Bloomin' Brands IPO: Rare, Medium, Or Well Done?

| About: Bloomin' Brands (BLMN)

Bloomin' Brands (NASDAQ:BLMN) is one of the largest casual dining restaurant companies in the world, operating Outback Steakhouse, Bonefish Grill, Carrabba's Italian Grill and Fleming's Prime Steakhouse and Wine Bar. The company currently owns and operates 1,247 restaurants across 49 different states and 21 countries internationally. They also franchise 195 restaurants and hold a 50% joint-venture stake in Roy's. Outback Steakhouse and Fleming's hold the #1 and #4 market position in the steak and fine-dining steak categories respectively. Meanwhile, Carrabba's and Bonefish Grill hold the #2 market position in the Italian and seafood categories respectively.

Bloomin' and CKE Inc (CK), the Carl's Jr. and Hardee's parent company, will be the third and fourth restaurant operators to launch IPOs this past month. Del Frisco's Restaurant Group Inc. (NASDAQ:DFRG), another steakhouse, and Tex-Mex chain Chuy's Holdings Inc. (NASDAQ:CHUY) debuted in July with mixed performances. Del Frisco's closed the weekend at $13, even with its IPO price, while Chuy's rose to $18.30, up 22% from its offering price.

Let's take a look at Bloomin' Brands to see if this IPO will flounder or sizzle:

The company started struggling prior to the economic slowdown, with debt surging 828% from the middle of 2006 to the end of 2007. At one point, Bloomin' owned 1,491 restaurants; today they only own 1,247. Clearly, management misspent and over-expanded, leaving the business in bad financial shape. Part of the new strategy was to stop expanding aggressively and focus more on enhancing menu options, with a larger offering of lighter and cheaper dishes, introducing a new marketing strategy, initiating a remodeling program, and strengthening management and cost savings.

Even though management has turned around in recent years and improved the financial condition and business growth, debt remains a huge issue. The company will use all of the $136.1 million from the IPO along with some cash towards reducing $248.1 million of debt. However, this only represents a 13.5% reduction. The company will still have around $1.5 billion of debt along with cash of less than $100 million and total assets of around $3 billion. While this isn't terrible, it will make it very hard for management to achieve their goal of "new unit development" to make up for "curtailed expansion from 2009 to 2011." Management is looking to double the amount of Bonefish Grill and Carrabba's stores, expanding from the 158 current stores located in the south and east. Ambitious goals will certainly require more leverage, making the current debt levels concerning.

Management also wants to expand promotional marketing with limited time offers and cheaper dishes to improve the amount of times customers visit the restaurant. The company wants to transition from being just a weekend dinner occasion to a weekday and a non-dinner occasion as well. Supply-chain efficiencies and food waste reduction will also drive margin growth.

Investors should also consider all of the one-time fees the company will incur next quarter, although they will probably be ignored in valuations because they are one-time charges. Bloomin' will record a $13.5 million non-cash compensation expense for stock options held by its CEO. Also, a $22.4 million payment will be triggered as bonuses for the CEO within 60 days of the IPO. Bloomin' will also pay $8 million as a termination fee to its sponsors Bain Capital and Catterton Management. This only hurts its cash situation considering the amount of debt the company has. However, cash flow from operations was over $300 million last year, proving the financial situation stable for now.

Outback, Carrabba's Italian Grill and Bonefish Grill brought more customers through the door last year at a time when some other casual-restaurant operators were challenged. Each of those three restaurants generated positive same-store sales for eight straight quarters in 2010 and 2011, and Bloomin' Brands' revenue increased 5.9% in 2011 from a year earlier. The growth of companies such as Chipotle Mexican Grill (NYSE:CMG), Panera Bread Co (NASDAQ:PNRA), and Fiesta Restaurant Group (NASDAQ:FRGI) shows the strength of casual dining businesses despite the weak economy. Expect this new generation of men and women to continue eating out more as they lose touch with home cooking due to further education and more demanding careers.

However, I cannot recommend this stock until I see Q2 results. Revenue is expected to be around $980 million, with comparable sales up 2.4% and net income between $15.5 and $17.5 million. If results continue to impress investors and debt continues to go lower, this stock could go much higher. Keep this stock in the pan a little longer before taking a bite. Also keep in mind that up to 96 million stocks will come on the market when the lockup period ends 180 days after the IPO, so make sure to finish your meal quickly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.