Activist investors, internal change stir things up at Bloomin’ Brands

Bloomin’ Brands Inc.

A Member of Pat McKeough’s Inner Circle recently asked for his advice on a U.S. restaurant chain whose brands include Outback Steakhouse.

Bloomin’ Brands has almost 1,500 company-owned or franchised restaurants in the U.S. and 19 other countries. Recently it has focused on re-organizing and strengthening its core brands. Nonetheless, the company attracted the attention of two activist investors who called for further changes. This stock is vulnerable to slowdowns in business and higher labour costs, says Pat, but it should benefit from a stronger economy and its own upgrades.

Q: Pat: What is your recommendation for U.S. restaurant chain Bloomin’ Brands? They own Outback Steakhouse. Thank you.

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A: BLOOMIN’ BRANDS INC. (symbol BLMN on Nasdaq; owns and operates 1,494 restaurants (1,200 company-owned and 294 franchised) in 48 states and 19 countries. Its restaurant brands include Outback Steakhouse, Fleming’s Prime Steakhouse, Bonefish Grill and Carrabba’s Italian Grill.

Bloomin’ Brands operates in the casual dining sector of the restaurant industry. Its restaurants aim to offer quality food in a relaxed and fun atmosphere.

In 2014, total revenue rose 7.5%, to $4.44 billion from $4.13 billion in 2013. However, earnings fell 1.1%, to $140.8 million ($1.11 per share) from $142.4 million ($1.11 per share) in 2013.

Starting in 2015, the company focused on strengthening its core brands and closing underperforming restaurants. That year it sold off its interest in Roys for $10 million. That chain, known for its Pacific Rim cuisine, included 20 company-owned stores.

As a result of the re-organization, revenue tailed off by 1.4%, to $4.38 billion in 2015; it then dropped 3.0%, to $4.25 billion in 2016, and a further 0.9%, to $4.21 billion in 2017.

Earnings, however, rose 10.3%, to $155.4 million ($1.23 a share) in 2015. They then dipped 5.7%, to $41.8 million in 2016, although per-share earnings rose 4.1%, to $1.28, on fewer shares outstanding. Profit declined further in 2017, falling 7.8%, to $135.1 million. Again, per-share earnings, on fewer shares outstanding, rose 6.3% to $1.36.

In 2017, Bloomin’ Brands opened its first Express units, which combine Outback Steakhouse and Carrabba’s Italian Grill offerings in a delivery and take-out only format. These express units are expected to expand sales and profit margins.

In addition, the company remodeled 145 Outback Steakhouse restaurants in 2017. It also relocated 18 others from underperforming locations to prime ones serving the same area. In February 2017, it decided to close 43 restaurants.

Dividend stocks: Revenue falls slightly while earnings jump in the latest quarter

For the three months ended July 30, 2018, Bloomin’ Brand’s revenue fell 0.4%, to $1.031 billion from $1.036 billion a year earlier. The decrease was largely due to domestic refranchising (converting company-owned outlets into franchised ones) as well as foreign currency losses. These were partially offset by the impact of new restaurant openings and closures and higher comparable restaurant sales in the U.S.

Earnings in the latest quarter were up 29.2%, to $35.8 million from $27.7 million. Per-share earnings jumped 40.7%, to $0.38 from $0.27, on fewer shares outstanding.

The company opened eight new restaurants in the second quarter of 2018.

Bloomin’ Brands holds cash of $81.6 million, or $1.13 a share. Its long-term debt of $1.1 billion is a high, but manageable 63% of its market cap.

Like most U.S. restaurant chains, the company is vulnerable to a slowdown in business when consumer confidence is weak and families cut back on eating out. Traffic levels for the casual dining segment have declined due to an oversupply of restaurants, the relative affordability and quality of prepared meals from supermarkets, and an increase in home delivery services. Labour costs for all restaurant operators also continue to move up.

However, Bloomin’ Brands should benefit from a stronger economy, high employment rates, and its efforts to upgrade its restaurants.

On February 21, 2018, activist investor Barington Capital Group sent Bloomin’ Brands CEO Elizabeth Smith a letter recommending the company spin off all of its smaller restaurants—Bonefish Grill, Carrabba’s and Fleming’s. That would leave Outback as a separate company to operate on its own. Barington holds less than 1% of Bloomin’ Brands outstanding shares.

In addition to its spinoff proposal, Barington would like to see the company improve its customer experience and reduce expenses. The activist investor believes Outback has lost ground to rival Texas Roadhouse (symbol TXRH on Nasdaq and a recommendation of our Stock Pickers Digest newsletter).

Jana Partners, another activist investor, earlier this year recommended Bloomin’ Brands appoint food industry veteran Wendy Beck to its board. The company did so. Jana has been reducing its stake in the company ever since, from 9% to 6.4%.

The involvement of Barington and Jana should also help draw investor attention to Bloomin’ Brands and its well-known restaurant chains.

The company’s $2.0 billion market cap makes it a reasonably affordable takeover target. That’s not reason enough to buy the stock, but it adds appeal.

Bloomin’ Brands trades at 12.8 times its forecast 2018 earnings of $1.45 per share. In February 2018, it increased its quarterly dividend by 12.5%, to $0.09 from $0.08. The new annual rate of $0.36 yields 1.9%.

The company also continues to buy back shares: it has repurchased $81 million worth since its most recent buy back authorization in February 2018, after repurchasing $273 million in 2017, $310 million in 2016 and $171 million in 2015.

Inner Circle recommendation: Bloomin’ Brands is okay to hold.

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