Bloomin’ Brands, Inc. (NASDAQ:BLMN) Q1 2024 Earnings Call Transcript

Bloomin’ Brands, Inc. (NASDAQ:BLMN) Q1 2024 Earnings Call Transcript May 7, 2024

Bloomin’ Brands, Inc. misses on earnings expectations. Reported EPS is $-0.96378 EPS, expectations were $0.75. BLMN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Bloomin’ Brands Fiscal First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow management’s prepared remarks. [Operator Instructions] It is now my pleasure to introduce your host, Tara Kurian, Vice President, Corporate Finance and Investor Relations. Ms. Kurian, you may begin.

Tara Kurian: Thank you, and good morning, everyone. With me on today’s call are David Deno, our Chief Executive Officer; and Michael Healy, our Chief Financial Officer and Executive Vice President. By now, you should have access to our fiscal first quarter 2024 earnings release. It can also be found on our website at www. bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures appear in our earnings release on our website as previously described. Before we begin formal remarks, I’d like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at www.sec.gov. During today’s call, we’ll provide a brief recap of our financial performance for the first fiscal quarter 2024, an overview of company highlights and current thoughts on fiscal 2024 guidance. Once we’ve completed these remarks, we’ll open the call up for questions. With that, I would like to now turn the call over to David Deno.

David Deno: Well, thank you, Tara, and welcome to everyone listening today. As noted in this morning’s earnings release, adjusted Q1 2024 diluted earnings per share was $0.70, and U.S. comparable sales were down 160 basis points. These outcomes were within our expectations and represent a solid start to 2024. The industry backdrop remained more challenging than expected after the weather-related impact in January. Despite this headwind, we consistently outperformed the industry on both sales and traffic. Combined, U.S. comparable sales were 230 basis points better than the industry sales during the quarter, as measured by black box. Importantly, during Q1, we saw a sequential improvement in our performance, and for the quarter, we outperformed the industry.

Our top-line performance was driven by Outback and Carrabba’s. Driving same-store sales growth and improving traffic at Outback remains our number one priority. As we discussed in our last call, we have done a significant amount of work on our customer. We are well-underweighting further improving our marketing and guest experience and leveraging our technology. Having said that, we have more to do. The work thus far is contributing to our market share gains. Our goal is to have best-in-class operations. We will continue to focus on delivering a differentiated guest experience through improved service and consistently great food. All of our technology and equipment investments, such as new grills and server handheld, have been rolled out, and now our job is to leverage these investments.

As we discussed last quarter, all this work has significantly improved our internal customer measures. A couple of key leading indicators we track are steak accuracy and consistency of experience. Over the last year, steak accuracy is up 500 basis points and consistency of experience is up 400 basis points. This is further validated by casual dining industry metrics which have continued to improve. Friendly service and food quality are now 370 and 240 basis points ahead of our casual dining peers, respectively. We are very confident that our strategy at Outback is working. We are seeing it improve sales and traffic at Outback. Outback sales outperform the industry by 270 basis points in the first quarter and beat the industry in 20 of the last 22 weeks.

Importantly, traffic has been the key driver of this sales momentum. Outback traffic beat the industry 240 basis points on average over the last 2 months of the quarter. Michael will talk to full year and second quarter guidance shortly, but most importantly, we expect second quarter sales at Outback to be positive, and we expect Outback to continue to outperform the industry during the quarter. We feel very good about Outback’s performance and the direction of the brand, and we are in a state of continuous improvement. All of our future enhancements will be grounded in the No Rules, Just Right philosophy, and will stay true to the irreverent and adventurous spirit of the Outback brand. As mentioned on prior calls, we are putting more marketing dollars behind these great ideas to improve our share of voice in a highly competitive market.

Our multi-channel advertising strategy leverages analytics to ensure strong returns and maximizes our ability to connect with our customers. Specifically, since the holiday season last year, we’ve had three strong limited time offers at accessible price points that have resonated with our guests. We offered the [Steak Mate’s] [ph] LTO in Q4, followed by the three-course offering in the spring, and now backed by popular demand, Steak and Lobster. These Steak-centered LTOs are differentiated offerings that can only be found at Outback and represent a great value to our guests. We are equally confident in our marketing calendar in the back half of the year. We are focusing on delivering the right balance between traffic driving ALTOs, while still providing a great return for the company.

Now on to some of our other priorities. During 2024, we will continue to make investments to upgrade our assets through new openings, relocating and remodeling restaurants. We expect to remile 60 to 65 restaurants and open 40 to 45 new restaurants system-wide this year. 15 to 17 of these new restaurants will open in the United States. We know that upgrading our assets is a big part of improving our traffic trends, especially at Outback. In addition, we are seeing very good returns from our new restaurants and relocations and we have a robust pipeline. The last priority I’ll discuss today is our leading off-premises channel. This business has more than doubled since 2019 and currently represents 23% of our U.S. sales. We need to continue to pursue our off-premises business and grow in-restaurant sales.

We are pioneers in the to-go space and we continue to see strong demand in this highly incremental occasion. In addition, the success of our catering business and all of our brands, but particularly at Carrabba’s, provides a runway for future growth. Importantly, the sales initiatives I have described are supported by a solid foundation of robust cash flow and a strong balance sheet. This gives us the ability to invest in our marketing and operations initiatives, our technology plans and asset improvements. These efforts are helping us build a strong business that will thrive for many years to come. I want to stress the first quarter results and all the initiatives that I laid out would not have been possible without the great teams in our restaurants and restaurant support center.

Thank you for delivering outstanding hospitality and service to our guests. Before I turn the call over to Michael, I want to provide a quick update on our Brazil business. As included in our earnings release this morning, we are reviewing strategic alternatives for our operations in Brazil. Although we are under no obligation to sell, discussions with interested parties are ongoing. This is a great business with an outstanding management team and a significant runway for future growth, which we believe who wants a strong valuation. And finally, as you are aware, Michael Healy was appointed as our company’s Chief Financial Officer last month. We are very fortunate that Michael is our CFO. He has had several increasingly important positions in finance, supply chain, and general management that prepared Michael to be an outstanding CFO.

Michael is a terrific executive, and I know you will enjoy your interactions with him. Before handing over to Michael, I want to take a moment to expand on the announcement of my retirement. When I joined Bloomin’ Brands in 2012, my intention was to stay here for 5 years. While the opportunity to serve as CEO, followed by the pandemic, extended that plan, the time was now right to begin the search for my successor. Discussions with the Board of Directors about the time of my retirement has been underway for some time, and they are leading the search. I will remain in my role as CEO and Director. I will continue leading the implementation of our strategic priorities that are making us a stronger, leaner, operation-centered company until the new CEO is identified and a successful transition is completed.

The best day for Bloomin’ Brands are ahead with proven leaders at the helm of these great brands. On a personal note, I have worked with several of you for many years and have enjoyed returning to restaurants and the opportunity to work with you again. Thank you for your continued support of Bloomin’ Brands. And with that, over to you, Michael, to discuss our Q1 financial performance and 2024 guidance.

Michael Healy: Thank you, Dave, and hello, everyone. I wanted to share how excited I am to work more closely with our investor community and help share our Bloomin’ story. I would like to start by providing a recap of our financial performance for the fiscal first quarter of 2024. As a reminder, Q1 this year does not include the high-volume week of December 26th through December 31st that is included in Q1 2023. Additionally, we are lapping the Brazil value-added tax exemption, which affected both our revenue and profitability. Both of these have a negative impact on our results and impact comparability to last year. Total revenues in Q1 were $1.2 billion, which is down 4% from 2023. This was primarily driven by decline in comparable restaurant sales, which includes the negative calendar week shift in December.

The negative weather impact in January, the net impact of restaurant closures and openings, and the loss of the Brazil value-added tax exemption benefit that ended in 2023. The decline was partially offset by positive effects of foreign currency translation. U.S. comparable restaurant sales was negative 160 basis points and traffic was negative 430 basis points. Importantly, this reflects a 230 basis point beat versus the casual dining industry on sales and a 160 basis point beat on traffic. After a difficult January, we saw sequential improvement in our performance and for the quarter we outperformed the industry. Average check was up 2.7% in Q1 versus 2023. We are appropriately balancing delivering value to our customers, while continuing to support the business in a period of higher inflation.

Dave walked you through some exciting LTOs that will bring great value to our guests. From a consumer standpoint, we believe our pricing decisions compare favorably to other competitors in the industry. Q1 off-premises was approximately 23% of total U.S. sales. Importantly, the highly incremental third-party delivery business was 13% of total U.S. sales, which was up from 12% in Q1 2023, driven by growth in catering. Our Q1 GAAP diluted earnings per share for the quarter was negative $0.96 versus positive $0.93 of diluted earnings per share in 2023. This is driven, in large part, by the loss on extinguishment of debt related to the significant reduction in our convertible note obligation. Our Q1 adjusted diluted earnings per share was $0.70 versus $0.98 of adjusted diluted earnings per share in 2023.

The primary difference between GAAP and adjusted diluted earnings per share is due to the loss on the extinguishment of debt as well as restaurant closing and impairment costs related to the restaurant closing initiative. Q1 adjusted operating margins was 7.5% versus 9.7% last year. There are a number of factors contributing to the margin decline this quarter and I will lay them out. First, there are approximately 110 basis points from the following events. The calendar shift in January weather negatively impacted margins by approximately 80 basis points. We traded the high volume week between Christmas and New Year’s for a week in March and the weather was 1.3% headwind on comparable sales on the quarter. As discussed previously, we are lapping the Brazil value-added tax benefit which cost us 30 basis points of margin versus last year.

There were additional factors that also contributed this quarter. Inflation levels remain somewhat elevated and drove additional year-over-year margin on favorability. Labor cost was up driven by wage inflation of 4.5% in Q1. Other restaurant operating expenses were also up year-over-year partially due to inflation and partially due to spending $7 million more in advertising this year. Depreciation expense was higher in Q1, consistent with our increased levels of capital spending and our investments in infrastructure to support growth. This was offset by favorability in food and beverage costs from pricing benefits and supply chain productivity initiatives. Commodities inflation was 1.3% for Q1. Most importantly, we have a roadmap to maintain the margin gains that we have made over the past few years, even with difficult market conditions.

Turning to our capital structure, total debt was $952 million at the end of Q1. The higher balance is driven by the convertible note and accelerated share repurchase activity earlier in the quarter. We retired approximately $84 million of convertible note leaving $21 million remaining. This significantly strengthens our financials by removing the variable share dilution underlying the convertible note. While our total debt levels are elevated compared to Q4, we are still very pleased with our leverage metrics and levels of liquidity. Importantly, we remain committed to being at or below our least adjusted leverage ratio of 3 times. In terms of share repurchases, earlier this quarter we entered into a $220 million accelerated share repurchase program agreement in connection with our previously announced 2024 share repurchase program.

Year-to-date, through the end of April, we have repurchased a total of 8.4 million shares of stock for approximately $233 million. This included share is associated with the convertible notes that we repurchase. We have $130 million remaining under our share authorization program. The board also declared a quarterly dividend of $0.24 a share that is payable on May 31st. Now, turning to our full year 2024 and Q2 guidance. We are reiterating our U.S. comp sales and adjusted earnings per share guidance communicated on our February 23rd earnings call. We have updated our share count expectations to reflect the convertible note and corresponding share repurchase activity completed during the quarter. Our adjusted diluted earnings per share guidance did not change and we are reiterating the range to be between $2.51 and $2.66.

The range provided reflected the uncertainty of the industry trends following the weather impacted January. Currently, industry trends remain on the lower end of our expectations and should they continue we would expect to finish on the lower end of both our U.S. comp sales and EPS guidance ranges. There are several critical factors to delivering on this guidance. First, we are very pleased with Outback trends to date and their ability to outpace the industry in this challenging environment. They have a stronger promotional calendar versus last year especially in Q3 and early Q4. From a marketing dollar standpoint, we will begin to lap the marketing increase we started a year ago and, therefore, the increase will not be as large in the back half.

Second, the negative calendar shift experiencing Q1 of $0.06 is largely recaptured in Q4. Third, we pulled forward pricing decisions to earlier in the year, which we expect to increase the check average benefit by 100 basis points. We have seen improving trends in food and service execution at Outback stemming from the investments in technology and operations. We have compelling limited time offers at Outback that reflect our differentiated equities in steak and seafood, while offering great value for our customers. Fourth, we are lowering our commodities inflation guidance from 3% to 4% to 2% to 3%, as we are seeing signs of favorability in our beef program. We all know the beef market is somewhat volatile, but we are encouraged by the trends we are seeing year-to-date.

Collectively, these actions strengthen our ability to manage through this challenging environment and continue to take share in the industry. As it relates to the second quarter of 2024, we expect U.S. comparable restaurant sales to be flat to up 150 basis points on a comparable calendar basis. The industry continues to be a headwind, and while we expect traffic to be negative for the quarter, the good news is Outback continues to outpace the industry. We expect Q2 adjusted diluted earnings per share to be between $0.55 and $0.60 Importantly, the removal of the Brazilian tax exemption is a headwind of $0.12 in Q2 versus 2023. We did want to share a critical update on tax legislation in Brazil. New tax legislation was recently passed by both the Brazilian House of Representatives and the Senate.

If signed into law by the President, this tax legislation could be a positive benefit for our company in 2024 and into the future. We are still working through exactly what this means, including the impact to our financials. Any potential impact has not been included in our current guidance. We will provide updates when we know more. In summary, we are successfully navigating a challenging environment, and importantly, Outback is taking share. We will remain focused on executing against our strategy in 2024, we will take the necessary steps to preserve our financial momentum, and we will remain disciplined in our capital allocation. And with that, we will open up the call for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeffrey Bernstein with Barclays. Please go ahead.

Jeffrey Bernstein: Great. Thank you very much. Dave, congrats on the well-deserved retirement. You will be missed.

David Deno: Well, thanks, Jeff.

Jeffrey Bernstein: Congrats on your new role. Absolutely congratulations. Two questions. The first one, just on Brazil and the strategic review, I feel like it’s been kind of on-again, off-again review for a while now. I’m just wondering what has changed with this review in terms of whether it’s expectations or otherwise. And I feel like you were, in the past, maybe more hesitant to consider an actual sale, because you want to retain involvement. So just curious what has changed this time around relative to last time and he thought that would be great. And then, I had a follow-up.

David Deno: Yeah, sure. On the Brazil piece, it is a – we’ll still have governance. Okay. So what the royalty rate will be and those kind of things are yet to be determined and we’ll take a look at what that looks like for the business. Now, as you know before COVID, we looked at the possible re-franchising here and we got pretty far along and then COVID happened. Now, COVID is behind us, the Brazil business is in really great shape. They’re growing quickly and it’s time to take a look to see if this is the right time to re-franchise the business. Now, it’s a great business and we don’t have to sell it, but we expect the proper valuation for it, but we’re taking an active look at it as we speak.

Jeffrey Bernstein: Understood. And the fact that Bonefish in the U.S., it seems like those comps remain under pressure. And last quarter or two, you said they don’t necessarily have the right to grow. At this point, I’m just wondering whether that was at all contemplated in terms of considering Bonefish within the Brazil strategic review.

David Deno: No, Bonefish is a terrific brand. We’ve got some more customer work to do, much like we did at Outback. We’ve got some product and service elements to improve. I think, you’re going to see that brand come back in same-store sales. It’s not a priority for growth for us. It’s something that we will continue to improve upon and invest in, but it’s not a growth vehicle for us. But where we have strong locations and strong situations, Bonefish does very well. So we don’t have any plans to sell that business.

Jeffrey Bernstein: Understood. And then just my follow-up was on the consumer environment. You mentioned a challenging industry backdrop. Obviously, that’s the backdrop and you’re taking shares, that’s the focus. But I was wondering, have you seen any change in consumer behavior in recent months, whether on traffic or mix shift, kind of how you – what evidence do you have to demonstrate that there has been perhaps a slowdown in trend, any color that would be great? Thank you.

David Deno: Yeah. Thanks, Jeff, and thanks for the congratulations all on my retirement. I must say, I’ve got a job to do to lead the company and have a great succession and transition. So that’s where my efforts are totally behind as we go forward. So on the industry itself, we’re seeing a couple things. One, as others have discussed, the lower end consumer is, we’ve seen some check management, we can see it in some of our tax, NAPs [ph] and stuff, and we can see it in some of our trends. The more middle or higher class customer and casual dining is still hanging in there pretty well. Again, we can see that in some of our trends. Fine dining is a little weak right now, but boy, that was really frothy there for a couple of years. So I don’t think that there’s necessarily anything wrong, shall we say, on the high end. But I’d say on the lower end consumer facing some pressure.

Michael Healy: Yeah, I’d just jump in to say, as far as Deno mentioned, a little softness and mix, but it’s holding up pretty good. Our mixed impact is more revenue channel than it is the basket in the restaurant. So certainly softness in the traffic that’s coming in the restaurant, but once they’re in the restaurant, they’re having the full experience.

Operator: Thank you. The next question comes from Alex Slagle with Jefferies. Please go ahead.

Alexander Slagle: All right, thanks. Welcome, Michael. And David, congrats, my echo thoughts there on all you’ve accomplished have been remarkable through some uncertain years, as we all know.

David Deno: Thanks, Alex.

Alexander Slagle: I wanted to just kind of ask on Outback, and it looks like solid progress continuing. And as you look at sort of the top tier of stores in your system that are driving the best traffic growth. I mean, what are the commonalities and learnings from that group of stores? And what really stands out? Is it the manager and staffing tenure or trade area differences? Or I’m just kind of curious what you see and which attributes you’re able to move the needle on at the underperforming restaurants versus some attributes that maybe are not easily replicated?

David Deno: Yeah, we’re very pleased with the trends at Outback. I think what we’re doing is really paying off. And we’ve talked about that going forward, too. We’ve talked about the work we’ve done. But if you look at where we do well, A, we have a great market presence, right, in the Southeast, especially Florida. So we’ve got good trade areas, good presence. We’ve got refreshed assets. We’ve got tenured partners that are leading the restaurants over a long period of time. And you look at other parts of the country like the Mid-Atlantic, where we’ve had a really long tenured, really terrific group of people running those restaurants, and we’ve got good scale up there. You can clearly see the difference.

And our job is to make sure we bring that to all parts of the country in some locations that are underperforming right now. But, overall, when we look at the work we’ve done with the customer, when we look at the marketing stuff, the marketing programs we’ve been doing at Outback, when we look at the improvement in operations, when we look at really being irreverent and No Rules, Just Right, and you look at those things that we’re trying to do to drive traffic at Outback, that’s paying off, and you’re going to see more of that from the company going forward.