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Takeaway: $BLMN is facing some difficult headwinds to achieve its goal of expanding EBITDA margin by 300 bps

When Outback Steakhouse went private in 2006, then-Chief Executive Bill Allen extolled the virtues of a private structure, saying, “as a private company, OSI will have greater flexibility to focus on our long-term business improvement initiatives”.  If Don Corleone was being pitched Bloomin’ Brands’ stock, he might say “what have I done to deserve such generosity?” Vito’s reservations, by our speculation, would be rooted in the 300 basis points of margin upside that Bain Capital and Catterton seemingly left on the table when bringing the company public again. 


The prior incarnation of Outback Steakhouse, OSI, in the public markets, was a typical case of a restaurant management team attempting to maintain a growth multiple by overpaying for smaller brands.  The difficulty involved in managing a portfolio of multiple brands as one company ultimately became too great (this may remind you of our thoughts on another casual dining name we are bearish on).


So, is the BLMN proposition analogous to Sollozzo’s solicitation to Don Corleone? Is there a Tattaglia family in the picture? 


While the time the company spent as a private company clearly did not bring around the kind of changes that Mr. Allen suggested it would, the company is under new executive leadership that we believe has credibility with the investor community.  This time around, the players are different and it will be critical that the company’s second stint as a public company does not end in a similar manner to the first.  Still, as things stand, BLMN is a highly-leveraged multi-concept casual dining company that is stating its intention to be a more efficient and focused organization. There is definitely potential for this to turn out poorly.


We will be publishing more on BLMN going forward but for now, we would like to expound on three earnings drivers for the company.



1) 300 bps Adjusted EBITDA margin improvement from cost cutting and sales leverage by end FY14?


Management assured us on the earnings call that the margin improvement would be obtained primarily through Food & Labor efficiencies as well as sales leverage.  Comparing BLMN to major casual dining peers it seems that the margin opportunity is sizeable.  When contemplating how the gap will be narrowed, how attainable the opportunity is becomes less clear.  If it were easy, surely the private operators would have taken that money off the table. The following are our two primary concerns from here:

  • The industry’s outlook, along with BLMN’s mature store base, suggests to us that sustained acceleration in same-store sales is unlikely.  Guidance for 2012 blended same-restaurant sales is 3%.
  • Consumers are likely to face 3-4% food inflation in 2013, according to the USDA.  With labor inflation running at roughly 1-2%, and Food & Labor being the primary source of margin expansion for BLMN, it seems that this goal will be difficult to achieve.

 BLMN: AN OFFER YOU CAN’T REFUSE? - casual dining ebitda margins


2) Unit Growth from Bonefish, Carrabba’s and the International division will drive top line


We are skeptical about aggressive unit growth within the casual dining space, particularly among mature chains, given the macro environment and the demographic outlook for key age cohorts such as those within 55-65 years of age.  Our conversations with industry insiders corroborate this view; it is becoming more apparent that oversupply, stemming from years of restaurant executives being compensated to grow, has become a major issue in casual dining. With this in mind, we will be paying attention to incremental returns as an indicator of the investment worthiness of the smaller chains. Rarely, in casual dining, do multi-brand companies become bigger and better at the same time. 


BLMN: AN OFFER YOU CAN’T REFUSE? - pop growth 55 65



3) Lunch being introduced at Outback will spur same-restaurant sales growth


The company claims to have analytical support to back up its claim that lunch at Outback makes good business sense.  On the surface, it seems to make sense, particularly during weekends but this day part is more competitive and performance during the day-part can often play a key role in shaping consumer perception of the brand.


The argument for attacking lunch seems to hinge on two factors: it’s better than leaving the store dark and it’s accretive to margins on an enterprise level.  However, from the perspective of the Outback brand it’s dilutive to margins as lunch carries lower margin than dinner.   This sales-building initiative, that lowers the margins of the overall business, may not be as beneficial for shareholders as it may first seem. 



There has clearly not been much progress in fixing this company since it was taken private in 2006 and casual dining faces stiff headwinds from a demographic and economic perspective.  It seems to us that the company is dependent on strong sales and an opportunity to implement efficiencies in the P&L.  The macro environment, via a poor jobs market and accelerating food inflation, may make these goals difficult to achieve.  We’re staying away from this name for now.



Howard Penney 

Managing Director


Rory Green











Takeaway: Higher margin slots and Mass significantly outpacing VIP

  • While August VIP improved on July, it was still slightly down
  • Mass continues to crank despite China’s economic difficulties
  • Slots becoming a real contributor to profits




Takeaway: Global growth is slowing at an accelerating rate.



  • With the inclusion of this morning’s swath of global PMI data, we continue to receive confirmation that our call for global growth to slow is proving accurate.
  • Looking ahead, we see the confluence of downside risks to growth as being both more probable and more impactful over the intermediate term.
  • Those risks include, but are not limited to: Fed policy-sponsored commodity price inflation; a renewed debt ceiling debacle in the US and a potential government shutdown in Japan – the world’s third largest single-nation economy; inadequate Fiscal Cliff resolution; and a continued deceleration in global industrial production as Chinese policymakers surprise consensus expectations for economic stimulus to the downside. Further austerity measures and/or financial market contagion is likely to continue weighing on the slope of European growth as well.
  • From our purview, the key question to debate from here is not whether policymakers are poised to deliver more [failed] stimulus policies, but rather if the reflexive and interconnected nature of the global economy starts to perpetuate an acceleration to the downside with respect to real GDP growth over the intermediate term.  


Each month as a small part of our rigorous Global Macro research process, we amalgamate a broad sample of global PMI readings to get a data-driven sense of how global growth is trending on a sequential basis. The analysis includes 23 readings from 14 countries and/or economic blocs and we measure the absolute level of the indices and the sequential deltas on a median basis to produce a top-down look upon trends across the global economy.


As we allude to above, global growth continues to slow and the median reading of 48.6 (from 49.3 in JUL) implies that global growth broadly slowed at an accelerating rate in AUG. Only the US’s ISM Non-Manufacturing Index isn’t included in the current sample (to be released tomorrow at 10AM); there is a fair amount of risk that it surprises consensus expectations of a -0.1 point decline to the downside, especially in the context of an +8.7% rip in the average national retail price for gasoline during the month.




Looking to the future, weakness across several key New Orders indices implies to a degree that there is additional contraction to come in the coming months, absent a rebound in end demand over the immediate-to-intermediate term – something our team does not view as a probable event. The respective New Orders Index has been sub-50 for three consecutive months in the US, for four consecutive months in China and in back-to-back months in Singapore. Furthermore, each country posted the lowest reading in AUG in its respective cycle (US’s lowest since APR ‘09, China’s lowest since NOV ’11 and Singapore’s lowest since JAN ’12).




All told, the evidence supports our bearish thesis on global growth and we continue to warn of downside risks to global economic growth with respect to the intermediate-term TREND. Moreover, we don’t view the widely-held “it’s contrarian to be bullish” stance as anything more than a broad-based attempt to reckon with the cognitive dissonance that is a result of investors being bullishly positioned on US equities in the face of consistently-bad economic data.


For a refresher on our TREND and TAIL thoughts on global growth, please refer to the following notes:


  • DEBUNKING THE STRUCTURAL BULL CASE (8/15): We see downside risk in the US equity market over the intermediate term as the structural bull thesis is riddled with shortcomings.
  • THINKING OUT LOUD RE: GLOBAL GROWTH (8/10): New data points, including negative revisions to the official growth forecasts out of Singapore and Hong Kong, affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. Applying a longer-term lens, would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future.
  • ARE US EQUITIES SUFFERING FROM COGNITIVE DISSONANCE? (8/8): We see a similar see a similar pattern in consensus storytelling and a similarly-asymmetric price setup as we did in the previous occurrences of our being bearish at cyclical tops in the US equity market and “risky assets” broadly (1Q08, 1Q10, 1Q11, 1Q12).
  • GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD (8/3): Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.
  • CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY (7/25): We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.
  • HAVE US CORPORATE EARNINGS GONE TOO FAR? (7/20): When analyzed outside the vacuum of short-termism associated with quarterly reporting, US corporate profit margins appear particularly overstretched – from both an operational and a social perspective. This has potentially dire implications for corporate earnings growth over the long term.


Darius Dale

Senior Analyst

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Lower Highs: SP500 Levels, Refreshed

Takeaway: The storytelling out there on why the market isn’t going straight down is fascinating.

POSITIONS: Short Small Caps (IWM)


The storytelling out there on why the market isn’t going straight down is fascinating. It was in mid-March too. Growth is slowing, globally, at an accelerating rate (inflation policies do that) and the only big part of the bull case that’s left is bailouts.


All the while, like it did in March-April, the broader market continues to make lower-highs on lower and lower volumes. Imagine they took APPL out of the SP500; then the storytelling would get really good.


Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1407
  2. Immediate-term TRADE support = 1401
  3. Intermediate-term TREND support = 1367


In other words, provided that 1401 holds, the market’s range can easily remain tight (1). That 17 point range is less probable on a close below 1407; and a close below 1401 puts 1367 in play, faster.


Central planning is so exciting!



Keith R. McCullough
Chief Executive Officer


Lower Highs: SP500 Levels, Refreshed - SPX

The Relationship Between TMO and FDX

Takeaway: FedEx's revised quarterly outlook spells trouble for TMO as global shipping volumes decrease.

FedEx (FDX) slashed its quarterly outlook yesterday, citing the global economic slowdown as a catalyst for slowing growth. That made us look at the relationship between FedEx shipping volume and Thermo Fisher Scientific’s (TMO) industrial focused Analytical Instruments business. With TMO shares up +27% year-to-date and up +16% alone in the last 3 months, the company is vulnerable to a move to the downside.


In the FedEx press release, FedEx only commented on their earnings guidance which they reduced to $1.37-$1.46 from their June guidance of $1.45-$1.60.  With the off-month reporting, we looked at both FedEx as a leading indicator for TMO (0.78 correlation) and peer UPS coincidently, (0.73 correlation). Take a look at the two charts below. Both the FDX and UPS charts show a decline in both business segments from Q212 onward.



The Relationship Between TMO and FDX - TMO FDX



The Relationship Between TMO and FDX - TMO UPS



If shipping volumes are the indicator of what’s to come, things are not bright for TMO going forward. We are currently short TMO in our Healthcare position monitor.


Takeaway: LVS looks great over the trade and tail durations.

Keith bought LVS in the virtual portfolio at $40.93   



LVS is way down off its $60+ high reached in April of this year owing to a halt in VIP growth in Macau, a rough start from Sands Cotai Central (SCC), and slowing growth in Singapore.  With the stock price cut by a third, we believe concerns have been adequately discounted in the stock.  However, there are signs that growth is picking back up in Macau and that SCC's performance has improved.  We believe September Macau GGR growth will accelerate sequentially from August's +6% and July's +2%. Singapore expectations have moderated to only slight EBITDA growth for 2013 which might actually be too low.


The stock trades at 11x 2013 EV/EBITDA, close to a historical low.  Meanwhile, there are a number of positive upcoming catalysts.  The opening of 2,500 Sheraton rooms at SCC should provide a big boost starting September 20th.  Sheraton is probably the top hotel brand in China and combined with the associated marketing and potential infusion of junket liquidity, should provide more market share juice for LVS as well as grow the market.  Additionally, with its significant free cash flow - enough to easily fund another Cotai project - and low overall leverage, we think LVS could announce a stock buyback.   



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