Shifting Tastes And High Costs Will Sap Restaurant Margins

Key Takeaways

• Shifting consumer preferences toward health-focused dining and rising at-home food consumption threaten demand, customer traffic, and long-term revenue growth.
  
• Brand maturity, labor cost pressures, and high execution risks from turnaround initiatives constrain profitability and viable avenues for future expansion.
  
• Operational and digital initiatives, leadership expertise, and a disciplined capital approach position Bloomin' Brands for enhanced efficiency, guest experience, and long-term profitability.

Catalysts

Through its subsidiaries, owns and operates casual, polished casual, and fine dining restaurants in the United States and internationally.

• The ongoing secular shift toward healthier, plant-based, and health-oriented dining preferences threatens to erode demand for Bloomin' Brands' core offerings like steak-centric menus at Outback, with management admitting that further menu reductions and changes are still needed to align with changing guest preferences. This could result in steadily declining customer traffic and pressure on long-term revenue growth.
  
• The rise of at-home food consumption, such as delivery, meal kits, and ready-to-eat supermarket options, continues to divert customers from casual dine-in chains. Despite management efforts to improve off-premises sales, in-restaurant traffic and overall sales remain weak, placing long-term pressure on average check size and ultimately on revenue growth and operating margins.
  
• Brand maturity and saturation in the U.S. market, especially at Outback Steakhouse, means there are limited domestic growth avenues. The leadership acknowledged that turnaround initiatives are still in the early innings, and current market share continues to decline versus peers, indicating limited opportunity for organic growth or operating leverage, which threatens long-term earnings potential.
  
• Persistent labor market tightness and sustained wage inflation continue to outpace management's ability to offset rising costs, with labor inflation tracking near four percent and server-to-table ratios in flux. This will continue to drive up restaurant-level operating expenses and compress net margins over time.
  
• Execution risk is elevated as Bloomin' Brands increases investment and testing across 42 restaurants for service, quality, and value improvements. Early financial impacts already include millions in restructuring and transformation costs, while the transition to new executive leadership and significant investment in turnarounds and remodels strain profitability and provide limited visibility on future earnings improvement.

Bloomin' Brands Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bloomin' Brands compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bloomin' Brands's revenue will decrease by 0.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.0% today to 2.9% in 3 years time.
• The bearish analysts expect earnings to reach $116.0 million (and earnings per share of $1.35) by about August 2028, up from $77.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.2x on those 2028 earnings, down from 7.3x today. This future PE is lower than the current PE for the US Hospitality industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Bloomin' Brands Future Earnings Per Share Growth

Risks

• The company's multi-pronged Outback turnaround strategy, including expanded restaurant testing for improved service, steak quality, menu innovation, and value, has already shown positive momentum in traffic and guest experience metrics, creating the potential for improved sales and higher revenue over the long term if the model is successfully rolled out systemwide.
  
• Investments in technology such as handheld payment devices, advanced analytics, AI-powered labor scheduling, and expanded digital and loyalty programs are driving operational efficiency and customer engagement, which could lead to increases in customer frequency, higher average checks, and improved net margins in the years ahead.
  
• Bloomin' Brands' focus on operational consistency, simplified menus, and portfolio optimization enables the company to adapt faster to consumer preferences and potentially capture demand for experience-based dining, supporting resilience in revenue and margin growth as industry trends favor such spending patterns.
  
• The new senior leadership team, with deep operational, technology, and consumer analytics experience from industry leaders, is likely to accelerate execution of strategic priorities such as international expansion, cost discipline, and digital transformation, potentially leading to sustained improvements in net earnings and profitability over time.
  
• Refranchising initiatives, asset-light model adoption, and a disciplined capital allocation plan-including debt reduction, remodels over new builds, and cost controls-position the company to enhance free cash flow and boost long-term return on invested capital, directly supporting future earnings and shareholder value.

Valuation

• The assumed bearish price target for Bloomin' Brands is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bloomin' Brands's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $116.0 million, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $6.63, the bearish analyst price target of $6.0 is 10.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.