Bloomin’ Brands: The Battle Of The Steakhouses Has Its Losers And Winners (NASDAQ:BLMN)

Outback in perspective

If you’ve been following the restaurant industry closely, and specifically the full-service restaurant segment, you know what the buzzword is: ‘Value.’ But unlike what we’re seeing in limited-service restaurants, winning strategies are often being decided outside of the ‘Value War’. This is almost an absolute truth within the steakhouse segment. Here, more than ever, the ‘Perceived Value’ factor is key to both maintaining consistent traffic and the elasticity of the average check per guest.

I talked about this in more depth in my recent article called “Taking Advantage Of The Selloff: 2 Full-Service Restaurants I’d Like To Buy On The Dip” which I highly recommend reading. In short, a welcoming environment, good service and a balanced balance between portion and price are what have kept steakhouses as a refuge in an inflationary environment where the guest can really perceive value in what they are paying.

Texas Roadhouse (TXRH) is a shining example of execution. The company has successfully maintained positive comparable sales that far outpace the full-service restaurant average over the past few years. The gap with the FSR Index has only grown as its competitors’ traffic has declined through 2023. As the average guest has grown weary of menu price increases, the simple lever for increasing the average check has fallen, and industry-wide comparable sales have declined. This is not the case at Texas Roadhouse. Both traffic and average check have grown in the mid-single digits.

Another interesting example is Longhorn Steakhouse, a Darden Restaurants (DRI) brand. In fact, Longhorn was the only Darden brand that managed to maintain positive comparable sales at the turn of the year. Other brands, especially Olive Garden, showed signs of weakness, especially among lower-income guests, and experienced a relapse from which they have not yet fully recovered in the second quarter. Unlike Texas Roadhouse, Longhorn couldn’t handle last year’s strong comps and experienced negative traffic. But that’s where it’s ace in the hole lies. Longhorn kept menu price increases at the same level as in 2022, successfully offsetting the negative effects of traffic with a high average check increase.

For someone who doesn’t follow the industry, before even looking at Outback’s (NASDAQ:BLMN) numbers, one might assume that they are performing well in an inflationary environment given the performance of steakhouses. That was not the case. During Q2, Outback continued its string of disappointing comparable sales despite a relatively weak comparable base. Worst of all is the traffic data, which corroborates a loss of market share to other competing brands.

Observe the behavior of comparable sales of Outback and its direct competitors in the last quarters:

Note that even facing softer comps than the FSR Index, it still showed comparable sales in negative territory during Q2 2024.

The logical conclusion we can draw from a situation like this is that if Outback operates in a segment that does not rely on promotions to deal with slow traffic and low-income guests, then we should see some sort of resistance to traffic loss or a reduced sensitivity to menu price increases. If neither of these occur, it would seem that we are looking at a loss of market share through a deterioration in the perceived value of guests.

Clearly, this weakness has already been apparent to management, which has been taking some important steps towards menu simplification and leaner unit development for some time now. I discussed important developments such as the ‘Joey’ units and remodeling in my last review. I recommend reading it for a full understanding of the topics covered here.

However, these developments take time to materialize in practice, especially the remodeling of the units. In this last quarter, management compiled these objectives that make up Outback’s turnaround into a three-pillar strategy. Many full-service restaurants are adopting similar strategy models when they want to reposition themselves. Take Cracker Barrel (CBRL) and its ‘Five Pillars’ strategy as an example.

‘Three Pillar Strategy’

One of the first signs that Bloomin’ needs new strategic leadership to turn things around in the United States is the replacement of its CEO David Deno by Michael L. Spanos. On the same day of his appointment I made my opinion very clear in the pinned comments of my last Bloomin’ review. On the same day of his appointment I made my opinion clear in the pinned comments of my latest Bloomin’ review.

To paraphrase myself: “It seems that the market didn’t like the appointment of the new CEO at all. I believe that Mike Spanos’ lack of practical experience with restaurant operations is causing skepticism that he will be able to turn things around. And that’s a fair point, especially when we look at the complexities of various full-service restaurant concepts. Although his last position was at Delta, Mike has experience in the Asian market acquired during his time at PepsiCo, which could mean a direct understanding to help expand in South Korea and other countries on the continent. In addition, Mike has been part of Six Flags and Casey’s, which may have added experience in hospitality and food supply chains.”

It’s interesting to note the changes that have been happening within the industry recently. The CEO change we saw at Starbucks (SBUX) was just the tip of the iceberg. About 25% of all public companies in the industry have announced new executive changes.

Perhaps the most notable case was Brian Niccol’s departure from Chipotle (CMG) to take the helm at Starbucks, but we’ve also seen changes this year at Wendy’s (WEN) with Kirk Tanner, Papa John’s (PZZA) with Todd Pennegor, Shake Shack (SHAK) with Rob Lynch, and El Pollo Loco (LOCO) with Liz Williams.

Returning to our initial discussion, the ‘Three Pillar Strategy’ has the following objectives:

1. Consistently deliver great experiences;
2. Improve the menu to offer abundance and value; and
3. Building consumer decision-making and digital marketing capabilities into a competitive advantage.

Note that both objective 1 and objective 2 effectively refer to improving the value offered by the brand to guests, and objective 3 refers to the efforts aimed at ensuring that this value is perceived in practice.

The strategy for ‘Pillar 1′ according to the company is based on both service improvement and investments in remodeling. While Bloomin’ has not given any major tips on how to achieve greater satisfaction goals in terms of improving services, we already have some ideas regarding remodelings. Bloomin’ is expected to complete between 60 and 65 remodeling projects in 2024.

In addition to increasing guest satisfaction through improved order management and fulfillment systems, such as new grills, portable servers and KVS, the remodels help drive unit-level profitability. This will be essential in stemming the net closures we saw starting last year. Approximately 10 company-owned Outback locations and one franchised location closed in 2023 in the United States. These closures were offset by 6 new company-owned restaurant openings. In the international segment, we also saw some closures in South Korea (10 closures offset by 16 openings) and none in Brazil.

Note that when we put into perspective the fact that none of these closures were of a smaller footprint unit called ‘Joey’ developed by Bloomin’ after the pandemic, we realize the importance of lean units in slow-traffic environments. There is also a flexibility factor when we talk about ‘Joey’ units that helps adapt them to different environments. In Brazil, for example, they have an even smaller footprint to be inserted inside shopping malls. Generally, even with the reduced footprint, these units manage to present very high turnover rates, since their layout incorporates new arrangements that are integrated with the updated service processes post-pandemic.

Thanks to these efforts, we have seen a steady trend in closures and even net unit growth when we look at Outback. There have been 5 openings since the end of last quarter and no closures. In fact, across all brands, the only closure was a Fleming’s Prime Steakhouse & Wine Bar unit. In this sense, Bloomin’ and Outback differ from Dine Brands (DIN) and Applebee’s, which still plan to close double-digit units in fiscal 2024. The situation also differs from the family restaurant segment like Denny’s (DENN), which appears to continue to see unit closures on the rise. I also recommend reading my quarterly follow-ups from both companies.

This culminates in a rate of 40 to 45 new restaurant openings in 2024. We do not have any forecasts for closures, but they are expected to be in the low single digits given the impact of remodeling. Therefore, similar to 2023, we should see net growth in the number of locations, but without the offsetting closures seen last year. At least half of these openings will occur in Brazil (approximately 20 units) and will be Outback units. Another 15 openings will also be Outback units, but within the United States. One Fleming’s unit will also be opened by the company, and the rest will be franchised restaurants.

As I mentioned earlier, 5 Outback locations in the United States have already opened, as well as 6 in Brazil. This means that we still expect 10 more Outback locations in the United States and 14 in Brazil for the rest of the year. The Fleming location may be extended due to the headwinds from the guest, which are even more noticeable in the fine dining segment.

Moving on to ‘Pillar 2’, management has made it clear that it will seek to achieve a balanced proposition between abundance and value without resorting to heavy discounts. This indicates to us that management truly believes that the perceived value proposition will be able to bring the guest back, even with powerful competitors who are already at the top of mind.

The first step for Bloomin’ is to reduce the size of the menu. Menu simplification is being used by many restaurants. Examples include both limited-service and full-service restaurants:

• Burger King (QSR) is simplifying its menu as part of its ‘Royal Reset’ program. Part of this effort is also focused on remodeling select franchises to the ‘Sizzle’ model and leveraging digital sales;
• Del Taco (JACK) has been testing a menu simplification strategy and focusing on full-meal promotions. The company continues to leverage average check levers such as ‘Del’s Real Deal$’, which offers select items starting at $2, as well as Jack In The Box’s ‘Munchies Under $4’. Del Taco’s simplification is aimed at increasing unit-level margins, which have been contracting for some time at levels close to 13%;
• Taco Bell (YUM) is giving its franchisees the option to skip breakfast starting in October. Management said the move came as a choice to simplify the menu and aid in operational efficiency;
• KFC is testing its ‘Original KFC’ prototype at about 16 locations in Orlando. These prototypes feature a smaller footprint and simplified menus;
• Cracker Barrel (CBRL) has menu simplification as a centerpiece of its ‘Five Pillars Strategy’. The new CEO, who is trying to successfully turn around the family-owned restaurant company, said they are removing certain underperforming menu items (low orders and shrinking margins) and testing in Texas restaurants to figure out which new items to add to the menu.

These simplifications can be seen in many ways, from increasing operational efficiency and avoiding waste to improving the guest experience. In the case of Outback, it is clear that the simplification aims to highlight the value provided, making it perceived by the guest. Only then will the company be able to compete in this way with its biggest competitors.

By focusing the possible options on meals that, in the opinion of the menu engineer, provide both a good margin, gross capital inflow per order and perceived value, there is an interesting window to add menu innovations from specific LTOs. This could be quite difficult with huge permanent menus.

As a centerpiece of its value proposition focused on bringing back non-casual guests, Outback is promoting the ‘Aussie 3-Course’ meal for $14.99. This meal consists of three different courses, an appetizer (soup or salad), a main course (Bloomin’ Burger; Gold Coast Coconut Shrimp; Grilled Chicken on the Barbie; Bloomin’ Fried Chicken and other various options) and an individual slice of New York-style cheesecake.

Since this value promotion was introduced after the Q2 2024 developments, we do not yet have traffic data to corroborate the ideal scenario envisioned by Bloomin’. Invariably, this type of promotion aims to attract non-occasional guests back to the restaurant and stimulate the number of transactions by encouraging the frequency of visits per guest. These are customizable meals with more than 5 options as a main course. In addition, an appetizer and a dessert are already included. It is clear that management is targeting the daily value, and this is a way to build loyalty through a one-off LTO.

It is easiest to demonstrate this need to recover lost traffic by compiling the preceding data. Note that in the case of Outback, the loss of traffic cannot be compensated by increasing menu prices. That is, non-occasional guests need to be attracted by the daily value offered, and management is relying on the ‘Aussie 3-Course’ for this task:

Once the new menu is formatted, it is time to renew it, so as not to run the risk of selling down. This is a serious problem for companies that are struggling with traffic loss and do not consistently redirect the promotional mix to non-occasional guests only. Because they lack a hook and build strategy, they end up corrupting traffic through unprofitable LTOs. In my last article about Dine Brands, I found a series of inconsistencies in Applebee’s promotional mix that were causing chronic traffic problems and unit closures due to weak sales. I highly recommend reading it to understand how this dynamic works in practice.

It appears that Outback does not run this risk. With a value promotion that aims to re-establish non-occasional guest traffic through a daily value proposition, the company can successfully direct LTOs to the occasional guest, encouraging repeat visits.

In this sense, simplifying the permanent menu and focusing on value promotions will make it easier to target innovations present in the limited-time menu and in some cases work with new types of protein, such as the Tasmanian Shrimp & Scallop Pasta, Reef & Beef Platter, Perfectly Grilled Salmon, Bloomin’ Fried Shrimp, Blue Cheese Pecan Chopped Salad and the Chocolate Thunder From Down Under dessert. Alcoholic beverages are also part of the temporary menu, such as the Aussie Jawssie.

‘Pillar 3’ effectively aims to ‘spread the word’ about the value built through the previous pillars. In this way, it would be effectively perceived and transformed into a competitive advantage. Since multichannel advertising strategies and metrics regarding impact and loyalty are internal metrics at Bloomin’, it is up to us, the analysts, to measure the financial impacts.

Bloomin’ saw an increase of approximately 0.4% in its other operating expenses due to higher advertising spending during Q2. Still, this cost center remains contained at Bloomin’ despite growing 1.4% of total revenues compared to a year ago.

Looking broadly at cost centers, we see that in the last quarter they grew by 2.1% percentage-wise. Food, beverage and packaging costs are falling more slowly than at other restaurants. This cost center has surpassed the 30/30/30 metric and is the company’s biggest profit drain at 30.5%. However, with food inflation cooling off, we can classify it as under control for the next few quarters, as the worst is behind us.

Labor costs rose 1.1%, in line with what we’re seeing across the industry. We’ve seen the impact that higher wages for limited-service restaurant workers have on industry-wide compensation. Denny’s, for example, recently had to raise its prices by 5% to offer higher fixed wages and control turnover. We’re not seeing a slowdown in that situation yet. However, Bloomin’s situation appears to be more manageable, as it still has this cost center below 30%, unlike many FSRs that are in the mid-30s.

Looking from a historical perspective, we have the following situation:

Despite upward pressures from some cost centers, all of them are below historical averages. Food, beverage and packaging at 0.36%, labor costs at 0.29% and other operating costs at 0.65%. This implies that Bloomin’ still has some flexibility to fund projects related to ‘Pillar 3’.

A quick look at other brands

As highlighted in my first analysis of the company, Outback accounts for approximately 60% of Bloomin’s total revenue in the United States and almost all of its revenue in the International segment. However, the company has three other full-service restaurant brands, one of which is in the fine dining segment. If you are interested in a more in-depth analysis of each brand individually, I highly recommend reading my first analysis of Bloomin’.

What interests us most here is: have the brands diverged from Outback’s declining performance? To answer that question, let’s take a look at the comparable sales figures for each brand:

Aside from Carrabba’s, all other Bloomin’ brands, including Outback’s international segment (which operates predominantly in Brazil and South Korea), had negative comparable sales below the FSR SSS Index. Of these, only Outback International had headwinds from tough comps. Since Outback US and Carrabba’s account for about 76% of all Bloomin’ US sales, we saw some offsetting weakness in Fishbone and Fleming’s. As a result, we saw comparable sales for Bloomin’ US above the FSR SSS Index by approximately 0.2%.

However, outperforming the segment’s comparable sales decline doesn’t say much. Past analysis of the numbers shows that Bloomin’ has faced a much larger previous comparable sales decline than its competitors. Only Outback International and Carraba’s have outperformed the segment average in the post-pandemic years.

Traffic issues are a common denominator across the industry, unless you’re called Texas Roadhouse, Chipotle, Wingstop (WING), Shake Shack or Tim Hortons. Those are the exceptions. With declining traffic, most businesses are faced with the dilemma of whether to increase the average check or try to recover lost traffic through value promotions (basically competing on price). With average check growth slowing, achieved through guest sensitivity through successive menu price increases (the most basic way to increase the average check), restoring traffic has become critical to maintaining healthy comparable sales.

We can materially prove this through the compilation of check data made by Black Box Intelligence:

This means that excluding Carrabba’s (which exceeded the industry average), other brands such as Fishbone and especially Fleming’s needed an increase in the average check to compensate for the slow traffic. We can see how this dynamic plays out in the following graph:

The trend we should continue to see in the coming periods for both Fishbone and Fleming’s is that fine dining (as well as family restaurants) are the restaurants that have suffered the most from restaurant inflation. During Q2, traffic at family restaurants fell by 5.1% and fine dining restaurants fell by 3.1%.

Both Carrabba’s and Outback should see easier comps and should start to see upward pressure on comparable sales. These are the most important brands for Bloomin’ and key drivers of the company’s growth metrics. Either way, I don’t see anything special here. Carrabba’s is a solid concept, but it’s not delivering stellar performances that could boost Bloomin’s sales. Proof of this is that the number of units has been stagnant for at least a year, with 7 net closures in 2023 (although we have not seen any closures in Bloomin’-owned units during 2024).

Let’s update our PT

Given the new developments in the industry and the company, we will renew our target price for Bloomin’ and establish our rating based on the qualitative and quantitative findings presented in this analysis. In this chapter, I would like to revisit a series of metrics that will help us in this endeavor.

As in the last analysis I restricted myself to establishing a few quantitative methods, we will explore some more facets and in the end use a ‘Football field’ graph for the best display of the PT.

Starting with the Comps Model, let’s select five comparable companies to measure the price for Bloomin’. I’ve chosen Texas Roadhouse, Darden Restaurants, Dine Brands, Brinker International, and BJ’s Restaurants. All of these companies are or have FSR concepts that operate in and out of the United States. I’ll use about eight metrics for comparison purposes: P/E, EV/EBITDA, P/S, P/CF, P/B, EV/EBIT, PEG Ratio, EV/S.

The average of these metrics gives me a PT (Comps) of $44.07. This high price is due to the high multiples that stocks like Texas Roadhouse, BJ’s Restaurants and Darden Restaurants are trading at. Eliminating limitations like these is beyond comparative models, so we will focus more on intrinsic valuation models from now on.

Let’s run our NPVGO model. Given EPS of $2.11 per share for fiscal year 2024, a projected ROA of 5.33% (taking into account the number of shares and projected EPS), a discount rate of 6.84% (WACC), and a payout ratio of 40%, we find an internal growth rate of 3.2%. This indicates that Bloomin’ will grow approximately $0.07 from the retention of $1.27 per year. Ultimately, Bloomin’ modeled NPVGO in perpetuity will be -$7.67. The value of the stock will be its intrinsic value if it were a cash cow plus the NPVGO. This gives us a PT of $23.17 ($30.85-$7.67). This would imply an upside of approximately 37%.

Moving on to the DDM models, we have three more cards up our sleeve: SPDDM and MPDDM.

In the SPDDM I considered the same assumptions about the dividend for fiscal year 2024 and discount rate, but I considered a P/E for sale in 2025 of 10.17 (returning to the 5-year average) and an EPS of $2.11. This gives us a PT of $20.98 (considering the cash flows from the dividend and the sale price of the stock discounted to the present value).

In MPDDM, we will make the same assumptions regarding the cash flow from the first dividend. For the dividend in year 2, we will assume that there was an increase in dividends due to a change in the distribution policy to $1.02 per share. This is in line with long-term dividend growth. I will also assume that the P/E returns to its 5-year average. This would give us three cash flows (D1=$0.96; D2=$1.02; SP=$23.09) that discounted to present value would be $22.15.

Other valuation models for value investors, such as the Ben Graham Model, seem to corroborate the intrinsic valuation models we have outlined above. When we consider the EPS of $2.11 and the EPS growth projection of 3.26% (in line with the 5-year average), we get an intrinsic value of $20.59 for Bloomin’. However, when we apply a 25% margin of safety, we get a value of $15.44. This is below where the stock is trading. Furthermore, the Lynch Model indicates a multiple of 1.12, which indicates that Bloomin’ is priced at ‘ Fairly Valued‘.

For our DCF model, we will start by trying to forecast revenue for the next few quarters based on regressions of historical financial statement data. The average error of this model is 0.8%. Here is what we found:

Revising growth expectations to more conservative estimates, as well as using more recent gross margin and EBIT margin data, I found a more conservative value from my new DCF model. This price target sits at approximately $18.50.

I also ran a Monte Carlo simulation to see how the target price behaves based on different iterations that are modified by revenue growth, gross margin, EBIT margin and WACC. This was the result:

Most of the results I got corroborate the DCF I ran earlier. Now, let’s use the ‘Football field’ chart to define the actual target price for Bloomin’ Brands:

Since there is a dissonance between the performances of the comparable groups and the respective premiums paid, I consider it more useful to consider only the intrinsic valuation models for defining the average price. Therefore, I update my PT for Bloomin’ to approximately $20-$21.

My recommendation

Even though it is discounted relative to its peers and trading at approximately 19% below my price target, I maintain my ‘Hold‘ position on Bloomin’ Brands. In my opinion, the company will continue to underperform in the casual dining segment for some time to come for the following reasons:

1. Outback’s restructuring will take time and will require significant capital expenditures for remodeling. One positive is that the unit drain appears to have stopped, unlike other brands we’re seeing in the FSR segment like Denny’s, Applebee’s and Cracker Barrel, but these effects seem to me to be offset by the ability of its direct competitors to provide value to their guests. This is nothing new and is certainly the main reason for the continued decline in traffic metrics. We know about consumer inertia and all the spillovers of changing strategy mid-stream, especially when there are strong competitors out there;
2. While Carrabba’s has managed to stabilize, Fishbone and especially Fleming’s appear to continue to underperform. Aside from a Fleming’s opening, the pipelines for these other brands remain static; and
3. With higher capital expenditures for remodeling and shrinking top-line sales, Bloomin’ may need to take a few steps back and show ever-decreasing dividend growth. These assumptions tend to refute theories of perpetual growth and make it unviable to buy and hold as I suggested for Wendy’s. Wendy’s has a value proposition that allows it to maintain stable comparable sales, and its franchise expansion model allows it to act as a cash cow, which Bloomin’ is not.

In any case, I will continue to monitor the company closely. I am very interested in seeing how traffic will respond to the new value promotion and ongoing remodeling.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.