Is This a Bloomin' Good Deal or a Value Trap?

By Chad Henage - May 7, 2012 | Tickers: EAT, DRI | 0 Comments

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Bloomin' Brands, the company that owns Outback Steakhouse, Carrabba's, and Bonefish Grill, is going public. These brands rank #1, #2, and #2 in their respective categories, so should investors be excited by a chance to own a piece of the Outback?

Maybe, maybe not. On one hand, I've read an article on Motley Fool by Mercedes Cardona saying that investors should be skeptical of this deal. One of the main issues pointed out is that the company's debt load currently stands at $2.1 billion, and the proceeds from the IPO are expected to be primarily used to extinguish debt. On the other hand, at a reported $10 a share price, the stock would trade initially with a P/E ratio of just 11. I've read the S-1 filing (yes, the whole thing) and let me show you what I've found.

First, the company plans to offer up to $300 million worth of its shares to pay down $248 million in Senior Notes and the remainder will be used for working capital and corporate purposes. The stock is expected to trade under the symbol BLM (no comment on exchange yet). The company owns 1,248 restaurants and has 195 franchised or joint-venture restaurants. Along with the Outback, Carrabba's, and Bonefish concepts, the company also owns Fleming's Prime Steakhouse and Wine Bar and Roy's. What exactly is the potential for these brands? Let's look at each concept and see if we can figure out the answer.

Outback Steakhouse

Outback is both the largest concept for the company, and the most well known. The company operates 780 restaurants and has franchised 153 worldwide. In addition, there are 34 restaurants run through a joint venture internationally. With a total of 967 Outback restaurants worldwide and about six new restaurants expected in 2012, new restaurant growth will only amount to 0.60%. This division saw 4% comparable sales growth in 2011. With 4% comparable sales growth and a small contribution from new restaurants, this concept could grow earnings by 5% in 2012. Given that this is 67% of the company's total restaurants we'll assign a weighted growth rate of 0.0335.

Carrabba's is the second most prominent concept for Bloomin' Brands. With 231 company owned and a single franchised restaurant in the U.S., you can see there is plenty of room for growth. The company expects to test an updated theme for Carrabba's and add about seven restaurants in 2012. This represents 3% new store growth, and comparable sales last year were up 4.6%. Combine these two metrics and you get net growth of about 7.6%. With Carrabba's representing about 16% of restaurants, we'll assign a weighted growth rate of 0.0122.

Bonefish Grill is the company's main growth focus in 2012. The concept has the highest average check per person of the three major chains, and also has the highest comparable sales. Last year, comparable sales grew by 8.3%. With 158 total restaurants, the company expects to open about 20 this year. This is 12.66% new store growth, and if you add the 8.3% comparable sales you get an impressive 20.96% expected growth rate. With only 10.91% of the total restaurants, we will assign this concept a weighted growth rate of 0.0228.

The fourth major concept is Fleming's Prime Steakhouse and Wine Bar. This concept is a high-end steak and wine restaurant with much higher pricing. In fact, the average check per person is about three times the average check at Outback or Carrabba's. There are only 64 restaurants, but these units saw good same store growth last year of 7.4%. With no specific plans to expand this concept, same store sales is the growth driver. Assuming another 7.4% comparable sales increase, we will assign this division a weighted growth rate of 0.0032 with just 4.4% of total restaurants.

Add all of these weighted scores together and you get a combined expected growth rate of 7.17%. Not terrible, but clearly the company's growth is tilted heavily toward the Outback chain.

Now what about that debt of $2.1 billion that the company is sitting on? First, if the offering goes as planned, the company will extinguish about $248 million of Senior Notes. These notes cost the company about $25 million a year in cash flow for interest alone. Assuming the IPO pays off these notes, annual interest costs should drop to around $58-$60 million. In the last three years, look at the company's income + depreciation versus interest costs:

You can see that while cash flow from operations has stayed relatively flat, interest costs have been dropping each year. Interest coverage in the last three years has increased from 2.2 times to just over 3 times. While these aren't the best numbers I've seen, they are moving in the right direction.

Speaking of cash flow, I think its instructive to compare Bloomin' Brands to two of their competitors. Brinker Intl. (NYSE: EAT) seems a logical fit, as they own the Chili's and the Maggiano's chains. Chili's competes directly with Outback Steakhouse, and Maggiano's competes with Carrabba's. Darden Restaurants (NYSE: DRI) also makes sense, as their Olive Garden concept is a direct competitor of Carrabba's, and Red Lobster competes with Bonefish Grill. With Brinker operating 1,500 restaurants and Darden running 1,900 restaurants, these two companies are also similar in size to Bloomin' Brands. This comparison should help us get a sense of what Bloomin' Brands might be worth versus two of their major competitors.

You can see that Bloomin' Brands would rank at the bottom when it comes to free cash flow generation. On a cash flow basis, Brinker is valued at $2.5 billion with three times the cash flow. Darden is valued at $6.51 billion with 50% more cash flow. When it comes to growth assumptions, I've been very conservative and assumed almost no margin growth for Bloomin' Brands, whereas the company has improved margins each of the last three years.

In the end, the debt is worrisome, but if Bloomin' Brands can continue to improve its margins, pay down its debt, and improve its cash flow, the stock might be a good value. The problem is because of the brands involved, I'm sure the stock will see a first day pop from the proposed $10 offering price. If investors can buy near the $10, this might be a bloomin' good deal after all.

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