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Takeaway: We remain bearish on casual dining but, at this point, do not see BLMN as the best way to play that theme.

Last week, Bloomin’ Brands reported a strong 3Q12 with some of the more impressive same-restaurant sales trends in the industry.  The company also raised 2012 earnings guidance to at least $0.95 and SRS guidance of “in excess of 3%.

We have been cautious on Bloomin’ Brands for the following reasons:

  • We were not convinced of the potential of adding lunch for top line or margins
  • Margin accretion was doubtful given top-line and inflation outlook
  • Long-term demographics unfavorable for the industry

While we remain cautious on casual dining, as a category, we think that BLMN is likely to buck the trend over the near-term given traffic trends in excess of 400bps above industry at Outback during the third quarter.  The lunch initiative, along with enhanced marketing and an aggressive four-course-for-$15 promotion, drove same-restaurant sales in excess of our expectations. 

We believe that the stock, at these levels, has given the company credit for the margin story (300bps improvement in adjusted EBITDA margins) and has adequately discounted the potential for slowing sales.  From a consensus perspective, we believe that the Street may be too pessimistic in its same-restaurant sales projections over the next 3-4 quarters.  While we do not believe that the stock is going much higher from here, the downside is also limited if top-line trends remain at these levels.  We would look elsewhere (TXRH, BWLD) for opportunities to short casual dining.

Top-Line Strength

During 3Q12, Outback Steakhouse and Carrabba’s beat consensus same-restaurant sales estimates by 270bps and 30bps, respectively.  Even with difficult comparisons, every concept under the Bloomin’ umbrella, with the exception of Carrabba’s, accelerated top-line sales on a two-year average basis.   Outback’s outperformance was likely driven by an effective four-course-for-$15 promotion, expanded lunch service, and continued remodels. 

Any slowdown in trends from 3Q, at Outback, will be a red flag given the current initiatives that the company is implementing to drive sales.  Over the next two quarters, the Street is modeling a slowdown in same-restaurant sales at Outback.  Carrabba’s is operating in a particularly difficult segment of the casual dining industry, given that the chain competes directly with Olive Garden and its value-focused marketing message. 

BLMN TOP LINE TRUMPING BEAR CASE - outback SSS

 

BLMN TOP LINE TRUMPING BEAR CASE - Carrabas SRS

 

BLMN TOP LINE TRUMPING BEAR CASE - bonefish SRS

 

BLMN TOP LINE TRUMPING BEAR CASE - Flemings SRS

 

BLMN TOP LINE TRUMPING BEAR CASE - roys SRS

Margin Outlook Uncertain

The long BLMN investment thesis depends heavily upon the margin story materializing.  There is a basis for skepticism: if the expansion is so attainable, why was it left on the table prior to the initial public offering?  That aside, there was little progress made in 3Q12, from a margin standpoint, as COGS and labor expenses gained as a percentage of sales.  Labor costs were impacted by deferred comp expense. 

Management guided to 3-5% inflation in FY13 with the risk, in our view, to the upside given the ongoing supply concerns around beef supply in the United States.  

Over the next two quarters, Bloomin’ Brands and its peers face difficult top-line compares.  For BLMN, the COGS comparison is particularly daunting; we believe that lower labor costs are essential for the company to drive $0.20 in EPS for 4Q. 

Howard Penney

Managing Director

Rory Green

Analyst