,000 2.05 6,802,000 1.00

Net Income.............................................. $39,292,000 2.41 $26,792,000 1.65 $16,281,000 1.00

Earning per Common Share...................... $0.89 2.28 $0.61 1.57 $0.39 1.00

Weighted Average Number of Common

Shares Outstanding...........................

43,997,000

1.06

43,738,000

1.05

41,504,000

1.00

PRO FORMA:

Provision for Income Taxes....................... 22,286,000 2.70 15,472,000 1.88 8,245,000 1.00

Net Income.............................................. $38,608,000 2.60 $25,242,000 1.70 $14,838,000 1.00

Earnings per Common Share..................... $0.88 2.44 $0.58 1.61 $0.36 1.00

page B

VERTICAL ANALYSIS OF THE CONSOLIDATED STATEMENT OF INCOME

1994 94 1993 93 1992 92

REVENUES.............................................. $451,916,000 100 $309,749,000 100 $189,217,000 100

COSTS AND EXPENSES

Cost of revenues................................. 175,618,000 39 121,290,000 .39 73,475,000 .39

Labor and other related expenses....... 95,476,000 .21 65,047,000 .21 37,087,000 .20

Other restaurant operating expenses.. 93,265,000 .21 64,603,000 .21 43,370,000 .23

General & administrative expenses.... 16,744,000 .04 12,225,000 .04 9,176,000 .05

(Income) from operations of affiliates (1,269,000) - (333,000) - -

379,834,000 .84 262,832,000 .85 163,108,000 .86

INCOME FROM OPERATIONS.................... 72,082,000 .16 46,917,000 .15 26,109,000 .14

NON-OPERATING INCOME (EXPENSE)

Interest income.................................. 512,000 1,544,000 1,428,000

Interest expense................................. (424,000) (369,000) (360,000)

88,000 1,175,000 1,068,000

Income Before Elimination of Minority

Partners’ Interest and Income Taxes

72,170,000

.16

48,092,000

.16

27,177,000

.14

Elimination of Minority Partners’ Interest 11,276,000 .03 7,378,000 .02 4,094,000 .02

Income Before Provision for Income

Taxes..

60,894,000 .13 40,714,000 .13 23,083,000 .12

Provision for Income Taxes....................... 21,602,000 .05 13,922,000 .05 6,802,000 .04

Net Income.............................................. $39,292,000 .09 $26,792,000 .09 $16,281,000 .09

Earning per Common Share...................... $0.89 $0.61 $0.39

Weighted Average Number of Common

Shares Outstanding...........................

43,997,000

43,738,000

41,504,000

PRO FORMA:

Provision for Income Taxes....................... 22,286,000 .05 15,472,000 .05 8,245,000 .04

Net Income.............................................. $38,608,000 .09 $25,242,000 .08 $14,838,000 .08

Earnings per Common Share..................... $0.88 $0.58 $0.36

page C

LIQUIDITY

1991 1992 1993 1994

0

2

4

6

8

10

12

14

1991 1992 1993 1994

Current Ratio

Outback

Lonestar

Longhorn

Bugaboo

Industry Avg.

1991 1992 1993 1994

0

2

4

6

8

10

12

1991 1992 1993 1994

Quick RatioOutback

Lonestar

Longhorn

Bugaboo

Industry Avg.

page D

PROFITABILITY

1991 1992 1993 1994

0

0.5

1

1.5

2

2.5

1991 1992 1993 1994

Asset Turnover Ratio

Outback

Lonestar

Longhorn

Bugaboo

Industry Avg.

1991 1992 1993 1994

0

0.05

0.1

0.15

0.2

0.25

1991 1992 1993 1994

Profit Margin Before Income TaxOutback

Lonestar

Longhorn

Bugaboo

Industry Avg.

page E

1991 1992 1993 1994

0

0.05

0.1

0.15

0.2

0.25

0.3

1991 1992 1993 1994

Return On Total Assets (Dupont)Outback

Lonestar

Longhorn

Bugaboo

Industry Avg.

1991 1992 1993 1994

0

0.05

0.1

0.15

0.2

0.25

0.3

1991 1992 1993 1994

Return on Common EquityOutback

Lonestar

Longhorn

Bugaboo

Industry Avg.

page F

SOLVENCY

1991 1992 1993 1994

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1991 1992 1993 1994

Debt Ratio

Outback

Lonestar

Longhorn

Bugaboo

Industry Avg.

1991 1992 1993 1994

0

50

100

150

1991 1992 1993 1994

Times Interest Earned Ratio (EBIT)Outback

Lonestar

Longhorn

Bugaboo

Industry Avg.

page G

1991 1992 1993 1994

0

0.5

1

1.5

2

2.5

3

1991 1992 1993 1994

Debt/Equity RatioOutback

Lonestar

Longhorn

Bugaboo

Industry Avg.

page H

•ACTION PLAN•

Action Explanation-Reason-Logic By Whom Timing

FRANCHISING Secure Leadership Market Position in short-term then buy back later.

Immed.

IncreaseProfit Increase Shareholder Wealth TAKE-OUT/DRIVE-THRU Related Diversification Test Increase Sales Volume/Profit Increase Shareholder Wealth MENU ENGINEERING Diversify Menu Regionally Immed. Strengthen Market Position Increase Sales Volume/Profit Increase Shareholder Wealth SITE SELECTION Decrease Market Saturation Immed. Strengthen Long-term Market Position Increase Sales Volume/Profit Increase Shareholder Wealth RELATED DIVERSIFICATION Reduce Financial Risk Immed. Increase Sales Volume/Profit Increase Sharholder Wealth

page I

•CITED AND UNCITED REFERENCES•

Dun & Bradstreet Credit Service. Strategic Industry Study - Restaurant. 1985 Troy, Leo. Almanac of Business and Industrial Financial Ratios. 1995 pages 10-19 and 257 Annual Report. Outback Steakhouse, Inc. 1994 Hayes, Jack. Company Profile: Outback Steakhouse Nation’s Restaurant News. March 27, 1995 pages 51-86 Gibson, Charles H. Financial Statement Analysis 1995 Andrew, William P & Schmidgall, Raymond S. Financial Management for the Hospitality Industry 1993 Schmidgall, Raymond S. Hospitality Industry Managerial Accounting 1990 Investext 1. Complete Company Records on the Outback Steakhouse, Inc. 12/31/93 Investext 2. Complete Company Records on Longhorn Steaks, Inc. 12/31/93 Investext 3. Complete Company Records on Lone Star Steakhouse & Saloon, Inc. 12/31/93 Certo & Peter. Cases In Strategic Management. 1988 Hunger & Wheelen. Strategic Management. 1993 Kahn. Restaurant Franchising. 1992 Kasavana. Menu Engineering. 1982

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