By Jacob Sonenshine

While the fare offered at Bloomin' Brands' Outback Steakhouse, Carrabba's Italian Grill and other restaurants might be tasty, its stock has been anything but for investors who bought it on Barron's recommendation.

Yes, we got it wrong when we recommended the stock in late February. We believed that the company's investments in marketing, digital sales capabilities, technology to improve waiter efficiency, and new grills and ovens would boost sales and help it catch up to peers. That didn't happen. Instead, the company has posted year-over-year traffic and sales declines for all four of its restaurant chains, its margins have declined, and it missed analyst earnings estimates in two out of the three reported quarters this year.

To solve these problems, Blooming hired a new CEO, Mike Spanos, in August. Spanos, who came from Delta Air Lines, had never run a restaurant business before. The stock dropped 2.6% the day after his announcement, which Raymond James analyst Brian Vaccaro suspected was "due in part to Spanos' lack of direct restaurant industry experience," he wrote at the time.

"Mike is an ideal strategist, operational, and cultural leader," the company said in response to q request for comment. "He was chosen for his experience and sustained results operating large and complex multi-unit portfolio businesses in competitive retail and food service environments. He has a customer-first mindset and brings a global perspective and commercial acumen to our business, and we look forward to his contribution at Bloomin' Brands."

Now, Bloomin' stock has dropped 55% since we recommended it. At a recent $11.46, its market capitalization is now under $1 billion.

Part of the problem is its declining sales and earnings forecasts. Management, on its third quarter earnings release in November, reduced its full year 2024 U.S. same-store-sales growth guidance to negative 0.75% at the midpoint of its range from negative 0.5% previously and It lowered its EPS guidance to $1.77 from $2.20. But there's more to the drop than just the fundamental deterioration of the business. Investors are now paying a mere 6.6 times expected earnings per share for the coming 12 months to own the stock, down from 10.5 times in February, a sign that the market has lost confidence in Bloomin's ability to grow over the long-term.

Bloomin' can't blame broader weakness in restaurants for its woes. Consumers are continuing to spend enough to keep sales growing for the better restaurant operators right now. Brinker International, owner of Chili's, and Cheesecake Factory are both seeing growth this year, for example, and both stocks have gained in 2024: Cheesecake Factory has gained 36%, while Brinker's has more than tripled.

Rejuvenating the brand would start with management simplifying the menu, which Spanos has mentioned, but the market is still waiting on further details. For the moment, "it remains unclear what changes need to be made to improve its value and/or guest experience," Vaccaro writes.

Another adjustment Bloomin' is making is to refocus on its domestic business. The U.S. represents the majority of its sales, and fixing that area will go a long way toward rekindling profits. That's why it sold the majority of its Brazil business to Vinci Partners for $243 million in November, about half of which Vinci paid up front, with the rest to come in 2025. Bloomin' will need to use some of the proceeds from the sale of the Brazil business to improve profits in the U.S.

The financing activities can boost the company's current cash position, which is currently about $84 million, and help it pay down debt, which currently totals almost $1.1 billion. It can service the debt partly with expected free cash flow of $175 million next year according to FactSet, but Vaccaro also mentions it may need to cut its dividend, which analysts currently expect to total almost $90 million next year.

None of this will do much for the market's confidence until Bloomin' shows that it can drive growth again. It's in for a "multiyear turnaround journey," writes Gordon Haskett analyst, Jeff Farmer.

We don't see a reason to wait. It's time to throw in the towel on this pick.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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December 31, 2024 02:30 ET (07:30 GMT)

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