2. Bloomin’ Brands, Inc. NASDAQ: BLMN
CFA Institute Research Challenge P a g e | 1
Important Disclosures appear at the back of this report
Recommendation: BUY January 20, 2015
Current Price $23.50 (as of 12/19/2014)
Target Price $26.28 (11.85% Upside)
Highlights
We issue a BUY recommendation on Bloomin’ Brands, Inc. (BLMN) with a price target of
$26.28. Using a blend of the discounted cash flow model and a forward Price to Earnings
multiple, the valuation offers an 11.85% upside from the December 19th
, 2014 closing price
of $23.50. Bloomin’ Brands’ upside strength results from superior sales growth, margin
improvements, and strong growth in operating cash flow. Additionally, significant brand
recognition improves firm value by allowing for successful expansion both domestically and
internationally.
Domestic Growth to Remain Robust – Bloomin’ Brands outperforms industry peers in
both sales growth and consumer traffic. Since 2010 Bloomin’ Brands has beat the Knapp-
Track Index in comparable store sales and traffic by 2.9% and 4.5% respectively. The
company seeks to maintain the gap to the Knapp-Track Index through a national lunch
rollout in its Outback Steakhouse and Carrabba’s Italian Grill brands. Bonefish Grill,
which provides the highest ROIC for the company, will be the focus of domestic new
restaurant build outs and is expected to contribute 74% of domestic new stores sales in
2015.
International Expansion – Global market size for full service restaurants is projected to
grow at 1.5 times the rate of the U.S. market, creating an opportunity for Bloomin’
Brands to expand its international footprint. Currently, international operations in
Brazil, South Korea, and China account for 12.3% of the company’s total revenue. The
addition of over 100 restaurants outside the U.S. by 2019 is expected to drive 18.5% of
company revenue. Furthermore, Brazilian Outback average unit volume of $6 million is
double its U.S. counterparts’. Incremental international sales are projected to contribute
24.3% of Bloomin’ Brands 2014 total revenue growth.
Improved Margins – Productivity improvements will save Bloomin’ Brands near $50
million in operating costs per year. We forecast operating profit margins to rise from
5.5% to 6.7% through 2019, moving closer to the industry peer median of 8.3%. Margin
improvements are expected to come from the implementation of labor optimization,
high performance kitchens, and supply chain efficiencies. Past productivity
improvements have previously contributed 130 bps to operating margin.
Strong Operating Cash Flow – Bloomin’ Brands’ operating cash flow has grown at a five
year CAGR of 5.9%. Going forward the operating cash flow will outweigh upcoming
investing and financing commitments, eliminating the need for external financing. The
company has recently announced the payment of its first dividend of $0.24 per share
and a $100 million share repurchase program. Additionally, Bloomin’ Brands is paying
down debt and projects to make CAPEX investments in the range of $255 million to $280
million, an increase of 14% from 2014. Despite the increase in cash outflows, we project
Bloomin’ Brands will experience a net increase in cash starting in 2016.
2012 2013 2014F 2015F 2016F 2017F 2018F 2019F
Revenue ($M) 3,988 4,129 4,409 4,545 4,795 5,055 5,326 5,608
EBITDA ($M) 304 405 391 445 489 531 559 589
Net Income ($M) 50 208 105 151 178 207 226 247
Diluted EPS ($) 0.44 1.63 0.84 1.23 1.47 1.71 1.87 2.04
Bloomin' Brands Forecast Summary
Sector Services
Industry Casual Dining
Restaurants
Price 12/19/14 23.5
52 Week High 26.45
52 Week Low 15.01
Avg. Daily Vol 2,117,580
Est. Yield (%) 1
Beta 0.98
Market Cap (B) 2.94
P/E (TTM) 23.74
P/E (FWD) 18.95
Institutional Ownership (%) 92.7
Insider Ownership (%) 7.61
Shares Outstanding (M) 125.7
Public Float (M) 97.8
EPS (TTM) 1.01
PEG (FWD) 1.73
1-Month Return (%) 7.69
6-Month Return (%) 4.72
1-Yr Return (%) 0.64
Key Statistics
0
10
20
30
0
500
1000
1500
2000
2500
S&P 500 BLMN
Stock Price Since IPO
0
10
20
30
1400
1600
1800
2000
2200
S&P 500 BLMN
Stock Price YTD
Source: Bloomberg
Source: Bloomberg
3. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 2
Figure 1: 2014-YTD Sales by Restaurant
Concept ($M)
Source: Company Data
Figure 2: Outback Sales Comparison
Source: Company Data
Figure 3: Carrabba’s Sales Comparison
Source: Company Data
Figure 4: Bonefish Sales Comparison
Source: Company Data
Business Description
Summary
Bloomin’ Brands, Inc. (NASDAQ: BLMN) is the second largest full service casual dining
company by sales with $4.38 billion. Its portfolio of 1,491 locations consists of four
differentiated restaurant concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish
Grill, and Fleming’s Prime Steakhouse & Wine Bar (see Figure 1). Bloomin’ Brands was
initially incorporated as OSI Restaurant Partners Inc. in 1987 and initially went public as
Outback Steakhouse in 1991. Bain Capital and Catterton Partners took the company private
in 2007 for a purchase price of $3.2 billion in order to turn around the underperforming
company. In August 2012 the company was taken public again as Bloomin’ Brands, named
after the signature menu item, Bloomin’ Onion. The current market capitalization is $2.98
billion and Bain Capital is still the largest shareholder with 14.6% ownership.
Headquartered in Tampa, Florida, Bloomin’ Brands operates company-owned stores in the
United States and abroad while also selectively franchising. Domestically it maintains a large
presence in the Southeast United States, primarily in Florida with 223 restaurants. CEO
Elizabeth Smith has led the company since the 2012 IPO. Outback Steakhouse currently
comprises 63% of the portfolio, but future growth will be focused on Bonefish Grill and
international Outback locations.
Outback Steakhouse (Domestic) -- Australian themed steakhouse with 648 company-
owned restaurants and 105 franchises across the U.S (see Figure 5). The Outback brand
accounted for $2.1 billion of Bloomin’ Brands’ 2013 revenue and holds the top position
in full service steakhouses (see Figure 2). Alcohol comprises 11% of sales and the
average check is $20 per person.
Carrabba’s Italian Grill – Italian style dining with 248 company-owned and one
franchised location in the U.S. Carrabba’s is ranked second in full service Italian dining
(see Figure 3). Carrabba’s contributed $706 million to top line revenue in 2013. Alcohol
represents 16% of the sales mix and the average check is $21 per person.
Bonefish Grill - Polished casual dining seafood restaurant with 209 company-owned
units and seven franchises in the United States. Bonefish is second in full service seafood
and accounts for $555 million of Bloomin’ Brands’ 2013 revenue (see Figure 4). Alcohol
accounts for 24% of sales and the average check is $23 per person.
Fleming’s Prime Steakhouse – Upscale contemporary steakhouse with 65 locations
across 28 states in the United States. Fleming’s 2013 revenues were $265 million.
Alcohol makes up 29% of sales and the average check is $69 per person.
Outback International – Operations in 21 countries with 171 company-owned locations
and 51 franchises or joint ventures. Brazil and South Korea are the largest international
markets and Outback is ranked first and second respectively among casual diners.
Revenue in 2013 was $344 million.
Industry Overview and Competitive Positioning
Overview and Key Macroeconomic Drivers
The casual dining restaurant industry is projected to generate $92.0 billion in revenue for
2014 and accounts for nearly 15% of total U.S. restaurant sales. The fragmented nature of
the industry creates a highly competitive market place with no firm having greater than
10.7% market share. In this divided industry, Bloomin’ Brands holds a 4.6% market share.
Over the past five years, the casual dining restaurant industry has shown recessionary
recovery revenue growth of 2.1% annually. Going forward, overall industry revenue is
projected to grow at a slower annual growth rate of 1.5% through 2019. Acting as a demand
driver, lower unemployment rates have benefited the casual dining industry by consumers
contributing more discretionary spending. The current unemployment rate of 5.8% is a
positive indicator for the industry along with improved consumer confidence and spending
levels. Increased consumer confidence drives spending habits on discretionary items such as
sit-down meals.
Outback
Steakhouse 50%
Carrabba's 17%
Bonefish
Grill 14%
Bloomin'
International
13%
Fleming's 6%
1,627
535
461
200
437
$-
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
Sales($B)
# 1 in Steak Sales
$-
$1.0
$2.0
$3.0
$4.0
Sales($B)
# 2 in Italian Sales
$-
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
Sales($B)
# 2 in Seafood Sales
4. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 3
Figure 5: Store Concept Breakdown
Source: Company Data
Figure 6: Revenue vs Employment
Source: IBIS World & Capital IQ
Figure 7: Revenue vs Consumer Spending
Source: IBIS World & Capital IQ
Figure 8: International Foodservice
Growth by Type
Source: Company Data
Consumer spending is expected to increase at an annual rate of 2.6% over the next five years.
The average consumer spends roughly 5.2% of annual expenditures on food and beverages
outside the home. An estimated 40% of industry demand comes from consumers with
household incomes of $100k or more, while roughly 50% comes from households with
incomes between $20k and $80k. Correlations between changes in casual dining restaurant
sales and changes in employment and consumer spending are 78.1% and 70.2% respectively.
Co-movement of these variables are shown in Figure 6 and Figure 7.
Industry Analysis
Domestic Market Saturation
Casual Dining Restaurants are beginning the mature stage of their economic life cycle as
evidenced by Industry Value Added (% contribution to gross GDP) projections of 2.1%,
matching the projected five year growth of U.S. GDP. Market saturation is the largest
constraint to comparable store sales growth and new restaurant growth. The key metric in
industry comp store sales is the Knapp Track Index which projects domestic growth to be
negative 2% to 0% for the casual dining restaurant industry, indicating market saturation.
Gains at the firm level will have to come from market share rather than industry growth.
Furthermore, new store growth is hindered by competition for real estate in prime high
consumer traffic locations.
Consumer Preference Trends
Consumer preferences have shifted toward lighter, healthier options, such as the 6 oz. sirloin
paired with fresh mixed vegetables listed on Outback’s 600 calorie menu. This trend will be
reinforced by upcoming FDA regulations mandating that nutritional information be listed on
menus. Traditionally, casual dining restaurants have benefitted from large portions and high
calorie entrees as a value proposition. Recent shifts in the healthy eating index indicate
consumers are seeking out lighter meal options; however, the casual dining industry has
been slow to react. Furthermore, fast casual chains such as Chipotle and Panera have been
able to capitalize on the trend. The casual dining industry is anticipated to face pressure to
adjust menus and possibly revamp brands to accommodate changing consumer preferences.
M&A Activity
A number of restaurant groups have been offloading underperforming chains to private
equity firms. The largest recent move came from Darden Restaurants in 2014. The company
sold its 600-plus Red Lobster restaurants to Golden Gate Capital for $2.1 billion. The private
equity community plays a significant role in the industry. Firms have targeted
underperforming chains with the goal of a quick turnaround in profitability. Roughly 25 M&A
deals have occurred since 2012 in the entire restaurant industry, a pace that has been
increasing in order to lock in lower interest rates. Most recently, Bloomin’ Brands has
announced the sale of its Roy’s brand to a Dallas-based Applebee’s franchisee.
Barriers to Entry
The barriers to entry for the casual dining restaurant industry are low. The ability to franchise
allows for the easy transition of equipment, training, and marketing from a corporate to
franchisee level. Franchising allows inexperienced ownership a lower operating cost and
favorable financial risks in operating a restaurant. Although the industry is highly regulated
with regards to food quality and health concerns, there are no extraordinarily restrictive
barriers. The most significant barrier entry is competition for prime restaurant locations.
International Growth
The saturated domestic market is driving the industry to expand abroad. International
expansion is favorable as the average global consumer has seen increases in wealth. Full
Service restaurants are projected to account for 50% of all international food service growth
from 2014 to 2018 (see Figure 8). Firms in the industry have varied their approach to
international operations, choosing either to franchise, engage in a joint venture, or own the
restaurant themselves. Bloomin’ Brands projects 30% of its future revenue will come from
international operations. As a comparison, international sales currently account for 13.4% of
revenue (see Figure 9). In terms of future growth, casual dining restaurants that successfully
capitalize on international locations will see large gains in both revenues and profits.
Outback
Steakhouse
753
Bloomin'
International 277
Carrabba's
244
Bonefish
Grill 201
Fleming's 66
-5%
-3%
-1%
1%
3%
5%
%Change Revenue
% Change Employment
-5%
-3%
-1%
1%
3%
5%
%Change Revenue
% Change Consumer Spending
Full Service
Restaurants 50%Fast Food 30%
Other
20%
5. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 4
Figure 9: 2014-YTD BLMN Sales Mix
Source: Company Data
Figure 10: Five Forces Model
Source: Team’s Analysis
Figure 11: Industry Market Share
Source: Bloomberg
Figure 12: Average Check Comparison
Source: Company Data
Competitive Positioning
Bloomin’ Brands operates in a highly competitive industry (see Figure 10) and is the fourth
largest restaurant company by market share with 4% of the market (see Figure 11). Bloomin’
Brands is favorably positioned within the casual dining restaurant industry largely due to its
diversified portfolio of brands. Diversification allows it to compete in several restaurant
segments including: seafood, steak, fine dining, and Italian. Different food offerings,
expressed through each themed restaurant, protect against changing consumer preferences
and dietary trends. A history of high quality food and service dating back to 1987 has
produced a strong brand awareness which helps to distinguish BLMN from new competitors.
Average Check Reduction Adds Consumer Value
Outback Steakhouse has been able to provide value to customers by decreasing the average
check size relative to its peers. Since 2008 Outback average checks have dropped 9.1% from
$22 to $20. Over the same time span competitors’ average checks have risen (see Figure 12).
The brand has been able to capitalize by widening the menu with smaller portioned items
and giving more choices to the consumer. Bloomin’ Brands has been increasing Outback
menu prices by 2% annually, but consumer preferences towards smaller menu items has
driven down the average check.
Promotions
Bloomin’ Brands’ management has stated their intent to reduce many of the company’s
promotions in response to improved economic conditions. Most notably, the removal of
Bonefish Grill’s Bang Wednesdays. Increased consumer spending has reduced the need for
promotional prices to drive traffic. The goal is to create a regular customer base not driven
by promotions and to maintain traffic while increasing revenue.
Investment Summary
Recommendation
We issue a BUY recommendation on Bloomin’ Brands, Inc. (BLMN) with a price target of
$26.28. Using a blend of the discounted cash flow model and a forward Price to Earnings
multiple, the valuation offers an 11.85% upside from the December 19th
, 2014 closing price
of $23.50. Bloomin’ Brands’ upside strength results from superior sales growth, margin
improvements, and strong growth in operating cash flow. Additionally, significant brand
recognition improves firm value by allowing for successful expansion both domestically and
internationally.
Sales Growth Substantially Outpacing the Industry Average
Since 2010 Bloomin’ Brands’ annual comp store sales have outperformed the Knapp-Track
by an average of 2.9% (see Figure 13). Going forward, management expects this trend will
continue at a 2% pace. The gap to the Knapp-Track is accomplished through successful
restaurant expansion, addition of lunch, renovations and relocations, and innovative menu
updates.
Expanding Domestic and International Locations – Bonefish Grill restaurant unit growth
is the top domestic expansion priority. Bloomin’ Brands projects expansion of over 150
locations in the next four to six years. Restaurant unit ROI ranges from 3%-12%
depending on restaurant concept, with management noting that Bonefish provides the
highest ROI.
Internationally, Bloomin’ Brands’ focus is on leveraging local expertise from established
expansion in Brazil and South Korea into additional international markets. Target
markets include China, other Asia-Pacific countries, Mexico, and the Andean Cluster. The
international sales CAGR for full service restaurants is 6% compared to the U.S. rate of
4.1%. Given the current international growth rate being 1.5x the U.S. rate, future growth
will likely depend on expanding abroad. Expectations are that international revenue will
increase with a CAGR of 13.9% and comprise approximately 18.5% of total revenue by
2019.
Lunch Rollout - Bloomin’ Brands has already added lunch to half of Outback Steakhouse
locations and will bring lunch to the remaining half of by Q2 of 2015 to coincide with a
national lunch advertising campaign. Applying current market share ratios, Bloomin’
International 13.4%
Domestic 86.6%
437
2823
1
2
3
4
5
Substitutes
Competitive
Rivalry
Threat of New
Enterants
Buyer Power
Supplier Power
Darden 11%
Dine
Equity 9%
Brinker 5%
Bloomin'
Brands 4%
Cracker
Barrel 3%
Cheesecake Factory 2%
Other 66%
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
2008 2014
6. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 5
Figure 13: Comp Store Sales vs Knapp
Source: Company Data & Knapp Track
Figure 14: Productivity Savings
Source: Company Data
Figure 15: Net Debt / EBITDAR
Source: Company Data & Team’s Analysis
Figure 16: CMBS Loan Info
Source: Company Data
Figure 17: Pricing
Source: Team’s Analysis
Figure 18: DCF Price Calculation
Source: Team’s Analysis
Brands expects to add $1.4 billion of top line growth from the $25.4 billion CDR lunch
segment. The lunch rollout will include over 70 additional combinations to the menu
helping to drive the projected 85% lunch incremental sales.
Renovations and Relocations – Interior remodels of Outback Steakhouse were
completed in 2014, along with 40% of Carrabba’s. Remodels consist of a refreshed
contemporary interior and have resulted in a 3% traffic lift. The remodeling program
will continue with updated exterior designs. Focus is now on driving additional traffic
by relocating legacy restaurants from non-prime to prime locations within the same
trade area. Management has identified over 100 such relocation opportunities with
positive initial tests.
Health Conscious Menu Updates – BLMN has taken advantage of the shift in consumer
preferences towards healthier dieting and has implemented health conscious menu
items. The company plans to launch additional items under 600 calories for higher
customer retention as well as penetration into a new target market.
Improving Margins Create Profitability Opportunity
A cornerstone of Bloomin’ Brands’ turnaround under Bain’s private control was margin
improvement. Specifically, centralized purchasing reduced the cost of sales. Since the IPO
the company has targeted $50 million in annual savings through creating efficiencies and has
achieved a cost savings of over $330 million since 2008 (see Figure 14). Bloomin’ Brands’
operating margin is still 200 bps below the industry average representing potential upside
for the future as margins continue to improve.
Dividend and Share Repurchase Announcement
On December 16, 2014 Bloomin’ Brands announced a $0.24 per share dividend representing
a 1% yield. In addition, the company instituted a $100 million share repurchase program to
be carried out over the next 18 months. Free cash flow growth has allowed Bloomin’ Brands
to begin returning value to shareholders while simultaneously paying down debt. The
announcement prompted S&P to upgrade the rating on Bloomin’ Brands debt to BB.
Achievable Optimal Capital Structure
Bloomin’ Brands has stated its optimal capital structure is approaching 3.0x adjusted net
debt / adjusted EBITDAR (see Figure 15). The current ratio is 4.0x. Despite the recent
dividend and share buyback announcement, our forecast shows Bloomin’ Brands can
maintain 2013 debt pay down levels. The result is that BLMN can achieve a 3x adjusted net
debt / adjusted EBITDAR in 2019. Bloomin’ Brands debt rating is expected to be upgraded to
investment grade as its capital structure reaches optimal levels.
CMBS Maturation Gives Bloomin’ Brands Options
Bloomin’ Brands has $473 million of 6.3% Commercial Mortgage-Backed Securities with a
maturation date of April 2017 (see Figure 16). Bloomin’ Brands has the opportunity to
refinance the loans at a lower rate, due to its improved corporate credit rating. Additionally,
it can sell the assets to a third party and lease them back. Execution of either option will
provide the company with cost savings relative to the current situation.
Valuation
Our intrinsic valuation for Bloomin’ Brands is derived from two models: Discounted Cash
Flow (DCF) and Price - Earnings Multiple analysis.
DCF Model: Free Cash Flow to Firm (FCFF) Valuation
Using a DCF model forecasting free cash flow to the firm, we derived a valuation of $26.89
(see Figure 17, 18). Our rationale for using FCFF in the model is the following:
BLMN’s capital structure is still heavily influenced by the leveraged buyout, and its
Debt/EBITDAR of 4.0 is above the desired level of approximately 3.0. FCFF does not
account for principal and interest payments and is calculated to arrive at the cash
available to the firm's debt and equity holders.
FCFF also considers the time value of money and accounts for investment in future
growth opportunities, which is an important component of the company’s value
-2%
0%
2%
4%
6%
2010 2011 2012 2013 2014
Growth
BLMN
Knapp
2.9% Average Outperform
$0
$20
$40
$60
$80
2008
2009
2010
2011
2012
2013
2014E
Savings($M)
$330 (M) Cumulative
6.1
5.4
4.4
4.1 4.0 3.9
3.6
3.4 3.2 3.0
2
3
4
5
6
7
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Optimal Capital Structure
Current
Optimal
2012 CMBS Loans
Outstanding
Balance (0,000)
Interest
Rate
Mortgage Loan 301,859 4.07%
First Mezzanine Loan 85,392 9.00%
Second Mezzanine Loan 86,240 11.25%
Total 2012 CMBS Loans 473,491
Price Target $26.28
Current Price $23.50
Upside 11.85%
BLMN
Enterprise Value 4,578
Less: Debt (1,370)
Add: Cash 161
Equity Value 3,369
Shares Outstanding 125
DCF Value Per Share $26.89
7. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 6
Figure 19: Sales Forecast ($M)
Source: Team’s Analysis
Figure 20: Cost of Equity Calculation
Source: Yahoo & Team’s Analysis
Figure 21: Multiple Comparison
Source: Bloomberg
Figure 22: FWD P/E since IPO
Source: Bloomberg
Figure 23: BLMN Forecasted EPS
Source: Team’s Analysis
Sales Forecast
We forecasted revenue using comparable store sales and new store sales by individual
restaurant concept. Comp store sales imply a blended comp store sales growth of 2.2% for
2015 and 2.1% for 2016-2019. Our growth forecast anticipates BLMN to continue to outpace
the Knapp by 200 bps based on historical outperformance. New store sales are expected to
rise 12.5% annually with nearly 90% attributed to Bonefish and International locations. The
result is a revenue CAGR of 4.9% (see Figure 19). Further breakdown of projected revenue
can be found in Appendix 7 and Appendix 8.
Operating Margin
We expect the company’s commitment to creating efficiencies will help to protect and
improve operating margins from 5.5% in 2015 to 6.7% in 2019.
Cost of Goods Sold - Commodity inflation is expected to rise from 3% in 2014 to 4-6% in
2015 and will scale back to 3% for subsequent years. To mitigate the risk of increasing
commodity prices, BLMN has locked in 80% of its commodity prices through futures
contracts. The national rollout of lunch will impact margins due to lack of alcohol sales
and lower prices. We assume the implementation of inventory management will help to
offset the cost increases, resulting in 25% of total productivity savings and will improve
COGS margin by 10 bps in 2015, and 20 bps in 2016 and 2017.
SG&A - We modeled SG&A and other operating expenses to be 57.9% of sales in 2015,
57.7% in 2016, and 57.5% thereafter. Margin improvements are expected to come from
labor optimization and lunch efficiencies due to increased utilization. We do not expect
the Affordable Healthcare Act to have significant effect on margins as BLMN already
provides healthcare for employees.
Change in Net Working Capital
We analyzed historical working capital components as a percentage of sales resulting in a
net factor of -6.09%. We multiplied this factor by the projected change in sales to derive
future changes in net working capital. Historically, as sales have increased, net working
capital has become increasingly negative. We expect this trend to continue.
Capital Expenditures
CAPEX is expected to be the midpoint of management guidance of $235-290m in 2015 and
$270-290m thereafter. We anticipate net new store openings to be 33 in 2015, followed by
48 annually through 2019. 50% of openings are expected to be international. Additionally,
an increased focus on remodels and relocations is driving up CAPEX.
Weighted Average Cost of Capital
Cost of Equity of 8.34% was derived from CAPM using the 30-year Treasury of 2.76% as the
risk-free rate, a market risk premium of 5.7%, and a 0.98 beta calculated by regressing BLMN
excess returns against the S&P 500 (see Figure 20). We used a 4.88% pre-tax cost of debt to
compute a WACC of 6.63%
Terminal Value
We projected a 2.3% perpetual growth in FCFF for BLMN. Over the past five years the casual
dining industry growth rate of 2.1% has lagged behind GDP. Going forward, we expect this
trend to continue due to the mature stage of the industry. Our 2.3% estimate is below
forward GDP of 2.5% while still accounting for Bloomin’s Brands’ track record of outpacing
the industry and its plans for international growth.
Price – Earnings Multiple Valuation
We used a Price – Earnings multiple consistent with the street’s valuation of the company. A
peer average next twelve month P/E of 20.82 was used to calculate a price of $25.38 (see
Figure 21). The 20.38 multiple used offers a premium versus the historical average of 18.63
(see Figure 22). The premium is warranted based on the earnings growth outlook and the
similar valuation of comparable peers (see Figure 23).
Model Weightings
Given the discrepancy between the multiple and DCF valuations, we used a 60/40 weighting
in favor of the DCF. BLMN is a mature company with a steady cash flow stream and is
conducive to DCF valuation. The blend is the best representation of the true equity value of
the firm as it combines forward looking company projections with the firm’s position against
its peers (see Figure 24).
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2015 2016 2017 2018 2019
4.9% CAGR
Risk Free Rate 2.76%
Beta 0.980
Market Risk Premium 5.7%
Cost of Equity 8.34%
P/E Ratio
(NTM)
EV/EBITDA
(1-Yr FWD)
BLMN 19.573 9.570
EAT 18.609 9.827
DRI 22.795 12.215
CAKE 21.295 10.374
TXRH 24.213 12.089
DIN 18.453 11.934
Average 20.823 11.002
10
15
20
25
Sep-12 Sep-13 Sep-14
Average = 18.63
$1.23
$1.47
$1.71
$1.87
$2.04
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
2015 2016 2017 2018 2019
13.43%
CAGR
8. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 7
Source: Company Data
Source: Company Data
Source: Company Data
Source: Company DataSource: Bloomberg &Company DataSource: Bloomberg &Company Data
Figure 24: Price Target Calculation
Source: Team’s Analysis
Risk to Price Target
Domestic casual dining industry growth is expected to be -2% to 0% and a macro-driven
slowdown in industry traffic could push growth rates lower than the current soft
estimates. Should this occur, Bloomin’ Brands’ revenue would be adversely affected
negatively impacting our price target.
While we assume that remodels and lunch rollout will help to drive domestic comp sales,
there is a risk that these initiatives could result in lower than expected traffic.
We expect the company to aggressively expand internationally. Failure to expand due
to overseas factors could limit international growth.
Less than expected productivity cost savings can also adversely affect our Price Target.
Financial Analysis
Balance Sheet Structure
Management’s commitment to grow Bloomin’ Brands and pay down debt is
reflected in the structure of its balance sheets. In 2012, BLMN had $3,017
million worth of assets, which included $261.7 million in cash and cash
equivalents (see Figure 25). Liabilities were $2,797 million which included
$1,494 in total debt (see Figure 26). $220.2 million in equity, translated into a
Debt/Equity ratio of 6.79, a current ratio of 0.71, a quick ratio of 0.38, and
negative net working capital (NWC) of $203.6 million (see Figures 27, 30). In
2013 total assets rose to $3,274 million with $129.9 million in cash and cash
equivalents. Net PP&E increased by 8.51%, to $1,634 million. Debt decreased
to $1,419 million and total liabilities were $2,770million. Equity was $504.7
million, which translated to a Debt/Equity ratio of 2.81, a current ratio of 0.65,
a quick ratio of 0.28, and a deficit of $260.5 million in NWC.
By the third quarter 2014, BLMN reported $3,234 million in assets. Current
assets were $451.5 million; this included $144.7 million in cash and cash
equivalents. Net PP&E accounted for $1,640 million, a 1.43% increase from
the previous year. The rate of increase was reduced by the closure of 34 units
primarily in South Korea. Liabilities amounted to $2,640 million, with $1413
million in debt. The owners’ equity balance was $569.9 million, which
translated to a Debt/Equity ratio of 2.48, a current ratio of 0.66, and a quick
ratio of 0.21. NWC was negative $233.4 million.
Since the 2012 IPO, the company has been reducing debt levels incurred by
the 2007 LBO as well as expanding operations shown by increases in net PP&E.
Over the past three years, the result is a steady increase in assets with a CAGR
of 3.8%. Commitment to paying down debt has resulted in consistent
improvement of BLMN’s debt to equity ratio. Debt to equity has declined from
6.68 to 2.41 since 2012, largely from increases in equity through retained
earnings.
Bloomin’ Brands continues to operate with negative net working capital, a
common occurrence in the industry. The cash conversion cycle improved from
-11 Days in 2012 to -39 Days in 2014-YTD due to faster inventory turnover and
a lower payables turnover. The current ratio is below the peer average and is
declining with the industry trend over the past three years. BLMN’s quick ratio
was able to match its peers in 2014-YTD. This trend indicates the company is
holding less non-cash current assets than its competitors (see Figures 28, 29).
Price Weight P x W
DCF $26.89 60% $16.13
Multiple $25.38 40% $10.15
$26.28Price Target
0.1
0.3
0.5
0.7
2010 2011 2012 2013 2014-YTD
Peers
BLMN
Figure 29: BLMN Quick Ratio vs Peers
-120.1
-248.1
-203.6
-260.5 -255.4-300
-250
-200
-150
-100
-50
0
2010 2011 2012 2013 2014-YTD
Figure: 30: Net Working Capital ($M)
2147 2084.8
1494.4 1419.1 1413.1
0
500
1000
1500
2000
2500
2010 2011 2012 2013 2014-YTD
Figure 26: Total Debt ($M)
3016.6
3274.2 3234.3
2796.3 2769.5
2639.9
220.2
504.7 569.9
1400
1500
1600
1700
0
1000
2000
3000
2012 2013 2014-YTD
PP&E
Figure 25: Balance Sheet ($M)
Assets Liabilities Equity PP&E
Figure 27: Key Financial Ratios
0.6
0.7
0.8
0.9
1
2010 2011 2012 2013 2014-YTD
Peers
BLMN
Figure 28: BLMN Current Ratio vs Peers
2012 2013 2014-YTD
Debt to Equity 6.79x 2.81x 2.48x
Current Ratio 0.71x 0.65x 0.66x
Quick Ratio 0.38x 0.28x 0.21x
Cash Conversion Cycle -11.4 Days -18.8 Days -39.1 Days
9. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 8
Source: Company Data
Source: Company Data
Source: Company Data
Source: Company Data
Revenues and Profitability
From 2010 to 2014-Q3 revenue increased 21.5% and grew with a CAGR of 4.1%.
In 2011 revenue rose by 5.87% to $3,841 million. Gross profit margin was
slightly lower from the previous year at 68.08%. EBITDA margin improved to
9.56% due to lower SG&A costs (see Figure 32). The year ended with a net
income of $100 million and earnings per share of $0.94, almost twice the
previous year’s EPS (see Figure 31).
In 2012 top line grew by 3.81% from the previous year and totaled $3,988
million. Margins were slightly lower compared to the previous year, primarily
due to costs associated with the IPO. EBIT margin shrank to 4.54% from 5.56%
in 2011. However, gross profit margin and SG&A as a percent of sales changed
far less indicating that the drop stemmed from non-operating items. 2012’s net
Income of $50 million was half of 2011’s level, primarily due to $42.1 million IPO
expenses. Lower earnings resulted in an EPS of $0.44 per share.
Revenue amounted to $4,129 million
in 2013, a 3.55% increase from
2012. Acquiring a controlling
interest in Brazilian joint ventures
added the sales of 69 additional
restaurants to 2013 revenue. Both
EBITDA and EBIT margins improved
from the prior year. Net Income of
$208.4 million translated to an EPS
of $1.63 per share. Net Income
Margin jumped to 5.05% from
1.25% in the previous year due to an
Income tax benefit of $42.2 million.
The tax benefit was the result of a
release of a valuation allowance.
2014-YTD revenue is $3,334 million, an increase of 8.3%
compared to Q1-Q3 of 2013 (see Figure 32). However,
Gross Profit, EBITDA, EBIT, and Net Income margins are
lower than in 2013. Decreased margins are a result of
expenses related to the closure of 36 underperforming
restaurants, primarily located in South Korea. Net Income
of $68.7 million includes a Q3 net loss of $11.4 million,
resulting in an EPS of $0.54.
After analyzing the data for the noted 5 year period, we
conclude that revenue is growing. Gross Profit Margin is on
a slight downward trend; however, EBITDA and EBIT
margins have fluctuated over the period through improved
management of SG&A. Interest coverage ratio has
remained above 1.7 throughout the period indicating
sufficient operating income generation to satisfy interest
expense (see Figure 33). Net Income margin has improved
over the time span along with EPS as the company has
become more profitable.
Profitability and Growth
From 2010 to 2014-Q3, top line growth and profitability improvements translated into positive returns for ROE, ROA, and ROIC
(See Figure 34). ROIC has been consistently above the WACC of 6.63% indicating BLMN is creating value with its invested capital.
Retained Earnings
In 2010 retained earnings were -$922.6 million and has increased to its current level of -$497.3 million. Retained earnings has
consistently increased from 2010 to 2014-YTD due to the accumulation of positive net income (see Figure 35). As shown in Figure
35, the spread between operating income and net income is decreasing. The decline is primarily due to reduced interest expense
as BLMN continues to pay down debt accelerating retained earnings growth.
Figure 32: Revenues and Margins
$0.50
$0.94
$0.44
$1.63
$0.54
$0.00
$0.50
$1.00
$1.50
$2.00
2010 2011 2012 2013 2014-YTD
Figure 31: Historical Diluted EPS
2.56
2.09
1.71
3.32
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012 2013 2014-YTD
Figure 33: Interest Covearge Ratio
Figure 34: Profitability Ratios
For the Fiscal Year 2010 2011 2012 2013 2014-YTD Trend
Total Revenue 3628.3 3841.3 3987.8 4129.2 3,334.2
Growth Over Prior Year 0.70% 5.87% 3.81% 3.55% 8.30%
Gross Profit 2476.3 2615.2 2706.8 2795.4 2,253.4
Gross Profit Margin, % 68.25% 68.08% 67.88% 67.70% 67.59%
EBITDA 322.0 358.8 304.2 405.0 280.6
EBITDA Margin, % 8.87% 9.34% 7.63% 9.81% 8.42%
EBIT 168.9 213.5 181.1 225.4 151.3
EBIT Margin, % 4.66% 5.56% 4.54% 5.46% 4.54%
Net Income 53.0 100.0 50.0 208.4 68.7
Net Income Margin, % 1.46% 2.60% 1.25% 5.05% 2.06%
2010 2011 2012 2013 2014-YTD Trend
ROE 23.32% 43.56% 11.85%
ROA 1.63% 2.98% 1.66% 6.36% 2.12%
ROIC 9.74% 14.62% 14.28% 23.90% 8.85%
10. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 9
Source: Company Data
Source: Company Data
Source: Company Data
Since 2012 Bloomin’ Brands has maintained an Altman’s Z-
Score above the distress level of 1.8. Furthermore, BLMN
has raised the score above 2 and has maintained a range of
2.1-2.4 since the IPO. Retained earnings growth along with
increasing ROE, ROA, and ROIC has allowed the company
to stay solvent despite high debt levels (See Appendix 16).
Cash Flows and Profitability Analysis
Due to Bloomin’ Brands’ IPO in August 2012, the year
stands out in terms of cash flows. The company reported
$340.1 million in cash inflows from operations which were
heavily weighted by depreciation and amortization
amounting to $155.5 million (see Figure 36). BLMN
reported positive cash flow from investing activities of
$19.9 million. This inflow was a result of $192.9 million
from the sale of 67 restaurant properties in a sale-
leaseback transaction. The inflow was offset by a 48%
growth in CAPEX totaling $178.7 million. Cash outflow from
financing activities was $586.2 million. BLMN issued $142.2
million of common stock and reduced long-term debt by
280.4 million in part by refinancing its large debt position.
In 2013 cash flow from operations totaled $377.3 million.
In comparison to 2012, CFO growth of 10.9% outpaced
depreciation which grew only 5.5% to $164.1 million. Cash
outflow from investing increased to $346.1 million as
capital expenditures rose 32.7% due to acquisitions of
controlling interest in Brazilian joint ventures. Cash flow
from financing returned to a pre IPO level of $87.1 million,
with $80.8 million coming from repayment of LTD. As a
result, the company had net cash outflow of $51.8 million.
By the third quarter of 2014, BLMN reported $159.5 million
in cash flow from operations effected by Q3’s net loss of
$11.4 million. For the same period, BLMN reported a
change in unearned revenue totaling $134.5 million as a
result of gift card redemptions and promotional sales.
Capital expenditures were $174.4 million. Cash outflow
from financing of $48.9 million included the refinance of
$415.0 million in debt. In summary, BLMN’s cash position
has declined over the past 5 years as the company has
aggressively used cash for expansion and debt repayment. This trend is
consistent with the company’s continued commitment to growth as it
expands its store base. Despite the steady decline in cash, the need for a
capital infusion is not expected.
Free Cash Flow and Capital Expenditures
From 2010 through 2013 BLMN heavily invested in capital expenditures.
However, FCFF has been relatively steady throughout the period due to
growth in operating cash flow (see Figure 37).
Figure 38: Knapp CDR Traffic Trend
Investment Risks
Return to Industry Average in Sales Growth and Traffic
The ability to continuously outperform the Knapp Track in comp stores sales growth and
traffic is a core component of Bloomin’ Brands’ value. Should Bloomin’ Brands fail to outpace
the declining industry, cash flow generation will be reduced. Risks to comp store sales growth
include: shifting consumer preferences, failure to maintain high service standards, and
failure to keep brand awareness at current levels. Figure 38 shows industry traffic through
2014.
-5.60%
-2.50%
-0.40%
-1.50%
-2.80%
-2.90%
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
2009 2010 2011 2012 2013 2014
Source: Knapp Track
168.9
213.5 181.1
225.4
151.3
53.0
100.0
50.0
208.4
72.0
-922.6
-822.6
-773.1
-565.2
-497.3
-1000.0
-800.0
-600.0
-400.0
-200.0
0.0
200.0
400.0
2010 2011 2012 2013 2014-YTD
Operating Income Net Income Retained Earnings
Figure 35: Operating and Net Income Relationship ($M)
275.2 322.5 340.1 377.3
159.5
-71.7 -113.1
19.9
-346.1
-176.0-167.3
-89.3
-586.2
-87.1 -48.9
-600.0
-400.0
-200.0
0.0
200.0
400.0
2010 2011 2012 2013 2014-YTD
Cash Flow from Operations Cash Flow from Investing
Cash Flow from Financing
Figure 36: Statement of Cash Flows ($M)
0
50
100
150
200
250
2010 2011 2012 2013
CAPEX
FCFF
Figure 37: FCFF & CAPEX ($M)
11. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 10
Figure 39: Target Future Revenue Mix
Source: Company Data
Figure 40: Beef Prices and Future Contracts
(2012-17)
Source: Capital IQ
Figure 41: Monte Carlo Statistics
Source: Team’s Analysis
Increased International Focus
Bloomin’ Brands revenue growth from international operations grew 57.6% from 2013 to
2014 and will account for approximately 12% of total revenue in 2014. Management has
reiterated that future growth will largely come from expansion into international markets,
specifically Brazil and China, with a goal to achieve 30% of total revenue from abroad (see
Figure 39). International operations face additional and magnified risk factors including:
political instability issues, currency exchange fluctuations, changing government regulations,
sociocultural differences, ad commodity sourcing. Failure to execute as planned in
international markets could cause Bloomin’ Brands to underperform revenue targets.
Commodity Inflation Expansion
Food and beverage composes 33% of Bloomin’ Brands total costs. Of food and beverage
costs, beef accounts for 28% followed by produce at 12% and seafood at 11%. Bloomin’
Brands portfolio is heavily weighted towards Outback Steakhouse at 63% with future
international growth plans consisting primarily of new Outback locations. A significant rise
in beef commodity prices will have a negative impact on Bloomin’ Brands’ future margins
and earnings (see Figure 40).
Lunch Fails to Meet Expectations
To reach its projected $1.4 billion lunch sales goal, Bloomin’ Brands will have to overcome
being a late entrant into the lunch segment. Raising consumer awareness will entail a costly
marketing campaign which may not be able to overcome consumer’s view of the brand as a
dinner only option. Furthermore, consumer preferences for lunch have shifted towards
lighter and quicker meal options as evidenced by the growth of fast casual restaurant sales.
Leverage
Bloomin’ Brands is highly leveraged with a Q3 2014 debt to equity ratio of 2.48x. Despite
Bloomin’ Brands commitment to paying down debt, high leverage poses certain risks:
Interest Rate Risk - A portion of CMBS long term debt ($48.7 million) and the Senior
Secured Credit Facilities Loan ($935.0 million) carry variable interest rates. A rise in
interest rates would cause a substantial increase in the company’s interest expense and
could possibly restrict further financing.
Strategic Flexibility – BLMN’s high rate of leverage carries with it certain covenants. The
ability to increase borrowings to capitalize on future market opportunities such as
strategic acquisitions or divestitures is restricted by debt covenants and the overall
burden of debt.
Monte Carlo Analysis
A Monte Carlo Simulation was preformed to test the sensitivity of our terminal value and
model weighting assumptions (see Figure 41). The mean, median, and mode of the
distribution were above the current price and the probability of generating a sell rating was
only 3.8%. These results confirm our buy rating. See Appendix 11 for additional information
on the simulation.
Sensitivity to Earnings Announcements
All three major price moves in 2014 have come from earnings releases. The three earnings
announcements caused an average absolute price change of 18.5% (see Figure 42). Going
forward, a disappointing earnings announcement could significantly reduce the stock price
and require a long holding period to recover the one-day loss.
International 30%
Domestic 70%
30
40
50
60
Cattle - Live (BMF)
Historical Pricing
Cattle - Live (BMF)
Future Contracts
Number of Samples 10,000
Mean 27.14
Median 25.99
Mode 25.36
Sell 3.8%
Hold 44.5%
Buy 51.8%
Monte Carlo Statistics
0
5000
10000
15000
20000
10
15
20
25
30
Jan-14 Apr-14 Jul-14 Oct-14
Volume Price
Q2 2014Earnings
Q3 2014EarningsQ4 2013 Earnings
Figure 42: Earnings Announcement Effect on Stock Price
Source: Yahoo Finance
21. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 20
Appendix 9: DCF Model and Valuation Summary
Source: Team’s Analysis
0 1 2 3 4 5
2014 2015 2016 2017 2018 2019
EBIT*(1-t) 186.6 211.4 237.8 254.9 273.3
Depreciation 193.2 199.4 205.0 210.0 214.6
Change in NWC 8.3 15.2 15.9 16.5 17.2
CAPEX (255.0) (280.0) (280.0) (280.0) (280.0)
FCFF 133.1 146.1 178.7 201.5 225.0
Terminal Value 5,318.0
PV factor @ 6.63% 0.938 0.880 0.825 0.774 0.725
Discounted Cash Flows 124.8 128.5 147.4 155.8 4,021.4
Enterprise Value 4,578
Less: Debt (1,370)
Add: Cash 161
Equity Value 3,369
Shares Outstanding 125
DCF Value Per Share $26.89
WACC 6.63%
Terminal Growth Rate 2.3%
Risk Free Rate 2.76%
Beta 0.980
Market Risk Premium 5.7%
Cost of Equity 8.34%
Kd 4.88
Tax Rate 38.8%
A-T Cost of Debt 2.99%
Market Cap 2944.3 68.0%
Marked Value of Debt 1386.4 32.0%
WACC 6.63%
Current Price $23.50
Industry P/E (NTM) 20.823
BLMN EPS (NTM) $1.22
Multiple Share Price $25.38
DCF Share Price $26.89
Multiple Weight 40%
DCF Weight 60%
Price Target $26.28
Upside / (Downside) 11.85%
22. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 21
Appendix 10: Weighted Average Cost of Capital Assumptions
23. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 22
Appendix 11: Monte Carlo Simulation
A Monte Carlo Simulation was preformed to test the sensitivity of our terminal
value and model weighting assumptions. We simulated 10,000 analysts valuing
Bloomin’ Brands using randomly generated inputs for the terminal value growth
rate as well as the model weightings. The terminal value selected was based on a
normal distribution with a mean of our assumption of 2.3% and a standard
deviation of 1.0%. This distribution assumes that 99.7% of terminal growth rates
chosen fall between -0.7% and 5.3%. The simulation then chooses a weight for the
DCF model based on a normal distribution with a mean of 50% and a standard
deviation of 16.67%. This distribution assumes that 99.7% of weights fall between
0% and 100%. The simulation generated a distribution of price targets with a
mean of $27.14, a median of $25.99, and a mode of $25.36. 3.8% of the prices
indicated a Sell rating, 44.5% indicated a Hold rating, and 51.8% indicated a Buy
rating. The simulation confirms the legitimacy of our $26.28 price target and Buy
rating.
Source: Team’s Analysis
0
5
10
15
20
25
16.17
19.07
20.02
20.64
21.15
21.61
22.08
22.54
23.00
23.46
23.92
24.38
24.84
25.30
25.76
26.22
26.68
27.14
27.60
28.06
28.52
28.99
29.45
29.92
30.40
30.86
31.34
31.82
32.34
32.87
33.40
33.96
34.60
35.16
35.88
36.54
37.28
38.18
39.21
40.73
42.72
44.74
49.07
55.02
Monte Carlo Simulation
Mean $27.14
Median $25.99
Mode $25.36
STDEV $5.23
Max $111.11
Min $16.17
Condition Results Percentage
Below - $23.50 1884 18.8%
Above - $23.50 8116 81.2%
Total 10000 100.0%
Sell - $21.05 376 3.8%
Hold 4448 44.5%
Buy - $25.85 5176 51.8%
Total 10000 100.0%
24. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 23
Appendix 12: Adjusted Net Debt to Adjusted EBITDAR Reconciliation
Source: Company Data & Team’s Analysis
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net (loss) Income Attributable to Bloomin' Brands 53.0 100.0 50.0 208.4 105.4 150.9 178.4 206.9 226.3 246.8
(Benefit) Provision for Income Tax 21.3 21.7 12.1 (42.2) 35.1 53.0 66.0 76.5 83.7 91.3
Interest Expense, net 91.4 83.4 86.6 74.8 58.3 48.3 45.3 42.3 39.2 36.2
Depreciation and Amortization 156.3 153.7 155.5 164.1 192.3 193.2 199.4 205.0 210.0 214.6
EBITDA $321.96 $358.80 $304.20 $405.03 $391.13 $445.36 $489.04 $530.76 $559.23 $588.88
Adjusted EBITDA $338.90 $361.48 $396.31 $440.49 $470.11 $502.88 $550.28 $595.56 $626.46 $658.64
Rent 126.6 128.532 144.3 156.3 171.9 189.1 208.0 228.8 251.7 276.9
Adjusted EBITDAR $465.48 $490.01 $540.58 $596.79 $642.04 $692.01 $758.32 $824.40 $878.18 $935.53
Total Debt, Net of Discounts 2,147.0 2,084.8 1,494.4 1,419.1 1,369.7 1,288.9 1,208.1 1,127.3 1,046.5 965.7
Less: Cash 365.5 482.1 261.7 209.9 160.7 115.3 117.0 186.5 280.5 399.9
Net Debt $1,805.99 $1,627.21 $1,232.75 $1,209.27 $1,209.00 $1,173.56 $1,091.06 $940.81 $765.96 $565.77
Capitalized Rent 1,012.6 1,028.3 1,154.2 1,250.4 1,375.4 1,513.0 1,664.3 1,830.7 2,013.8 2,215.2
Adjusted Net Debt $2,818.61 $2,655.46 $2,386.97 $2,459.68 $2,584.44 $2,686.54 $2,755.34 $2,771.52 $2,779.74 $2,780.93
Adjusted Net Debt / Adjusted EBITDAR 6.1 5.4 4.4 4.1 4.0 3.9 3.6 3.4 3.2 3.0
25. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 24
Appendix 13: Macroeconomic Factors
U.S. GDP
On December 23, 2014, the Bureau of Economic Analysis (BEA) released this year’s revised third quarter Gross Domestic Product
Report. The estimate revealed a 5.1% annual growth rate. For comparison, in the second quarter there was an estimated annual
growth rate measure of 4.6%. There is a noted upward trend in GDP growth compared to recessionary levels and we anticipate
this trend to continue going into the 2014 Q4.
U.S. Unemployment
As of November 2014, the U.S. unemployment rate is 5.8%. The unemployment levels have gradually improved month over month.
The consumer has contributed to the noted growth in GDP levels. The uptick in GDP has been a factor in the growth of U.S.
employment levels. The 5.8% unemployment level points toward a more normalized economic situation compared to recessionary
highs of 9.8% in November 2009. Given the positive signs of growth, we anticipate for unemployment levels to keep moderately
improving and showing stability in a normalized economy.
Source: Capital IQ and Team’s Analysis
26. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 25
Consumer Confidence
The pattern in consumer attitudes and spending will have an influence on the casual dining industry. The more confident
consumers are about the economic situation, the more likely they are to spend on discretionary items. The consumer sentiment
report released on December 12, 2014 showed a robust 93.8 level. This is the strongest reading dating back to January 2007. The
current conditions and expectation components are signaling a rising confidence in future income and jobs for the U.S. economy.
Personal Income and Outlays
Income is the major determinant for consumer spending. Based on the current November 26, 2014 data release, the consumer
sector is slowly improving in the areas of income and spending. Personal income has increased 4.1% over the past year. The rise
in personal income is consistent with the 3.6% increase in consumer spending habits.
Source: Capital IQ and Team’s Analysis
27. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 26
Appendix 14: Competition Description
Darden Restaurants (DRI)
Darden is the largest casual dining restaurant chain in the industry measured by market cap and market share. Its market cap is
equal to $7.77 billion and accounts for 10.7% of total market share. Its family of restaurants includes: Olive Garden, Red Lobster,
LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s, and Yard House. Through subsidiaries, it owns
and operates more than 1,500 restaurants. It generates over $6.3 billion dollars in annual sales, and is headquartered in Orlando,
Florida. Darden employs more than 150,000 people and was recently included in Fortune’s “100 Best Companies to Work For”
list in 2014. DRI has made this list 4 years in a row. Darden caters to differing population segments and has the ability to reach
many markets.
Dine Equity (DIN)
Dine Equity is the second largest dining restaurant chain in the industry measured by market share and the 9th largest measured
by market cap. Its market cap is equal to $1.92 billion and accounts for 8.2% of total market share. Dine Equity’s duo of restaurants
is Applebee’s and IHOP. Headquartered in Glendale, California, Dine Equity owns 3,600 restaurants throughout 19 countries
employing over 200,000 people. Dine Equity also collects revenue from 400 franchisees.
Brinker International (EAT)
Brinker International is the 3rd largest casual dining restaurant chain in the industry measured solely by market cap. Its market
cap is equal to $3.73 billion. Brinker International owns both Chili’s Grill & Bar and Maggiano’s Little Italy restaurant chains. It
was founded in Dallas, Texas and owns, operates, or franchises 1,593 restaurants.
Buffalo Wild Wings (BWLD)
Buffalo Wild Wings is the 4th largest casual dining restaurant chain in the industry measured solely by market cap. Its market cap
is equal to $3.391 billion. Buffalo Wild Wings owns only the Buffalo Wild Wings restaurant concept. It was founded in 1982, and
is headquartered in Minneapolis, Minnesota. It currently owns and operates more than 1,045 Buffalo Wild Wings restaurants in
the United States, Canada, and Mexico.
Cracker Barrel Old Country Store (CBRL)
Cracker Barrel is the 5th largest casual dining restaurant chain in the industry measured solely by market cap. Its market cap is
$3.263 billion. Cracker Barrel Old Country Store owns only the Cracker Barrel restaurants & gift shops. It is headquartered in
Lebanon, Tennessee and owns as well as operates 634 stores in 42 states.
Source: Company Data & Team’s Analysis
28. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 27
Appendix 15: Porter’s Five Forces
Threat of Substitutes
Highest force of the five. Frequency of substitutes is high. Home cooked meals can be substituted for casual dining.
Fast Casual Restaurants
Fast casual restaurants are a relatively new and fast growing concept within the restaurant industry. The segment is
positioned between fast food restaurants and casual dining restaurants and is considered to be a hybrid of the two
concepts. Meals range from $8 to $15 per person. The biggest fast casual dining restaurant chains are: Chipotle Mexican
Grill, Panera Bread, and Baja Fresh.
Quick Service Restaurants
Quick service restaurants have grown at a faster rate than any other segment in the restaurant industry. Prices of meals
range from $3 to $6 per person. Food is prepared in big quantities, is highly processed, and cooked using standard
cooking steps. McDonald’s is the leading example, followed by Subway and Starbucks.
Competitive Rivalry
Restaurant density is high in the industry. Products and services are similar in nature. This intense competition keeps prices
relatively low and competitive. Larger restaurants have an advantage because they can take advantage of economies of scale,
and this allows them to advertise more frequently, innovate new menu items or services, and increase their technology.
Threat of New Entry
There are low barriers to entry. Intense competition and high fixed costs are deterrents, but many entrepreneurs enter due to
sales having a high profit margin once the break-even point is reached. Large chain restaurants enjoy economies of scale, more
benefits from advertising due to higher amount of stores, better technology, and more real estate expertise.
Buyer Power
Buyers collectively do not have much of an impact on menu prices. Buyers are average citizens from a wide array of socioeconomic
backgrounds.
Supplier Power
There are many suppliers for all of the various commodities that the casual dining industry requires. None of these suppliers are
special in any way, and there are a wide array of suppliers for differing commodities. Supplier power is heavily dependent on the
restaurant’s location, and how close it is to a supplier. The closer the supplier is to the distribution chain, the more bargaining
power it has. Prices are locked in with hedge contracts to guarantee a stable commodity price for about a year.
Source: IBIS World, Company Data & Team’s Analysis
0
1
2
3
4
5
Substitutes
Competitive
Rivalry
Threat of New
Entry
Buyer Power
Supplier Power
29. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 28
Appendix 16: Altman’s Z-score
Since 2012, Bloomin’ Brands maintained an Altman’s Z-score above the distress level of 1.80 and over the past 7 quarters the
score has been kept above 2.0 with slight fluctuations within a range of 2.1-2.4, as shown on the graph below.
Altman’s Z-score components show an upward trend in tangible assets as BLMN has aggressively invested in capital expenditures
to expand its operations. Simultaneously, sales components reveal a similar upward trend, reflected in EBIT translating into gains
to the bottom line and retained earnings. For the same period, liabilities decreased as the company paid down debt. Therefore,
the Altman’s Z-score progression does not show a warning for default.
Source: Company Data & Team’s Analysis
Inputs 2014 Q3 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4
Tangible Assets 2,275.0 2,270.2 2,251.1 2,310.8 2,185.8 2,166.5 2,136.2 2,193.8 2,073.2 2,173.4 2,205.6 2,519.0
Working Capital (233.4) (232.3) (226.3) (260.5) (148.4) (110.2) (146.8) (203.6) (201.9) (47.2) (30.0) (248.1)
Retained Earnings (513.3) (498.5) (543.7) (591.6) (640.9) (662.8) (729.2) (787.9) (810.6) (781.5) (792.3) (845.0)
EBIT 183.4 214.1 218.5 225.4 247.8 206.8 187.6 181.1 188.5 221.1 213.2 213.5
Market Value of Equity 2,371.9 2,839.8 2,974.3 2,996.1 2,934.4 3,085.3 2,189.1 1,894.8 1,992.1
Total Liabilities 2,639.9 2,631.6 2,656.5 2,769.5 2,575.4 2,584.9 2,655.7 2,796.3 2,679.4 2,895.4 2,942.1 3,313.6
Sales 4,384.8 4,286.9 4,194.8 4,129.2 4,077.1 4,062.4 4,024.4 3,987.8 3,945.0 3,920.4 3,895.0 3,841.3
Altman's Z-score 2.29 2.42 2.40 2.26 2.43 2.42 2.11 1.88 1.98
2.29
2.42 2.40
2.26
2.43 2.42
2.11
1.88
1.98
1.50
1.70
1.90
2.10
2.30
2.50
2.70
2.90
2014 Q3 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3
Altman's Z-score
30. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 29
Appendix: 17 Ownership Summary
Source: Capital IQ
Type Common Stock Equivalent Held % of Total Shares Outstanding Market Value (USD in mm)
Institutions 87,460,786 69.6 2,077.20
Individuals/Insiders 2,614,321 2.08 62.1
VC/PEFirms (>5% stake) 18,307,782 14.57 434.8
Public and Other 17,278,111 13.75 410.4
Total 125,661,000 100 2,984.50
Institutional Ownership Type Common Stock Equivalent Held % of Inst. Ownership
Traditional Investment Managers 53,025,193 60.63
Hedge Fund Managers (<5% stake) 24,521,455 28.04
Family Offices/Trusts 7,139,544 8.16
Banks/Investment Banks 1,447,030 1.65
VC/PEFirms (<5% stake) 596,973 0.68
Charitable Foundations 399,296 0.46
Government Pension Sponsors 328,626 0.38
Union Pension Sponsors 2,669 0
Total 87,460,786 100
Top Holders Common Stock Equivalent Held %of Total Shares Outstanding Market Value (USDin mm) Position Date
Bain Capital, LLC 18,307,782 14.57 435.5 Nov-14-2014
Point72 Asset Management, L.P. 6,746,724 5.37 160.5 Sep-30-2014
Citadel LLC 5,756,244 4.58 136.9 Sep-30-2014
AllianceBernstein L.P. 5,287,754 4.21 125.8 Sep-30-2014
Wellington Management Company, LLP 5,235,275 4.17 124.5 Sep-30-2014
Insider Holder Name Common Stock Held % of CSO Market Value (USDin mm) Change in Shares % Change
Sullivan, Chris T. 2,207,902 1.757 52.4 -99,997 -4.33
Kadow, Joseph J. 308,722 0.246 7.3 0 0
Smith, Jeffrey S. 32,016 0.025 0.8 0 0
Shaw, Amanda Link 15,780 0.013 0.4 0 0
Grossman, Mindy F. 14,857 0.012 0.4 0 0
Mahoney Jr., John J. 11,439 0.009 0.3 0 0
Deno, David J. 9,571 0.008 0.2 0 0
Pace, David A. 5,659 0.005 0.1 0 0
Craigie, James R. 4,763 0.004 0.1 0 0
Levy, Tara Walpert 3,359 0.003 0.1 0 0
Fitzjohn, David Roy 253 0 0 0 0
31. Bloomin’ Brands, Inc. (NASDAQ: BLMN) January 20, 2015
CFA Institute Research Challenge P a g e | 30
Appendix 18: Market Comparison
Bloomin’ Brands and Market Comparison
Bloomin’ Brands, Inc. is a member of the Russell 2000 Index, NASDAQ Composite Index, and Russell 3000 Index. In measuring
the returns of Bloomin’ Brands and the respective indices, historical data reveals that the company has outperformed the
market overall since the 2012 IPO. The stock has notable volatile trading volume on earning release dates. Specifically March 5,
2014 when 12,452,700 shares were traded; August 5, 2014 when 16,244,000 shares were traded; and November 11, 2014 when
10,186,100 shares were traded. The average daily trade volume for Bloomin’ Brands is 2.12 million shares.
Source: Capital IQ & Team’s Analysis
32. Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s)
to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The
information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not
constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to
be a recommendation by any individual affiliated with CFA society Miami, CFA Institute or the CFA Institute Research Challenge with
regard to this company’s stock.
CFA Institute Research Challenge
