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Coverage Initiation: Bloomin’ Brands, Inc.
Value Line has initiated coverage of Bloomin’ Brands, Inc. (BLMN) in its flagship product, The Value Line Investment Survey. Bloomin’ Brands is one of the largest casual dining restaurant companies in the world with a portfolio of leading, differentiated restaurant concepts. It owns and operates 1,259 restaurants and has 197 operating under franchise or joint venture arrangements across 48 states and 20 countries and territories internationally. Its brands include Outback Steakhouse (average check $20), Carrabba’s Italian Grill ($21), Bonefish Grill ($23), Fleming’s Prime Steakhouse and Wine Bar ($68), and Roy’s ($57). Only the first four brands are considered core concepts because Bloomin’ holds only a 50% interest in a joint venture that owns and operates 22 Roy’s restaurants.
According to the company, Outback Steakhouse holds the top U.S. market position in the steak category. Meanwhile, Carrabba’s and Bonefish Grill each hold the second-highest U.S. market position in their respective restaurant categories (Italian and seafood) and Fleming’s holds the fourth-largest fine dining steakhouse share in the United States. That said, the full-service restaurant sector is highly fragmented, and even the largest companies have a relatively small market share.
Bloomin’ Brands’ predecessor, OSI Restaurant Partners, Inc., was founded in 1987 by Tim Gannon, Bob Basham, and Chris Sullivan. A year later, it opened its first Outback Steakhouse restaurant and went public in 1991. Between 1994 and 2004, the company grew from approximately 200 restaurants to roughly 1,175 restaurants and acquired Carrabba’s, Bonefish Grill, Fleming’s, and Roy’s. Also, international expansion of the Outback concept began in 1996. In 2007, Bain Capital, Catterton Partners, and Messrs. Gannon, Basham, and Sullivan, formed Bloomin’ Brands, Inc., which subsequently merged with OSI, taking the company private. Five years later, on August 13, 2012, Bloomin’ Brands held its IPO and began trading on the NASDAQ stock exchange. Net proceeds from the sale of common stock totaled about $142.5 million and were used to reduce indebtedness. The company, however, still remains highly leveraged.
Despite going public, Bloomin’ Brands qualifies as a “controlled company” within the meaning of the corporate governance rules of the NASDAQ stock market. Under these rules, a controlled company is defined as an entity in which more than 50% of the voting power is held by an individual, group or another company, and therefore may elect not to comply with certain corporate governance requirements. Consequently, Bloomin’ Brands utilizes some of these exemptions. Notably, few of its directors are independent. The company’s largest shareholders are Bain Capital, about 56%; Catterton Partners, 12%; Mr. Basham, 7%; and Mr. Sullivan, 5%.
After the 2009 hiring of the current CEO, Elizabeth A. Smith, the company set its course on a new strategic plan and operating model. This new plan seeks to drive growth through various initiatives, including enhancing its brand and concept competitiveness (by evolving the menu, driving traffic, remodeling restaurants, and focusing on service), strengthening the management team and organizational capabilities, accelerating innovation (to take advantages of consumer trends), improving analytics and information flow (to improve visibility regarding consumer trends and have a better basis for making product, pricing, and marketing decisions), investing in information technology infrastructure (to support the analytical focus and growth opportunities), and increasing productivity by generating significant cost savings.
Specifically, top-line growth will be achieved by continuing to introduce menu items and categories, remodeling restaurants, and improving promotional marketing. These are aimed at driving traffic into its restaurants, which will help raise comparable-restaurant sales. Additionally, to boost revenues, it plans to roll out Saturday lunch at Outback and Carrabba’s locations, selectively expand weekday lunch, and pursue new domestic and international development. To increase earnings, Bloomin’ developed a multiyear productivity plan, which cuts about $50 million in annual expenses, focusing on four categories (labor, food cost, supply chain, and restaurant facilities). Long term, the company aims for annual 3% comparable restaurant, 7% revenue, 13% operating income, and 20% net income growth.
Of course, there are many obstacles the company will need to navigate around in order to achieve its goals. The restaurant industry is highly competitive and fragmented, and is sensitive to changes in the economy, lifestyle trends, seasonality (revenues are generally highest in the first quarter of the year and lowest in the third quarter of the year), and fluctuating costs. Operating margins for restaurants can vary due to competitive pricing strategies and fluctuations in prices of commodities, including beef (which makes up 28% of the company’s commodity basket), chicken (5%), seafood (11%), dairy (8%), produce (12%) and other necessities to operate a restaurant. Additionally, as mentioned earlier, the company has a large amount of debt, which could increase its vulnerability in tough times due to the substantial portion of cash flow from operations that needs to be committed toward the payment of principal and interest.
Subscribers interested in this restaurant operator are advised to consult Value Line’s quarterly reports for Bloomin’ Brands, as well as any supplemental reports and relevant articles as important news items arise.
The author did not have positions in any of the companies mentioned at the time of this article’s writing.