Pass on This Stock Until Debt Comes Down


For those who bought Bloomin' Brands last fall, it's been a great run. The stock came out of the IPO gates at $11 only to rally up more than 60% in six months. Here at the Fool, we weren't too excited about the restaurant holdings company based on its questionable reasons to go public and very high interest rates on near-term debt. The market didn't seem to care, and the company is still flirting with its all-time highs. After the most recent earnings report, we see a company that is outperforming its competitors on sales figures, but still debt-laden. In the meantime, it is one of the more expensive restaurant stocks on the market. Let's take a look at the numbers to see if Bloomin' Brands should be on your menu or if it's a heart attack waiting to happen.

As is all too frequent with companies owned by leveraged buyout firm Bain Capital, Bloomin' Brands was born into the public markets riddled with debt. The company had $248 million in 10% notes due in 2015 along with $1.1 billion in variable rate debt. In 2014, the company has $938 million in debt repayments alone. While it is no doubt a growing enterprise, Bloomin' Brands has low margins that will seriously hurt free cash flow over the next few years.

All that said, the company had a solid fourth-quarter and full-year earnings report.

Earnings rich
Starting out with full year-results, the company earned $0.99 per share in diluted earnings versus $0.81 in 2011. Adjusted net income rose to $114 million, compared to $86.5 million the year before. Same-store sales, one of the most important metrics when looking at restaurants, were up 3.7%, driven by traffic growth of 2.7%. This compares to an industry average of 0.6% in same-store sales and traffic down 1.5%. Revenue grew 3.8% to more than $4 billion. That's less than a 3% net income margin, but we'll back to that later.

In management's conference call, the tone was cautious. Citing the usual suspects of sequestration, tepid consumer confidence, and high gas prices, the company isn't sure 2013 will be a banner year even though it seems to be an industry leader. Its focus will remain on value-oriented items. In my opinion, that is a wise strategy for the company if it intends to make a long-term recovery from its ridiculous debt load.

At Outback specifically, same-store sales were up 5.3% in the fourth quarter and 4.4% on a full-year basis. Though I'm not a frequenter of the steakhouse myself, I cannot deny that the restaurants seem to be full every time I see one. Fleming's, an upscale steakhouse, performed exceptionally well, with 5.1% full-year same-store sales growth. I believe that Fleming's is an encouraging brand for the company, as upscale restaurants should have some insulation from general economic trends.

The company opened 15 restaurants internationally, contributing to overall new store growth of 37 -- two above estimates. Outback Brazil seems to be particularly outperforming, bringing in $250 million in net revenues for 2012. The company also opened its first location in China, which should be the beginning of a long growth runway in the brand-hungry nation.

For the fourth quarter, revenues came in at just under $1 billion, compared to $956 million in the prior year's quarter. The company isn't expecting substantial operating margin growth this year, but it is still committed to its long-term goal of a 300-basis-point improvement. The company doubled its bottom line from $0.10 per share to $0.20.

So the financials certainly look strong, given the macro environment. But what about that pesky debt, and is Bloomin' Brands a better-looking investment than it was at its IPO?

More debt talk
The company needs to recapitalize its debt at more favorable terms, preferably yesterday. I am surprised there is no activist interest in the stock currently, given that it does have healthy organic growth and strong brands. It's probably not as much management's fault that it is a debt-astrophe as it is a consequence of being the product of a private equity investment. That excuse won't last much longer, though.

Looking forward, the company is expecting comps to rise by 2%, which again outperforms expected industry growth. Commodity prices will remain a challenge for Bloomin' Brands and the industry as a whole, but the company does have contracts on 72% of its 2013 total buy, insulating it to some degree from expected beef inflation of 10% to 12%.

Bloomin' Brands paid down $600 million in debt in 2012, some of it fueled by its IPO, but it has much, much more to go. The company currently has a net debt-to-EBITDA ratio of 3.1. It's not that the ratio has to be low; for some it can add value. For comparison, DineEquity is sitting at five times net debt to EBITDA, but has fatter margins due to a focus on franchising company-owned stores. I believe a further focus on franchises, especially for international locations, could help Bloomin' Brands bring up its dismal margins and contribute to meaningful cash flow growth long-term.

At this point, I feel the stock is too expensive to justify its debt load. Investors might be wise to look elsewhere.

Editor's Note: A previous version of this article incorrectly stated the company's net debt-to-EBITDA ratio. The number provided (4.4 times) was net debt-to-EBITDAR, which takes into account full capitalization of lease obligations and is typically a more conservative metric. Bloomin' Brands was taken private in 2007 with $2.7 billion in debt. As of December 2012, $1.2 billion has been repaid. The Fool regrets the error.

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Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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