Bloomin’ Brands, Inc. (NASDAQ:BLMN) Q3 2023 Earnings Call Transcript

Bloomin’ Brands, Inc. (NASDAQ:BLMN) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Good morning, and welcome to the Bloomin’ Brands, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tara Kurian, Vice President, Corporate Finance and Investor Relations. Please go ahead.

Tara Kurian: Thank you, and good morning, everyone. With me on today’s call are David Deno, our Chief Executive Officer, and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal third quarter 2023 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 reconciliations 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 fiscal third quarter 2023, an overview of company highlights and current thoughts on Q4 and fiscal 2023 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 Q3 2023 diluted earnings per share was $0.44. This compares to $0.35 in Q3 2022, reflecting a growth of 26% year-over-year. Combined U.S. comp sales were down 50 basis points and traffic was 60 basis points behind the industry. Following Labor Day, sales trends in the casual dining industry softened. From August to September, there was nearly a 300 basis point decline in comparable sales trends. Our brands experienced a similar change in trend. Despite these top-line headwinds, we had 90 basis points of restaurant margin expansion versus last year, driven by our productivity initiatives. As a result, our Q3 profitability remains strong.

Moving forward, although the industry landscape has changed from earlier this year, we expect U.S. comp sales to improve sequentially in Q4 from Q3. We have already seen an improvement in October, and this is incorporated within our Q4 guidance. In the long term, we are committed to the strategic priorities that are making us a stronger, leaner operation-centric company. These priorities include: first, driving in-restaurant same-store sales growth, and this is our top priority; second, increasing new restaurant openings while refreshing our existing assets; third, maintaining our off-premises momentum; fourth, becoming a more digitally-driven company; and finally, investing in technology to drive growth while preserving margins. Since 2019, we have made great progress in improving our operating model through simplification efforts and by leveraging investments to improve efficiency.

The efforts have resulted in strong margin gains that have sustained despite record inflation. These achievements also provide a strong foundation for the exciting growth ahead, and we have confidence that these priorities will enable us to drive sustainable long-term sales and profit growth. In addition, our investments in the customer experience in both restaurant technology and operational simplification allow us to provide differentiated guest experience that strengthens our value proposition. Many of these investments have been made across the entire portfolio, but the primary focus has been at Outback. With a strong operating foundation and healthy margins, improving in-restaurant sales and traffic is our top priority. As the economic and consumer landscape continues to evolve, we are making sure we continue to evolve with it.

This includes doing the work to ensure we exceed the needs of our existing and future customers. This ongoing effort is always being done through the lens of the consumer and customer analytics. A few quarters ago, we discussed our “No Rules, Just Right” campaign that built on Outback’s brand equity and heritage. But this is more than just marketing. It’s an attitude. It’s how we re-energize our restaurants and bring back to our reference at Outback is known for. We’ll be spending more on marketing and advertising in Q4 as well as 2024. Although we do not intend to return to free pandemic levels, we do believe a higher level of advertising spend is warranted moving forward. Utilizing a blend of television and high-return digital tactics, we believe our increased marketing presence can help build traffic.

We will leverage a combination of new product innovation, highlighting our already accessible price points. For example, our current LTO at Outback, the Steak ‘N Mate’s $16.99 Combo offering provides a great value to the guest in an attractive return. We recognize in the short term that driving traffic growth may be challenged as the consumer is more careful with their discretionary spending. We’ll be thoughtful about our approach to discounting in this environment. Another catalyst for growth are the investments we are making to enhance our operations at Outback. At the end of the third quarter, we completed the rollout of our server handheld technology and the advanced Grills and Ovens. These investments are improving our consistency, overall meal pacing and guest satisfaction while also providing a cost-saving opportunity for the company.

Now our focus is leveraging this technology to further improve the guest experience. This will lead to increased intent to return metrics, which drive additional guest frequency and traffic growth. We are confident in the strategy at Outback and are making the necessary decisions to set up the brand for the long term. We’ll remain disciplined in our response in this environment and look forward to updating you on our progress in the future. As it relates to the broader strategic priority for the company, let me first talk about development. We are upgrading our assets to remodeling, relocating and opening new restaurants, especially Outback. On our remodeling efforts, we are at the beginning of a multiyear effort and remain on track for 100 remodels this year.

In terms of relocations, at Outback, we continue to see outsized sales lift with average volumes exceeding $4.7 million per year. The success of our relocation program reinforces the broad consumer appeal of Outback, and there are still another 50 relocation opportunities remaining. The new restaurant pipeline continues to build out back and across the portfolio, and we are seeing good returns on new units. Our development efforts provide a runway for future growth and are a critical part of our strategy. Complementing this strategy is our leading off-premises channel. This business was more than doubled since 2019 and currently represents 25% of our U.S. sales. As pioneers in to go, we continue to have robust demand and are maintaining strength in third-party delivery.

This is a highly incremental occasion and this differentiated offer that is profitable. In addition, the success of our catering business, particularly at Carrabba’s provides a runway for future growth. Before I turn it over to Chris, I want to comment on a couple of specific businesses that are doing very well. First, Carrabba’s had another excellent quarter with comp sales of 3%. The off-premises and catering channels are proving to be very robust. Off-premises is 34% of Carrabba’s sales, which includes a strong contribution from our growing catering business. Carrabba’s has the perfect menu to meet the demands of this important and growing channel. We launched Carrabba’s Bistro earlier this year, which is a lunch-focused catering option featuring a wide variety of sandwiches that represent Carrabba’s Italian heritage.

This continues to outperform our expectations. Off-premises will continue to remain a large part of the company in the future. Additionally, Carrabba’s continues to offer innovative product offerings such as the wine dinners and seasonal specials, which highlights the great value and experience that this brand is known for. The strong sales to Carrabba’s, combined with productivity initiatives and cost management, our financial returns continue to get stronger. Carrabba’s has earned the right to grow, and we started to build out a pipeline for future restaurant openings. Next, our international operations, driven by our market-leading business in Brazil. Brazil had another outstanding quarter with significant growth in sales and profits. The Brazil team offers amazing food and exceptional service, and we continue to rapidly expand the business throughout the country.

We look forward to capitalizing on our leading position and double our restaurant footprint in the coming years. Importantly, the sales growth initiative I described are supported by a solid foundation with healthy margins, robust cash flow and a strong balance sheet. This strength gives us the ability to invest in new unit development, technology enhancements and asset improvements while meeting our commitments. We remain dedicated to delivering great food and experience for our guests while building a strong business that will continue to thrive for many years to come. Finally, our results would not be possible without our great teams in the restaurants and our restaurant support center. Thank you for delivering on outstanding hospitality and service to our guests.

And with that, I’ll now turn the call over to Chris, who will provide more detail on Q3 and our thoughts on Q4.

Chris Meyer: Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal third quarter of 2023. Total revenues in Q3 were $1.08 billion, which was up 2% from 2022. This was primarily driven by revenue generated from net restaurant openings, the Brazil tax exemption as well as favorable foreign exchange translation. Consistent with the broader casual dining industry, we saw a sizable change in traffic trends coming out of Labor Day and September was softer than expectations. As such, U.S. comparable restaurant sales were down 50 basis points in Q3. Average check was up 4.2% in Q3 versus 2022. As we mentioned on our last call, menu pricing is rolling off, which is translating into lower average check as we move throughout the year.

This will continue in Q4 as we do not intend to take significant additional pricing for the remainder of the year. The softer industry backdrop suggests we must remain disciplined on future pricing actions to maintain proper balance on our price value equation. At approximately 25% of U.S. sales, Q3 off-premises increased 70 basis points from Q2. Importantly, the highly incremental third-party delivery business remains healthy and was flat at 12% of U.S. sales. As it relates to other aspects of our Q3 financial performance, GAAP diluted earnings per share for the quarter was $0.45 versus $0.34 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.44 versus $0.35 of adjusted diluted earnings per share in 2022. Adjusted restaurant level operating margins were 14% versus 13.1% last year.

Domestically, the benefits from our pricing and productivity initiatives continue to offset inflation. The technology we are putting into our restaurants is having an increasingly positive impact on our margins and the overall levels of inflation moderated somewhat in Q3 versus the second quarter. As it relates to inflation, commodity inflation was up 2% in Q3. We had favorability in produce, dairy and seafood, which helped to lower the overall inflation levels. We do expect commodities to be closer to 6% in Q4 as we lap some 2022 beef favorability that we were able to realize. We still expect total year inflation to be mid-single digits. Labor inflation was up 4.9%. Labor continues to be in line with our full year guidance expectations of mid-single digits.

Restaurant operating expense inflation was 5.2%. This is consistent with our expectations for the year. Also worth noting as it relates to restaurant margins, international segment restaurant margins were up 130 basis points. This was driven by the continued growth in our Brazil business despite a softer consumer environment. We also continue to benefit from the Brazil tax exemption in Q3. But as a reminder, the Brazil tax benefit will go away starting in the fourth quarter. Total company adjusted operating income margin was 5.3% in Q3 compared to 4.9% in 2022. Depreciation expense was up in Q3, consistent with our increased levels of capital spending and our investments in infrastructure to support growth. Overall, we remain focused on maintaining the progress we have made in margins since 2019.

In Q3, we were 300 basis points above our Q3 2019 adjusted operating income margin. Turning to our capital structure. Total debt was $795 million at the end of Q3. Our current balance sheet net leverage ratio was 1.3 times, and our current lease adjusted leverage ratio remains below 3 times. In terms of share repurchases, year-to-date, we have repurchased 2.4 million shares of stock for $61 million through the end of October. We still have $79 million remaining on the new authorization that the Board approved on February 7. The Board also declared a quarterly dividend of $0.24 a share payable on November 29. We believe our free cash flow allocation is balanced, and we’ll continue to deploy dollars against additional debt pay down, share repurchases and our dividend.

Now turning to our 2023 and Q4 guidance. First, we are adjusting our full year 2023 guidance to account for the softer industry backdrop. We expect full year U.S. comparable restaurant sales to be approximately 1.5% to 2%. This is on a 53-week comparable basis. Adjusted earnings per share are expected to be $2.80 to $2.90. This change in guidance is primarily driven by the reduction in U.S. comp sales. We are lowering our full year tax rate assumption in conjunction with the lowered earnings to be between 10% and 11%. Capital expenditures are now expected to be between $260 million and $280 million as we’ve been able to pull forward costs associated with 2024 projects. All other metrics remain the same as we communicated during our February 16 earnings release.

As it relates to the fourth quarter, trends in October have improved from the September softness. As such, we expect U.S. comparable restaurant sales to be flat to 1%. This reflects a 14-week to 14-week comparison. We expect Q4 adjusted earnings per share to be between $0.64 and $0.74. In summary, we successfully navigated a challenging environment in Q3. We will remain disciplined in executing against our strategy in Q4, and we will emerge a better, stronger operations-focused company. And with that, we’ll open up the call for questions.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Jeffrey Bernstein with Barclays. Please go ahead.

Jeffrey Bernstein: Great. Thank you very much. Two questions. The first one, Dave, you mentioned comp slowdown, I guess, post Labor Day, but perhaps maybe a little bit of a bounce back in October. I’m just wondering if you can maybe assess what you attribute that to. I feel like we’ve heard three different theories. One just be the consumer headwinds that are finally taking hold, which perhaps led to that slowdown in September. But then the bounce back being a return to more seasonality versus just the fact that everyone is lapping price and therefore, the comp is optically slowing. So I’m just wondering how you think about that slowdown and then modest recovery. Is it really the consumer is a lot weaker now? Or would you attribute it more to seasonality and therefore, we’re in a better place with the consumer still in relatively good shape?

David Deno: Hey, hi. Good morning. We view it primarily as seasonality as we look at just the history. Obviously, we’ve got to keep track of various macro headwinds that are out there, student loan repayments, interest rates, et cetera. But there’s some seasonality there. But also importantly, what we’re doing as a company, right, and the offers that we have and what we’re doing. And we talked about the uptick in September, and we feel good about November and December as well, and that’s in our guidance. So we think the consumer is in a decent spot, but we think it’s primarily a return to seasonality look at historically.

Jeffrey Bernstein: Got it. So when you say the softer industry backdrop to close the year, it’s not so much the consumer for sale, although you’re watching it, but it was just more like seasonality that led to that dip in September rather than some sort of consumer weakness?

David Deno: We’re watching the consumer very closely. But certainly, seasonality in September is what we primarily think. And as we look at going forward for the rest of the quarter, we feel good about what our programs and where we’re going to stand, and we’ve tried to incorporate that in our guidance, that bounce back.

Jeffrey Bernstein: Understood. And then could we just directionally look out to next year? I think Chris, you said that your guidance for commodities and labor and restaurant expenses this year were all kind of mid-single digit and you took some pricing to mitigate that. But how do you think about that going into to next year. One, would you expect inflation to maybe moderate across those lines, even if you don’t have specific guidance? And how you think of that relative to menu pricing? Because if there is a slow on consumer backdrop, some would say don’t take enough price to fully offset the inflation, maybe take a hit to margin, but preserve traffic. So how do you think about that theoretically in terms of directional inflation for next year and how you think about price? Will you offset the inflation or let it hit the margin in the short term?

Chris Meyer: Yes, good morning, Jeff, conceptually, our formula is pricing plus productivity offsets inflation. I think that candidly, it’s probably a little early to speculate on where inflation is going to level out next year. Obviously, we’ve talked about this in prior years. We don’t finalize our beef outlook until December. So it’s probably too early to give us a read on 2024 commodities. But look, anecdotally, outside of beef, things are looking pretty rational across the basket, which I think is a good sign. Beef is a little bit of an unknown. We’re still seeing the same information as everyone else out there, overall beef production remains a challenge. But other than that, there isn’t too much to say at this point other than we, as a company, have repeatedly shown the ability to navigate these markets as good as anyone else out there.

So we’ll monitor that. We’ll be sure that we have productivity initiatives in place because we do have a good amount of rollover from our productivity that we put in place this year. And we’ve got a lot of new ideas for next year potentially as well that can help offset. And what that does is that does reduce the need to take as much pricing as you would normally need to take to offset that inflation because we’re obviously pretty mindful of where the consumer is. And we do believe that going in with a mindset to keep the pricing as low as possible is the right place to be. Now in terms of labor and how that plays in, look, labor has been pretty consistently inflationary for a number of years now. Now look, it’s come down a little bit. As the year progressed, I think every quarter, it’s come down a little bit from where it was, certainly where it was last year.

But look, it wouldn’t surprise me at all if we’re still talking in that low single to mid-single-digit kind of inflation range just sort of into perpetuity.

David Deno: Jeff, just 1 thing I want to add. We’ve been really careful about our price increases. And if you look at our comp breakdown, we’ve got a 4% change in PPA in Q3. And that’s pretty disciplined versus what’s going on elsewhere in the industry. So I think we’re really trying to make sure that our price value equation as we continue to improve service and food, especially at Outback, comes together to help grow traffic.

Chris Meyer: Well, and just to piggyback off of that, if you look at our Q4 guide, that does imply that your check average is going to be in that 2.5% to, call it, 3% range, which again, as we’ve indicated, we do expect that check average to tick down as the year progresses, and we’re going to see that again in Q4.