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BLMN: Still Bearish

BLMN remains on the Hedgeye Best Ideas list as a SHORT.

BLMN reported underwhelming numbers this morning, missing both top and bottom line estimates by 69 bps and 288 bps, respectively.  Same-store sales across all four main concepts decelerated on a two-year basis in 1Q14, despite initiatives aimed at stemming this decline.  Traffic trends remain anemic, although they continue to outpace the casual dining industry according to Knapp Track data.  This is to be expected, as weekday lunch continues to rollout across Carrabbas and Outback restaurants.  Management maintained full-year guidance of 1-2% comp growth for its core domestic brands and GAAP diluted EPS of at least $1.21 on a calendar basis.  Trends will need to accelerate meaningfully throughout the rest of the year in order for BLMN to hit the numbers.  The real disconnect, however, comes in FY15 with the street expecting 20% EPS growth on 7% EPS growth.  These numbers are far too high and will be revised down, over time, as this becomes a realization.


We continue to believe the casual dining industry is in secular decline.  In the new era of casual dining, companies with large, diverse portfolios are at a structural disadvantage to smaller, more nimble players.  Darden is currently having issues operating its vast array of brands and we believe Bloomin’ is on a similar path.  As it stands, Bloomin’ has some of the worst operating margins in the entire restaurant industry.  Despite claims of significant efficiencies, its profit margins have essentially remained flat since the beginning of 2011. 


Aside from taking issue with the structure of the company, we continue to question the strategic rationale behind the company’s capital allocation decisions.  Management seems intent on maintaining its unit growth story, despite less than desirable results.  Carrabbas, for example, should not be growing at all.  Recognizing a problem and not immediately addressing it is a flawed strategy that will inevitably come back to haunt the company.


What We Liked:

  • Outback Steakhouse same-store sales growth of +0.8%
  • Interior remodel at Outback complete, exterior remodel underway
  • Currently rolling out Saturday lunch at Bonefish Grill; new core menu coming in 3Q
  • Brazil same-store sales and cash flow generation remain strong
  • Maintained +2-4% commodity inflation outlook; majority of 2014 needs are locked


What We Didn’t Like:

  • Two-year same-store sales decelerating across four core brands
  • System-wide traffic decline of -1.6%
  • Carrabba’s same-store sales decline of -1.8%; cited competitive pressure in the Italian segment
  • Carrabba’s new menu (rolled out at the end of Feb.) “hasn’t driven incremental traffic”
  • Bonefish same-store sales decline of -1.5%
  • Weakness in Korea largely offset strength in Brazil
  • U.S. restaurant margins were negatively impacted by a new menu launch and advertising costs
  • Operating margins decreased to 8.4% from 8.9%
  • Management refuses to halt new unit growth at Carrabbas



BLMN: Still Bearish - 1


BLMN: Still Bearish - 2


BLMN: Still Bearish - 3


BLMN: Still Bearish - 4




Howard Penney

Managing Director


Fred Masotta


Cartoon of the Day: Yield-Chasing Hamsters

Takeaway: The complexion of the US stock market this year has become a slow-growth-yield-chaser.

Cartoon of the Day: Yield-Chasing Hamsters - Yield chasing hamsters 5.09.2014


As CEO Keith McCullough wrote in today’s Morning Newsletter, "If you’re a levered long high-multiple-growth-momentum-chaser, you may not like the complexion of the US stock market this year, but that doesn’t change what it’s become – a slow-growth-yield-chaser."

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Video | $YUM CFO Talks Taco Bell Breakfast

Here's a short excerpt from an institutional conference call that restaurants analyst Howard Penney held with YUM CFO Pat Grismer earlier this week.


Disciplined management focused on opportunities and execution. High ROI projects on the way. Secondary coming in mid-June? 





  • Q1 Results 6.6% RevPAR based on +3.6% ADR and +1.9% Occupancy
  • First time in many quarters, system-wide group revenue growth in Q1 outpaced transient revenue growth.
  • Consistent with view at the midpoint of the cycle, group business continues to build.
  • System-wide group revenue growth in the quarter of 7.4% YoY
  • Banqueting revenue >12% in U.S.-owned and managed hotels
  • Big Eight hotels, group F&B spend for occupied room was up ~30% and 13% in our U.S.-owned and managed hotels.
  • F&B trends drive an overall increase revenue of almost 10% over the same time period in our U.S.-owned and managed hotels
  • Transient >6% across system
  • Weather offset by Easter shift
  • U.S. owned and operated hotels operating margins +157 basis points YoY
  • Owned and operated hotels outside the U.S. operating margins +191 basis points on a currency neutral basis.
  •  EBITDA $544m, margins +400bps
  • Hilton NY:
    • 6th Avenue repositioning begin by year end, complete by 2Q15
    • Interval sales to begin 2H14, units complete in 2Q15
    • Retail to add $8m EBITDA, NPV of Timeshare + Retail = $165m
  • Q1 approved 107 hotels = 15,000 rooms
  • Waldorf Astoria Beverly Hills, first new build on West Coast on Wilshire & Santa Monica will be 170-room luxury hotel
  • Increased fee paying rooms by 8,000 rooms in Q1
  • Launch two new brands in 2H14

Remainder 2014

  • Group very strong with increase in volume and rate
  • Group 8 up HSD YoY
  • Corp Mtgs up 12% in US O&M YoY
  • "very optimistic" for 2014
  • AsiaPac:  Japan significant    China 6-7%, Thailand weak
  • Europe:  UK, Turkey lead; sluggish France   Europe up MSD
  • Middle East / Africa:  Egypt weak, Saudi weak, Africa strong:
  • Resulting in revised RevPAR, EBITDA, and EPS

Financial Performance

  • Total M&F Fees: top line, units driven.  Franchise fees better.  Franchise rate 4.6% and increasing
  • Ownership: 172 bps EBITDA margin growth and 5.1% RevPAR
  • Timeshare:  transient rental, lower corp support costs, favorable in sale prices
  • Corp Exp & Other: 1x $18m conversation into stock based comp program, new program flow thru G&A and included in EBITDA
  • US:  Rack rate business +11%, corp trans +6% YoY
  • AsiaPac:  RevPAR - Japan +25% in Qtr, China +7% in Qtr
  • Balance Sheet: reduce leverage, use substantial FCF to reduce debt and achieve investment grade rating.   paid $200m in Q1 and $100m today and interest rate now L+250 bps
  • Cash $287m. no borrowings on revolver
  • Timeshare EBITDA guidance increased. 
  • Expect to prepay debt of $700m-900m in 2014


  • Confidence in 2H14 and into 2015 - optimistic because of transient strength in Q1 and continuing into Q2.  Group strength now growing faster than transient.  Big 8 in 2H up nearly 20% on Group.   Starting to see increases in ancillary spend, stronger F&B.
  • New Brands & CapEx - will not build any of new units on their balance sheet will use franchise model. 
  • First brand: 4+ star aggregate urban, iconic and resort brands.  conversion friendly.
  • Second brand: Lifestyle, launch in fall, working deals, upper upscale, 'accessible lifestyle'  not luxury, new builds, conversion friendly. 
  • Both brand focused on new units outside of HLT network, some new builds, mostly conversions.  Neither will impact 2014 net unit growth but will positive impact 2015 
  • NY impacts/any pause for 2H14 - no reason to change outlook.  Slowness due to supply, YoY superstorm Sandy, and weather.  Softer in Q1 but strengthen at muted pace due to supply.
  • Guided Q1 and 2H14 look conservative - flowed thru Q1 beat and feel conservative on guidance.
  • Timeshare - 60% of sales in asset light vs 50% in 2013.  Trajectory 80% of current 5 year inventory is capital light. 
  • Timeshare valued appropriately or consider spinning off - HLT committed to Timeshare.  HLT likes business.  Seeing increasing appetite for Timeshare product by consumers.
  • G&A - some Q1 timing issues were positive, will run-rate during remainder of year.  Expect G&A focus to remain at forefront will keep under control +3% to +5% for 2014 and 2015.
  • BIg 8 RevPAR - 5.1% and revenue growth slightly higher.  Surprised - no, but actually better than forecasts, growth depends on groups and group cycling. 
  • View on 2015 - very good sight lines, momentum building on pace.
  • NY Hilton retail repositioning - HLT doing work with consultants, no partners. 
  • Waldorf - deep into process to maximize value and how to execute against the asset in current form & structure. Considering how to significantly "enhance entire retail platform" given full-block exposure to Park Avenue.
  • Royalty Rates vs. 2013 - on track, raising rates 100 bps.  Had non-comp affiliates in Q1 2014
  • EBITDA Margin - expect 150 to 200 bps expansion in 2014



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