BLMN - Bloomin' Brands Stock: Cheap Can Get Cheaper

2023-11-03 12:00:47 ET

Summary

• Restaurant stocks are likely to experience a slowdown in sales due to weakening consumers, expensive debt, and a softening labor situation.
• Bloomin' Brands, Inc., the parent company of Outback Steakhouse and other restaurant chains, saw mixed results in Q3, with revenues rising but comparable sales being mixed.
• Margins improved for Bloomin' Brands thanks to reduced costs of food and controlled operating expenses, but inflation and labor remain headwinds. Guidance was revised lower for the year.
• There are much better opportunities for trading than Bloomin' Brands, Inc. stock.

We follow a number of restaurant stocks, and most recently we have been negative on the space for few months, with the Fed's actions to combat inflation leading to a weakening consumer, more expensive debt, and now as we saw with today's October jobs report , a softening labor situation. Then, we have the fresh bottleneck of student loan payments returning. All of this translates to a more than likely slowing of sales for restaurants.

On the positive side of things, labor inflation is normalizing, and the cost of foods and goods are also stabilizing after spiking in the last few years. Restaurants have been creative with menu pricing and portion control to pass many of these costs onto the consumer, but in the near term, that power has now played out.

We do have a few names in the space we like, but today we were asked about "cheap" shares in Bloomin' Brands, Inc. ( BLMN ). We agree the valuation is attractive on the surface, given the multiple compression following a selloff, but cheap can get cheaper. Bloomin' Brands, is of course the parent of Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, and Fleming’s Prime Steakhouse & Wine Bar. Bloomin' Brands pays homage to the Bloomin' Onion, a featured appetizer at Outback.

The overall company has more than 1,450 restaurants in 47 states, and in 13 countries. They are a player in the space to be sure. But, the company is facing pressure, and with the just reported Q3 earning s, we have to be neutral. We lean cautiously bearish, really, but there is not enough conviction after the recent pullback to sell-rate it. Still, the key metrics we follow suggest pressure is on and will remain in the near term.

We think if you are interested here, wait for BLMN shares to pull back. While there is some short-term support around $23, and traders should watch that level, the moderately high short interest and ongoing fundamental pressure suggests you should wait here for better pricing.

Discussion

Bloomin' Brands saw mixed results in Q3 . Barring a moderate to strong recession, there is still positive growth expected, but expectations have been tempered.

Bloomin' Brands revenues rise and comparable sales were mixed

Perhaps the most critical metric we look for in restaurants is growth in comparable sales. For Bloomin' Brands, revenues rose in Q3 versus the prior year's third quarter dramatically. Bloomin' Brands registered top line revenues of $1.9 billion in Q3 2023, up 1.9% year-over-year. This was in line with consensus estimates . With that said, the comparable sales were mixed. Overall U.S. comparable sales were down 0.5%, while international shares, excluding Brazil (impacted by severe currency fluctuations), were up a nice 4.1%. Within the U.S., we saw positive comparable store restaurant sales of 3.0% over last year for Carrabas, but comps were down 1.1%, 0.5%, and 4.1% for Outback, Bonefish Grill, and Flemings, respectively.

Now on a positive front, thanks to reduced costs of food, higher menu prices, and well-controlled overall operating costs, we did see margin expansion. Overall operating margin was 5.3%, up from 4.9% from a year ago. This is a positive, while restaurant level operating margin expanded 90 basis points to 14.0% versus last year.

Earnings growth for Bloomin' Brands

Margins are improving thanks to normalizing costs and controlled operating expenses, along with an average higher check per customer, but make no mistake, inflation and labor, while not rising as much as a year ago, are still a headwinds, but improving.

Helping earnings aside from margins were the repurchase program, at least on a per-share basis. The company repurchased 2.4 million shares through Q3. About half of the $125 million authorization remains.

That said, adjusted EPS was up a strong 26% from a year ago, hitting $0.44 per share. While this was a beat versus estimates, the reason we are applying a hold here is that the guidance was revised lower for the year.

Forward view

This reduction in guidance was concerning. In fact, management lowered guidance "primarily driven by a reduction in traffic assumptions due to a softer casual dining environment." That is a red flag. For the year 2023 management revised its comparable sales to just 1.5%-2.0%, from 2.0%-4.0%. While it remains positive, this is a massive cut, telling us they expect a very poor Q4, and despite an EPS beat they revised lower annual EPS to be $2.80-$2.91, from $2.91-$3.00.

Of course, value hunters will point out a near 4% yield with a stock at about 8.2X FWD earnings. However, cheap can get cheaper. If Q4 is as poor as management seems to expect, and, as we foresee at our investing group as a recession hitting in Q1 2024, then we expect further pressure on both the Bloomin' Brands, Inc. business and share prices. As such, we are neutral. There are better trading opportunities out there.

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