Bloomin’ Brands Inc (BLMN), Darden Restaurants, Inc. (DRI): A Restaurant Facing Many Headwinds

If you’re an American, then there’s a pretty good chance you enjoy dining out for Italian food, seafood, or a juicy steak, all while receiving good service in a comfortable atmosphere. Bloomin’ Brands Inc (NASDAQ:BLMN) has targeted this demand with its various restaurant brands, and the stock has skyrocketed over the past several years. However, the company might have difficulty flourishing going forward.

Brands and strategy

Bloomin’ Brands Inc (NASDAQ:BLMN) is best known for Outback Steakhouse, the largest of its casual brands. Its other casual brands include Carrabba’s Italian Grill and Bonefish Grill. Its upscale brands include Fleming’s Prime Steakhouse & Wine Bar and Roy’s. However, Roy’s isn’t considered a core brand.

Bloomin' Brands Inc (NASDAQ:BLMN)

Bloomin’ Brands Inc (NASDAQ:BLMN) has been a bottom-line focused company for many years. It’s not a company that will launch new brands and open more locations at a rapid rate. Bloomin’ Brands would like to grow, but it aims to do so at a methodical pace while remaining focused on its core brands.

In 2012, Bloomin’ Brands Inc (NASDAQ:BLMN) had 1,450 restaurants. In 2013, that number increased moderately to 1,483, and Bloomin’ Brands aims to add another 45 to 55 locations this year. If the company sees success, then it would like to increase that pace in following years. Its growth plans are focused on Bonefish Grill in the United States. Internationally, the focus is on Outback in the existing markets of South Korea, Hong Kong, and Brazil, in addition to new markets in China, Mexico, and South America.

More specifically, Bloomin’ Brands Inc (NASDAQ:BLMN) wants to improve its comps (more on comps soon) by remodeling Outback and Carrabba’s locations, offering promotions, optimizing its multimedia marketing, expanding lunch hours (at select locations), and adding innovative items to its menu.

Comps

Comps for Bloomin’ Brands refer to same-store sales at restaurants open for at least 18 months. The chart below should give you a quick idea of the comps growth picture.

Q1 2012 Q1 2013
Outback Steakhouse 2.3% 2.8%
Carrabba’s Italian Grill 1.5% 0.3%
Bonefish Grill 2.1% 0.2%
Fleming’s Prime Steakhouse & Wine Bar 6.8% 3.8%
Total 2.4% 2%

(Source: 10-Q)

Outside of Outback Steakhouse, comps growth has slowed. However, comp sales still managed to increase $18.5 million year-over-year. This was possible thanks to price increases, customer traffic (driven by day-part expansion and promotions), renovations, service, and menu innovation.

If you look at Q1′s restaurant sales, you will see a 3.9% increase, or $38 million, from $970 million to approximately $1.1 billion. However, $23.7 million of this gain was due to the opening of 45 new restaurants. Total restaurant sales can be deceiving due to new openings, which is why comps are so important.

Bloomin’ Brands Inc (NASDAQ:BLMN) might have specific strategies to improve comps, but accomplishing these goals will be easier said than done because of strong macroeconomic headwinds. Bloomin’ Brands has been affected by increased competition, commodity inflation, foreign currency exchange rates, high unemployment, underemployment, reduced government spending, higher gas prices, and consumers’ reduced disposable income.

The majority of these headwinds are expected to continue, which may disallow Bloomin’ Brands an opportunity to increase prices, and may reduce traffic levels. Bloomin’ Brands must now find innovative ways to drive sales.

Misleading performance

Bloomin’ Brands owns an impressive array of brands. Darden Restaurants, Inc. (NYSE:DRI), however, is even more impressive in this regard, with popular brands Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s Prime Seafood, and Wildfish Seafood Grille. With this diversified restaurant-brand portfolio, Darden Restaurants, Inc. (NYSE:DRI) effectively targets different types of consumers.

Below is the one-year stock performance of these companies:

BLMN Chart

Bloomin’ data by YCharts

Bloomin’ Brands has grossly outperformed Darden Restaurants, Inc. (NYSE:DRI), but it’s a much smaller company. Bloomin’ Brands has a market cap of $2.8 billion versus $6.1 billion for Darden. Smaller-cap stocks tend to move faster on news, and investors love growth stories in bull markets simply because there is more upside potential.

While Bloomin’ Brands might continue to be a better investment option in the near future, it should be noted that it sports a debt-to-equity ratio of 3.7 versus 1.3 for Darden Restaurants, Inc. (NYSE:DRI). With Bloomin’ highly leveraged, its growth potential will be impeded if the economy doesn’t improve. Worse, if the stock market were to suffer a steep correction, then investors and traders would flee from highly-leveraged growth companies.

While Darden Restaurants, Inc. (NYSE:DRI) isn’t a good defensive play, it’s a bigger ship to turn, it’s not as leveraged, and it currently yields 4.6%, whereas Bloomin’ doesn’t pay any dividends.

You might have also noticed Brinker International, Inc. (NYSE:EAT) in the chart above. Brinker International, Inc. (NYSE:EAT) owns Chili’s Grill & Bar, as well as Maggiano’s Little Italy. It has a market cap of $2.9 billion, making it similar to Bloomin’ Brands in size.

Trailing P/E Net Margin ROE Dividend Yield Debt-to-Equity Ratio
Bloomin’ 24 2.97% 51.28% None 3.70
Brinker 19 5.74% 71.15% 1.90% 5.40

(Source: Zacks.com)

Brinker offers a better value than Bloomin’ Brands Inc (NASDAQ:BLMN), it turns a higher percentage of revenue into profits (net margin), it turns a higher percentage of investor dollars into profits (ROE/Return on Equity), and it offers a 1.9% yield. This might lead you to think Brinker would be a better investment. However, a debt-to-equity ratio of 5.4 is concerning.

Brinker recently hiked its dividend by 20%, but don’t be shocked if the payout is cut at some point in order to reduce debt. If you’re looking for a better long-term investment than Brinker International, Inc. (NYSE:EAT), it’s likely to be Darden Restaurants, Inc. (NYSE:DRI).

Conclusion

Bloomin’ Brands seems to have the correct game plan, with a methodical approach to growth and strategic ideas to improve comps. However, Bloomin’ Brands has fueled its growth with debt, which could lead to danger in the future, especially in an uncertain macroeconomic environment with a hesitant consumer.

Bloomin’ Brands Inc (NASDAQ:BLMN) can cut costs to improve its bottom line, but sustainable top-and bottom-line growth over the next several years isn’t likely. Therefore, Bloomin’ Brands doesn’t look to be a top investment option at this point.

The article A Restaurant Facing Many Headwinds originally appeared on Fool.com and is written by Dan Moskowitz.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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