The Restaurant Market IPO Buzz Continues to Bloom
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The food service industry is abuzz thus far in 2012, and several key indicators are showing that investors are increasingly warming back up to the sector. Restaurant concepts on both ends of the spectrum – from quick serve joints including McDonald’s (NYSE: MCD) up to the higher-priced sit-down concepts owned by conglomerates like Darden (NYSE: DRI) – are enjoying new levels of profitability as discretionary consumer spending returns, new menu items attract new consumer types, and a newfound focus on convenience and fresh foods drastically improves the eating experience.
The enthusiasm surrounding the sector has harbored an attractive IPO environment, and the upcoming entry of Bloomin’ Brands to the market should give the parent company of the popular Outback Steakhouse chain a needed boost to gain additional relevancy points in the space.
Bloomin’ Brands, the operator of more than 1,400 worldwide restaurant units including the Outback, Carrabba’s Italian Grill, and Bonefish Grill concepts, seeks to raise $300 million in the latest IPO to hit the restaurant market. With close to 85% of its restaurants being company-owned, Bloomin’ Brands will join the ranks of other mostly non-franchised chains including Darden Restaurants – the owner of Olive Garden, Red Lobster, and Longhorn Steakhouse – and Brinker International (NYSE: EAT) – the owner of Chili’s and Maggiano’s Little Italy brands.
The corporation outlines in its pre-IPO filing that close to $250 million of the estimated $300 million to be raised will be used to retire long-term notes, with the remainder being reinvested into the business’ growth. This is undoubtedly the most effective use of the proceeds, as the corporation is significantly more indebted than the other players in the sector with a total debt balance that outweighs its equity by a factor of more than 50x. Darden and Brinker have respective ratios of 1x and 1.74x.
Likewise, the corporation’s own debt-retiring initiative, fueled by increasing levels of free cash generated from operations, has shown the ability of its future earnings potential. Free cash flow has expanded more than 45% between 2009 and 2011 as the total debt balance has decreased by 8% and annual interest expense has been cut by close to 1/3.
Bloomin’ does not currently stand out as an extremely attractive bargain on a free cash flow basis, although the $250 million, post-IPO debt reduction plan and its other future growth initiatives might make it one of the more promising players in the field. Below, “yield” is defined as [(EV/FCF)/(EV/Sq.Ft.)] – what an investor in each restaurant concept receives in terms of most recent twelve month free cash flow compared to what they pay on a square foot basis. 
Bloomin’ enterprise value estimate based on projected $10 per share in IPO
Continued growth in free cash, as mentioned, will not only be driven by continual debt reduction, but will also receive contribution from same store sales growth. Bloomin’ hopes to piggyback off of its 2.7% and 4.9% comparable store sales growth in 2010 and 2011, respectively, through additional investment in the business via:
- Store Remodeling: Since the introduction of the Outback Steakhouse remodeling initiative in 2009, 256 restaurants (around a quarter of total) have been revamped thus far with larger and more comfortable waiting areas and brighter and more upscale bars. Each remodeling costs Bloomin’ around $250,000 to complete, and the corporation plans to remodel an additional 160 Outback Steakhouses in 2012 and have a cumulative total of 450 remodeled units by the end of 2013. Based on traffic analysis conducted in 2010 and 2011, each remodeled unit commands close to 3% more annual customer traffic than non-remodeled counterparts. Due to the success of the program, a similar initiative will take place in the Carrabba’s concept.
- Revamped Menu: Significant comparable store sales growth has been driven by the attraction of new customers through the introduction of new menu items. More than 60 new menu items have been launched across all concepts since 2010, with a newfound focus on lower calorie and fresher food options.
- Marketing to Build Awareness: Outback Steakhouse is Bloomin’s only international brand, with close to 200 units in the international market. The popularity of the concept in foreign nations shows that there is a significant opportunity overseas – Outback held the #1 position in South Korea and Brazil among casual dining restaurants in the full-service sector in 2010 (based on total sales volume in each nation). The introduction of more local-focused menu items and an increased amount of ad expenditures in the international zone will continue to drive comparable store sales.
It is positive to note that the corporation, while resuming its new restaurant growth after a period of curtailed growth between 2009 and 2011, is aiming to supplement its existing restaurant base with slow and manageable expansion. The additional 30 restaurants that will be launched in 2012 represent around 2% of its year-end 2011 footprint. As experience has shown, a focus on boosting the efficiency of existing stores and supplementing top line with steady new store growth is generally the safest and most effective expansion method – in any retail industry.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Darden Restaurants. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
