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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Bloomin Brands Is a Value Trap

Customers are turning to new and better restaurant experiences

December 11, 2018 | About:

Bloomin Brands Inc. (NASDAQ:BLMN) owns and operates Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill and Fleming's Prime Steakhouse and Wine Bar. Collectively, these restaurants have generated over $4.1 billion in sales and $107 million in net income in the last 12 months.

The company's market capitalization is $1.73 billion, which prices the stock at just 0.4 times sales, far lower than the industry average and slightly lower than the company's historical average of 0.6 times sales.

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Normally, I might look at this company and see potential, but these brands are old in a time where consumers are looking for change and novelty. Customer counts declined at three of the company's U.S. chains during the third quarter. At the company's flagship chain, Outback Steakhouse, traffic increased less than 1% for the second straight quarter. Maybe it's the bubble of Washington D.C., but I think of these restaurants as the next wave of dying brands in the cycle of commercial real estate leases and neighborhood revitalization. Essentially, out with the old and in with the new, hip, fun and better.

I could be wrong about Bloomin Brands. It's true that earnings could be in the $1.50 range in 2020, up 50% from today, but that seems unlikely and the 1.89% dividend is not enough to compel investors that want to buy and wait for a turnaround. Prices did rise more than 2% at all four of the company's U.S. chains, and a new store remodeling program should kick off in early 2019, with remodels carrying new design elements to modernize the look and increase kitchen space to handle the higher expected order volume from mobile and digital users. If successful, the 3% traffic lift from new remodels could help the company's earnings pass $1.50 per share, but it is just as likely that the added costs will lower earnings. If customers don't show up as anticipated, the stock will fall along with profits.

Two big red flags are the debt load, which sits at $1.1 billion, and retained earnings, which continue to run negative, push book value down and result in an outrageously high return on equity rate of 281%. Investors are still paying up for established chains like Chipotle (NYSE:CMG), Cheesecake Factory (NASDAQ:CAKE) and Texas Roadhouse (NASDAQ:TXRH) that carry very little to no debt compared to net earnings. At this point, there are too many negatives holding Bloomin Brands back and the market could place an even lower price-earnings multiple on the stock in the future. At 10 times forward earnings, shares would price in the $13 to $14 range. That's more in line with the company's fair value.

Disclosure: I am not long or short any stocks mentioned in this article.

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About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website


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