BLMN - Bloomin' Brands: Valuation Is Attractive At 8x Forward Earnings

2023-05-14 07:55:09 ET

Summary

• BLMN reported better-than-expected adjusted EPS of $0.98 and witnessed a significant increase in US comparable sales, driven by growth at Outback and Carrabba's.
• BLMN is investing in operational enhancements, which aim to improve productivity, streamline operations, and enhance the quality of the final product.
• BLMN current valuation is attractive when compared to peer group and its own trading history.

Summary

Bloomin' Brands ( BLMN ) owns and operates a chain of casual dining restaurants via self-operated and franchise model worldwide. The business has gone through its ups and downs, making multiple changes and improvements during the pandemic period, especially its off-premises presence and in-store operations. I believe it is now in a better position to enjoy a normalized environment once the current inflation period dies down. We can already see some of this at work. SSS and EPS for BLMN 1Q23 were better than expected, and importantly, margin improved both sequentially and annually. That said, I am still slightly wary about the impact of a steep recession (hard landing) that could severely impact BLMN financials. As such, I am in agreement for management to hold a conservative approach to a lower 2Q23 guide, although trends have improved from 1Q to 2Q. It is, however, encouraging to see the business generating a healthy level of cash flow to pay down debt, thereby strengthening the balance sheet. In my opinion, the best course of action is to hold a pilot position (buy rating) in the stock because the valuation is cheap today relative to history at 7.7x forward EBITDA and the business is improving. However, a small position is recommended as it is still uncertain which direction the macroeconomy is going to move towards to.

1Q23 results

BLMN reported adj EPS of $0.98, exceeding the guided range of $0.85 to $0.90. Notably, headline US comparable sales increased by 5.1%. This growth was driven by a 4.9% increase in comparable sales at Outback, despite a 1.5% decline in traffic, and a 6.7% increase in comparable sales at Carrabba's, with a 1.7% rise in traffic. Furthermore, adj operating margins stood at 9.7%. This margin also surpassed BLMN long-term annual target of 8%. In terms of geography, US profitability grew to $188 million and maintained a flat 17.4% margin, and internationally, performance was robust, with operating profits of $24.5 million.

Operational efficiencies

I like how management is continuously investing into the business. Given the advancement in technology, restaurants can now employ various solutions and tools to make the life of in-store manpower easier. BLMN has made significant operational modifications to transition towards a more automated and technologically advanced business approach. These changes involve the introduction of tablet-assisted team service in 4Q22 and the expected completion of installing clam-shell grills and new ovens by the 3Q23. The end goal of these initiatives is to improve the productivity of kitchen operations and the quality of the final product. In my opinion, this is a very natural and strategic move as there are precedents of success – quick service restaurants. If we look at McDonald’s, the operational flow is standard and simple. The start to end process almost always dishes out the same final product. As such, I am excited about this initiative that BLMN is putting through. The majority of the investments for these improvements will be completed by 1H23, and management has stated that productivity benefits of roughly $50 million from increased productivity will be seen. I also note that making things easier for both the front and back of house workers have intangible benefits like increasing morale. The easier they can do their job, the better they will service the customers, which all flows positively to the profit line at the end of the day.

Delivery

BLMN has achieved considerable success in its off-premise strategy, with volumes consistently surpassing double the levels seen in 2019. Currently, off-premise sales account for 26% of total sales at Outback and 30% at Carrabba's. While this is not BLMN's core strategy and has lower margins, I believe food delivery is now a part of the F&B industry. As a result, rather than avoiding it, embrace it and consider it a form of profitable marketing. For example, if we consider food delivery apps to be the "Google" of food, consumers will search for food and come across BLMN brands. They may not have ordered, but BLMN brands would have earned a "slot" in their minds. If they order and enjoy the food, it is a win for BLMN as well because the customer is likely to return to the store the next time.

Valuation

BLMN is currently trading at 7.7x forward earnings, which I believe does not reflect the improved business with lower debt. The short-term issue of inflation reducing gross margins may be an issue, but I do not believe it is a long-term issue. We should eventually return to a more normalized growth rate, and BLMN will benefit from that recovery/growth. Before the pandemic, the stock traded at around 14x forward earnings, and I see no reason why BLMN should not trade at the same level in a normalized environment following this inflationary period. When compared to other casual restaurant peers, BLMN is also trading at a discount, despite having lower debt and a similar growth profile. As a result, from a valuation standpoint, BLMN appears appealing.

Conclusion

BLMN has shown positive progress in its off-premise strategy and operational improvements. The company exceeded expectations in 1Q23 with strong sales growth and improved margins. Despite concerns about a potential recession, BLMN has generated healthy cash flow and reduced debt, strengthening its balance sheet. With an attractive valuation and a focus on enhancing productivity, I am recommending to buy a small position in BLMN.

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