BLMN continues to be on the Hedgeye Best Ideas list as a SHORT.
4Q ESTIMATES ARE TOO AGGRESSIVE
The likelihood that BLMN reports 5.7% revenue growth and 35% EPS growth in 4Q13 is slim. The company only reported 1.5% revenue growth and 25% EPS growth, after missing same-restaurant sales, in 3Q13. The current 4Q consensus EPS estimate for BLMN is $0.27. We see this number coming in closer to $0.24-$0.25, which will largely depend upon the company's ability to manage the labor line (manager bonuses) in order to mitigate the sales shortfall.
Additionally we see BLMN missing sales estimates by 2-3%. As it stands, the street is looking for 4Q same-restaurant sales of 2.1%. We believe this is too aggressive, evidenced by the chart below.
THE STREET’S BULL CASE
The current bull case for BLMN either goes something like this:
“We believe Bloomin’ Brands should be viewed as a unique and compelling casual dining portfolio, with strong brands across multiple categories. The portfolio combines the maturity and industry leadership of Outback U.S. along with the growth of Bonefish, Outback International and Carrabba’s. Looking to 2014, we expect comp outperformance to prevail, and cost savings to be large, supporting high-teens EPS growth. While casual dining remains challenged, we believe the relative strengths of the Bloomin’ portfolio make a compelling long-term investment.”
Or something like this:
“Bloomin’ has the internal same-store sales drivers and margin improvement/productivity initiatives to offset a tough casual dining environment and outperform its peers.”
WHY THE BULL CASE IS WRONG
First, there has NEVER been a successful, much less compelling company in the casual dining sector that consisted of a “casual dining portfolio, with strong brands across multiple categories.” It doesn’t matter whether you sell fish, chicken, or steak if people aren’t going out to eat. The best run restaurants focus on doing one thing right.
Second, the casual dining industry is in secular decline. According to Knapp Track data, after declining -2.6% in 2013, the industry reported its eight consecutive annual decline in same-restaurant traffic. A company with a portfolio of brands imbedded in an industry in a secular decline is at greater risk of missing the numbers than a company focused on doing one thing right. Another issue BLMN faces is the fact that the company is trying to grow capacity in the midst of a secular decline in traffic – a strategy that DRI has proven to be a huge mistake.
Third, where is the margin improvement? Since going public, the company has been telling the story of “improvement/productivity initiatives” which we believe has not materialized. On a TTM basis in 3Q13, restaurant level margins declined 36 bps as operating margins improved 58 bps.