Editor’s Note: The metrics, statistics, and prices the author uses in this post were taken from Yahoo! Finance on Feb. 22.
Bloomin’ Brands Inc (NASDAQ:BLMN) completed a successful IPO during August of last year. Actually, the IPO was only successful on the basis that shares rallied $1.97, or 17.9%, to $12.97 after just one week of trading. For those of you who might be unaware, Bloomin’ Brands is the parent company of five casual dining restaurants: Outback Steakhouse, Fleming’s Prime Steakhouse & Wine Bar, Bonefish Grill, Carrabba’s Italian Grill, and Roy’s. Prior to the IPO, Bloomin’ had been privately held by Bain Capital and Catterton Management since 2007.
Since August, the price per share of Bloomin’ Brands Inc (NASDAQ:BLMN)’s stock has skyrocketed to $17.15 at the close of trading on Friday, Feb. 22. Despite the market’s obvious affection for the company, a deeper look inside their capital structure reveals serious flaws stretching back to the IPO. Fellow Fool Sean Williams underscored the shortcomings in an article last August which can be found here. To summarize Sean’s points, the purpose behind the IPO was not to raise capital for expansion or reinvestment—as IPO’s are typically conceived of by the average investor—but rather to pay off the company’s debt. Originally, the IPO was intended to raise $300 million to pay down roughly $250 million in senior notes. However, when the initial offering price dipped to $11 from the anticipated $13-$15 range, Bloomin’ only ended up raising $166 million. The fact that the $250 million in senior notes coming due in 2015 carry a steep 10% interest rate serves to exaggerate the negative implications of the insufficient IPO. Bloomin’ faces a tremendous debt burden going forward, adequately summarized by their 718.28 debt to equity ratio and worrisome 0.68 current ratio. To elucidate the issue more acutely, allow me to quote Sean:
“What’s more, $1.1 billion of Bloomin’ Brands Inc (NASDAQ:BLMN)’s debt is variable-rate, with quite a bit due over the next few years. According to the company’s amended S-1 (page F-39, for those interested), it has $332 million in debt repayments due in 2012, about $88 million due in 2013, nearly $938 million due in 2014, and another $259 million (including the $248 million in senior notes accruing 10% interest) due in 2015.”
In situations such as this, the company’s stock price is typically discounted to reflect the associated financing risks and costs. To the contrary, Bloomin’s valuation looks more akin to that of a growth stock! Consider the following: Bloomin currently sports a P/E ratio (ttm) of 30.41, EV/Revenue (ttm) of 0.91, and an EV/EBITDA (ttm) of 11.16. Darden Restaurants, Inc. (NYSE:DRI) —a fairly comparable company to Bloomin’ claiming brands such as Red Lobster, Olive Garden, and Longhorn Steakhouse, among others—on the other hand, maintains a P/E ratio (ttm) of 13.21, EV/Revenue (ttm) of 1.06, and an EV/EBITDA (ttm) of 7.90. A third company to compare Bloomin’s exorbitant valuation to is Brinker International, Inc. (NYSE:EAT), the parent company of Chili’s Grill & Bar, Maggiano’s Little Italy, and Romano’s Macaroni Grill. Brinker, like Darden, is valued at much more rational levels with a P/E (ttm) of 15.72, EV/Revenue (ttm) of 1.02, and EV/EBITDA (ttm) of 7.65.