The June-quarter earnings season is winding to a close, and it has certainly been a mixed bag for the restaurant industry. We take a look at some of the quarterly numbers and trends effecting results at this time.
Casual Dining Concerns
Bloomin’ Brands (BLMN), best known as the parent company of the Outback Steakhouse chain, has taken a big hit to its share price this earnings season. The casual dining proprietor, which also runs Fleming’s and Roy’s, missed June-quarter earnings expectations by a noticeable margin, but revenues were on point for the most part. However, it reduced its outlook for the balance of 2014. It was this announcement that drove the selloff.
New restaurant openings and a rise in domestic same-store sales helped BLMN edge above revenue views. But much of this good news was eroded by the shuttering of 29 restaurants since March of 2013 and a same-store sales dip in South Korea. Still, it was EPS guidance of $1.05 to $1.10 that brought out the bears. The original consensus figure being put out by Wall Street was $1.20. That said, we think the selloff may have been overdone. Third-quarter marketing expenses stemming from a new menu rollout at Bonefish Grill and the expansion of Carraba’s into the Brazil market are long-term pluses in our book.
Another casual dining chain operator, Brinker International (EAT), the parent of Chili's Grill & Bar and Maggiano's Little Italy restaurants, said that fiscal fourth-quarter earnings per share rose 10%, to $0.85, on a 4% hike in revenue. The top line beat expectations, but the bottom line was a penny or two shy of the consensus. Too, the midpoint of the outlook provided for fiscal 2015 was $0.03 below the median call. Nonetheless, the share price rallied due to the fact that management offered a 2016 earnings expectation of $4.00 a share. Not much color was given to support this assertion, but we assume that higher menu prices will outpace any cost increases the company experiences. Shareholders ate up this announcement and bid EAT higher.
Staying in this subsector, we continue to see reports of how fast casual is eating away at the market once carved out by the chain restaurants. Make no mistake, Chipotle Mex. Grill (CMG) and Panera Bread Co. (PNRA) have been strong performers, and their growth potential is sizable. Still, many casual dining entities met or exceeded revenue targets set for the June interim, it was the earnings that fell short of expectations. Over time, many of the circumstances pinching the bottom lines should subside. If so, many of these entities may well return to market darling status.
Are You Satisfried Now?
One investment mantra that has stood the test of time is “stick to what you are good at”. We think Burger King Worldwide (BKW) needs to remember that. The fast food burger chain rose to prominence with the success of its flame-broiled Whopper, an item that was criticized due to its belt-breaking caloric content, but praised because of its taste. In fact, BKW is known to its loyal patrons as The Home of the Whopper. Therefore, we were skeptical last year when management announced that it would now be pushing a type of French fry that absorbed less oil dubbed Satisfries. Just recently it was revealed that about two-thirds of Burger King Worldwide stores in the U.S. and Canada are phasing out the fries. Some are keeping it, and press releases continue to define them as a game changer. However, we still are skeptical. In our view, most people do not go to Burger King with a healthy diet in mind. We get that it is en vogue to appeal to the health conscious nowadays, but those people are likely elsewhere looking for even healthier alternatives. Just look at the numbers breakdown; a small box of the crinkle-cut Satisfries has 270 calories, 11 grams of fat and 300 milligrams of sodium. Regular French fries have 340 calories, 15 grams of fat and 480 milligrams of sodium. Yes, childhood obesity is a problem in this country, but we do not think that the aforementioned switch would address that phenomenon in a meaningful way. We applaud the effort, but much prefer the coinciding announcement released with this news. After a social media groundswell, the same great-tasting Chicken Fries originally launched in 2005, will return to restaurants nationwide for a limited time at participating restaurants.
Darden Proxy Battle
As we touched on in an earlier Roundup, Darden Restaurants (DRI) board of directors is looking vulnerable to an activist shareholder's push for changes that could pave the way for broader alterations at the underperforming owner of Olive Garden and LongHorn Steakhouse.
The shareholder meeting is set for September 30th. Darden thought its olive branch would be accepted when it recently conceded three board seats to Starboard Value LP, but it now seems that the company is gunning for several more positions. Starboard has an 8.8% stake in DRI and has joined forces with Barington Capital Group, a fellow activist investor, to push a plan where Darden sells its real estate and splits its mature chains such as Olive Garden from its newer, more vibrant brands, like Yard House. Recall, that much of the initial frustration arose when Darden rebuffed a proposed special meeting to discuss the divestiture of its Red Lobster units. That deal closed on July 28th at a price tag of $2.1 billion, much to the chagrin of the aforementioned activists. On the same day, Darden revealed that Clarence Otis, its embattled chief executive and chairman, would step down as CEO and relinquish the chairman perch at yearend. It was also announced that the two positions will be separated going forward.
Another statement from the company stated that this whole thing is a distraction and costing DRI money, which is clearly not in the best interest of shareholders. Management said they are ready to engage the activists and hopefully come to a resolution. Still, it was intimated that a full board upheaval could be significantly destabilizing, thus derailing the progress being made at Olive Garden and Darden's other brands. And, in one last salvo to steer investors on its side, the company revealed that all this commotion may put DRI’s $2.20 per share annual dividend in jeopardy. In the meantime, the shares have been range-bound for the most part of late. Clearly, movement on this front will likely jolt the quotation one way or another depending on the investment community’s view of the outcome. Let’s hope this proxy can be resolved in the best interest of all parties as soon as possible.