BLMN: Same As It Ever Was

We are adding BLMN to our Investment Ideas list as a long.

 

BLMN: Same As It Ever Was - 22

 

We've been saying for years that multi-concept casual dining companies are structurally flawed, putting them at a disadvantage to their nimbler counterparts.  If history is any indication, Bloomin' Brands will need to sell its non-core assets in order to focus on growing the profitability of the Outback Steakhouse brand.

 

There have been several multi-branded casual dining companies that have needed to restructure, including Brinker International when it operated eight brands and, more recently, Darden which has already sold Red Lobster and likely has more changes on the way.  Del Frisco's is another, much smaller, company that we suspect is structurally flawed and will face a restructuring in the future as it continues to grow and this becomes more readily apparent.  And then we have Bloomin' Brands,  who's day for restructuring is fast approaching. 

 

Recall that OSI Restaurant Partners, the former operator of Outback, Carrabba's and Bonefish Grill, struck a deal to be taken private by an investor group comprised of Bain Capital Partners and Catterton Partners back in 2006 in order to focus on longer-term plans.  This portfolio of brands re-emerged onto the public market in 2012 with a new name, but otherwise the same as it ever was -- a broken company.

 

We're calling for BLMN's board to come to grips with this reality and restructure the company.  The good thing, in our view, is that there is a large, motivated shareholder (Bain) that has four seats on the board.  They own 29% of the company which means they're likely laser focused on creating shareholder value.

 

In today's investment landscape, it's all a matter of timing.  The board would be crazy not to consider value enhancing alternatives, but when they will do so is unknown.  With that being said, there is a vast amount of investors with significant liquidity currently looking to deploy capital in the restaurant sector.

 

This is a portfolio of businesses that must be paired down to one (Outback) or two brands.  This should immediately be followed by an aggressive effort to improve margins at the Outback business, which is significantly below its peers.

 

Bloomin' is suffering from the same issues that former broken companies have successfully remedied -- inefficient capital allocation.  The Outback brand is so much larger than all of the other brands, that the 20th best idea for improving this business is likely more accretive to the bottom line of the overall company than the number one idea for improving any of the smaller brands.

 

These inefficiencies aren't always clear to outsiders, and we get that, but we guarantee they are clear to brands' Presidents.  Internal capital allocation discussions typically go something like this:

 

  • Outback senior management: "Why are you focused on the smaller brands when there are so many opportunities at Outback."
  • Fleming's senior management: "All of your focus is on Outback and we're not getting the resources or attention we need to be successful."

 

Now imagine this discussion revolving around five different brands.  As you'd imagine, internal politics can be a significant drain of energy and significant driver of inefficient capital allocation decisions.

 

It's easy for senior management to say the smaller brands are not a distraction but, at the end of the day, the overall business is not performing nearly as well as it should be.  The fundamentals are dismal and this could continue to be an issue, but what we see is a company that is vastly undervalued on the public market.  Based on our SOTP analysis, shareholders are essentially getting the Outback business at a discount and Bloomin's four other brands for free!

 

There is a real opportunity for the company to create significant value by selling off its non-core brands, improving operations at Outback and growing the brand internationally, where it has had tremendous success to-date.

 

BLMN: Same As It Ever Was - 11

 

Call or email with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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