Bloomin' Brands: A Dual-Pronged Strategy To Uncover Value

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About: Bloomin' Brands, Inc. (BLMN), Includes: DRI, TXRH
by: Dulan Lokuwithana
Summary

Bloomin’ Brands is turning a corner with the new leadership.

The company looks for sustainable sales growth with minimal impact on margins.

Customer traffic is signaling an improvement despite the removal of discounts.

The stock is trading cheap, while median forward P/E indicates a premium even with modest EPS growth.

Short-term pressure on sales and margins remains ahead of a period of thin traffic.

Investment Thesis

Since its stock market debut in August 2012, shares of Bloomin' Brands, Inc. (BLMN) have gained only 36.3%, a mere 4.5% gain annually when compounded over the seven-year-period. Putting into context, the S&P SmallCap 600 Index more than doubled over the period. The stock has slipped nearly 7.0% this year (compared to 9.7% gain in the S&P SmallCap 600) and hit a 52-week low over the week. Fuelled by falling foot traffic after the removal of price discounting, Bloomin’ Brands has witnessed sliding sales amid restaurant closures and disposals, while its margins continued to trail those of competitors.

Concerns from the activist shareholder Barington Capital last year capped off a leadership change and a boardroom reshuffle a few months ago. The new CEO, a veteran in the industry, will oversee a more sustainable approach to grow sales through an enhanced in-store experience and a focus on off-premise sales. Despite improving same-restaurant sales amid promising foot traffic, the company continues to trade at historic lows. Even with a modest consensus EPS forecast for 2019, the five-year median forward P/E indicates a premium of 22% for the stock, an attractive buying opportunity taking into account the company’s rising dividend yield. However, the short-term pressure on the valuation remains as Bloomin' Brands enters a period of lean sales and thin margins.

Bloomin

Source: Bloomin' Brands Investor Presentation - March 2019

A diverse portfolio of restaurant brands

Bloomin’ Brands operate four restaurant concepts through its 1,467 outlets spanning across 20 countries, mainly the US, where 83% of the outlets are located. With franchises only accounting for 20% the network, sales from company-owned restaurants dominate the top line. The leading brand is Outback Steakhouse, making up 42% of total sales, followed by 16% from the Italian restaurant Carrabba’s Italian Grill. The remaining two brands, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar, make up 14% and 7% respectively, while the company's international operations generate 11% of the top line.

Bloomin

Source: Koyfin.com

Sliding sales and narrowing margins

The stock’s poor performance is hardly surprising given how the company has operated amid intense competition from the likes of Darden Restaurants, Inc. (DRI) and Texas Roadhouse (TXRH), its peers in the full-service restaurant industry. Both companies with an international set-up and a business model similar to Bloomin’s possess rival brands in their portfolio. However, driven by an expanding restaurant network, its competitors witnessed growing revenue and rising margins over the years. In contrast, Bloomin’s top line was declining, and the margins were narrowing as its restaurant closures outpaced the openings.

Bloomin

Source: Koyfin.com

Since 2014, Bloomin’s revenue has declined at an annually compounded growth rate of c. 1.8% year over year (YoY) due to disposals, restaurant closures, and re-franchising. Stagnant US same-restaurant sales growth over the period hasn’t helped either, though it finally picked up 2.5% in 2018. The company did away with the price discounting three years ago, and since then, the average check per person has improved both in the US and international market. However, the customer traffic has suffered impacting same-store sales growth. Operating costs, meanwhile, have declined at a slower rate of c. 1.6% over the period, causing operating margins to weaken from c. 5.4% in 2014 to c. 4.5% in 2018. Nevertheless, compound annual growth rate for diluted EPS stood at c. 12.5% as share buybacks dropped the share count by nearly a quarter.

Bloomin

Source: Author; Data from company financials of BLMN, DRI and TXRH

Promising outlook

The pressure from the activist shareholder Barington Capital Group L.P. was gathering pace late last year as it reiterated its reservations over the company’s strategic focus and senior leadership at the time. Against this backdrop, new CEO David Deno took over last April, and the industry veteran, during his short tenure, has not yet been successful in convincing shareholders over the prospects of the company. A glance at the most recent quarters, however, indicates that same-store sales are picking up as foot traffic - once declining fast - point to future gains even without discounts.

Bloomin Brands Same Store Sales Performance

Sources: Author; Data from company financials and press releases

Sans value-oriented pricing, winning back diners lost to competitors who have enjoyed healthy traffic and check growth over the years will be challenging. However, a two-pronged strategy is underway for sustainable traffic growth without a significant impact on margins. With average ticket size for in-store sales being more than 1.5 times that of off-premise sales, the company is doubling down on core operations through remodels and relocations. Meanwhile, Bloomin’ is tapping into the burgeoning food delivery business, currently underserved by its competitors Darden and Texas Roadhouse. An interior remodeling initiative is in progress across 300 restaurants, further expanding the delivery-enabled restaurant count from the current 43%. It will complement the future delivery partnership with the third-party aggregator as highlighted by the company at the last earnings call. Such a partnership will not only provide the company with the scale but also more opportunities for marketing.

Bloomin’ is targeting a comparable restaurant sales growth of approximately 1.5-2.5% in the long term, despite flat US same-store sales in the most recent quarter. Much depends on the company’s performance in Brazil, its focus on international expansion, which is expected to drive 2019 overall sales growth as political stability returns to the country.

Growing its same-restaurant sales for ten consecutive quarters, the Outback Steakhouse unit remained a lone bright spot in Bloomin’ Brands portfolio throughout the company’s troubled past. A spinoff of the remaining brands into a separate company, as requested by Barington, could augment the company value, as it will enable the Steakhouse to operate separately.

Undervalued stock and rising yield

Despite brighter long-term prospects with the appointment of the new CEO, Bloomin’ continues to trade at historic lows in terms of forward P/E. The consensus EPS forecast for 2019 stands at $1.58, expecting only c. 5.3% of growth from the adjusted EPS for 2018. In comparison, 2018 and 2017 have witnessed c. 13.6% and c. 7.3% YoY growth in adjusted EPS respectively, and that for the first half of the year has already reached $1.11.

However, the current forward P/E of the stock trades at a c. 18.2% discount to the median forward P/E over the past five years at c. 13.1x, suggesting a good entry point for a buy. Even at the current consensus EPS, the median P/E values the stock at $20.70 with a premium of 22.3%, an attractive gain adding the fast-rising dividend yield of 2.37%.

Bloomin

Source: Author; Data from Koyfin.com

Bloomin

Source: Koyfin.com

Short-term pressure on sales and margins

However, the downside to the valuation looms large in the short term ahead of the third quarter, when customer traffic is weakest and operating margins narrow the most. In the long run, Bloomin’ expects a 50bps annual expansion to adjusted restaurant-level operating margins. Such an expansion needs significant cost savings, as margins declined for three years in a row even through the removal of discounts. If delivery operations pick up with the help of third-party apps, such savings seem unlikely, as their hefty commissions paid to the third party can squeeze company margins.

Meanwhile, the restaurant network as a whole is shrinking. Notwithstanding the plans to open 20-40 new restaurants annually in the long term with 20 new openings planned for this year, restaurant closures are outpacing the openings. The first half of the year alone has witnessed 21 net restaurant closures.

Conclusion

After a period of flagging sales and poor margins, the new CEO - a veteran in the industry - has taken over the leadership of Bloomin’ Brands. Even though the removal of price discounting hurt traffic, Bloomin’ is resolute on organic same-store sales growth and sustainable margin expansion through an enhanced dine-in experience. Restaurant remodeling and relocations are ongoing to win back the lost customer base. A future third-party delivery partnership could further lift sales through scale and more marketing opportunities. Even with the current consensus EPS forecast, which suggests only modest growth compared to previous years, the five-year median forward P/E indicates an upside of 22% - a good entry point to invest in the company given its brighter prospects. However, the short-term risks to the valuation remain ahead of lean months for sales and pressure on margins.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.