Activist Pushes Outback to Sell or Spinoff Other Brands
Activist investor Barington Capital Group, L.P. has pushed Bloomin’ Brands for change before. Back in February, the company sent a letter to Bloomin’s chairman and chief executive officer, Liz Smith, along with a detailed presentation that outlined how Barington felt Bloomin’ could improve shareholder value and the performance of its casual brands, Outback Steakhouse, Carrabba’s, Bonefish Grill, and Fleming’s. Barington issued a letter to Bloomin’s independent directors Monday, saying the company “has insufficient strategic focus,” and expressed concern over its “sustained period of underperformance.” It also suggested Outback sell or spinoff its sister concepts and become an independently operated brand.
The letter, addressed to James Craigie, Bloomin’s lead independent director, said Barington’s requests to meet with Smith have been denied to date.
Bloomin’ responded later in the day, saying the company has held seven discussions with Barington to better understand its views and suggestions.
“We are making great progress in elevating the total customer experience by investing in food quality, service, and ambience,” Smith said in a statement. “As a result, over the last three reported quarters, we have achieved an increase in sales and market share. We have also taken actions to reduce overhead and reinvest those savings to improve our digital and IT infrastructure, as well as to enhance our growing off-premises business.”
Added Craigie: “The Bloomin' Brands Board of Directors is actively engaged in overseeing the strategy of the company. We fully support the management team and its successful ongoing efforts. The company welcomes shareholder dialogue and any constructive input that may advance our goal of delivering superior returns for investors.”
Regardless of the communication, the activist, which owns less than 1 percent of Bloomin's shares, said it was more concerned with the “prolonged period of poor share price performance and declining market share.”
Barington, founded by James A. Mitarotonda in January 2000, has prior investments in companies such as Darden, Lone Star Steakhouse, The Children’s Place, Dillard’s, The Jones Group, Warnaco, Nautica, The Pep Boys, and Steven Madden.
In the letter, it asked Bloomin’ to appoint an independent chairman to improve board oversight of management and enhance the strategic direction; retain a financial adviser to help the board evaluate alternatives to enhance the company’s strategic focus; and declassify the board and adopt a majority vote standard for uncontested director elections to help improve Bloomin’s corporate governance.
Among the strategic changes Barington suggests: spinning off or selling Bonefish, Carrabba’s, and Fleming’s.
Barington said Bloomin’s performance is being hindered by the “complexity of its business structure.”
“Bloomin’ currently oversees four different restaurant brands, with both company-operated and franchised restaurants, as well as domestic and international operations,” the letter wrote. “We believe that the company’s attempt to operate four divergent brands has negatively impacted strategic focus and operating execution at each of its business, making it more difficult for them to compete with their nimbler competitors.”
The ideal scenario, in Barington’s vision, would be to operate Outback independently. “It is our belief that a more focused management team would perform substantially better and do a more effective job of enhancing the guest experience to improve customer loyalty and increase revenues,” the company said.
Additionally, at $1 billion or an average of 3.9 percent of sales in the last six years, Barington said Bloomin’s marketing spend isn’t lining up with its revenue growth. The company invested $1.4 billion in capital expenditures over the last six years.
Outback did cut back marketing spend 14 percent last quarter. “We are also focused on incremental sales layers to further accelerate momentum,” Smith said in the Q2 review. “This includes shifting our media spend from mass marketing to mass personalization, the Dine Rewards royalty program, and the rapidly growing off-premises business.”
Smith added that Bloomin’ “doubled the available dollars for partners to engage in local marketing in their communities, as we shift marketing spend away from national TV and LTOs.”
Bloomin’s investments in CRM to strengthen engagement to more customer-centric communication is another path the company is actively taking to generate higher return from marketing spending. There are more than 6.6 million members in its Dine Rewards program. Bloomin’ had 9 million unique profiles of customers in its database in 2014. The company ended Q2 with 20 million profiles.
In regards to OpEx, CFO Dave Deno said Outback “was past the large cycle of our investments. The investments we made in Outback and food, and labor and those kinds of things, those now begin to mitigate.”
Much of the CapEx conversation involves an interior remodel program that’s still testing multiple prototypes. These are expected to rollout second half and deliver about a 3 percent traffic lift.
“We can begin to monetize some of that investment as we go forward and we build sales. And obviously, simplifying our operations and reducing complexity, and continuing to use technology is a big part of our margin expansion,” Deno said.
Barington went on to express concern over impairment charges. From 2013–2017, Bloomin’ recorded $269 million of impairment losses and restaurant closing expenses, equivalent to $2.80 per share, Barington said, adding it has already recorded $11.6 million of impairment losses and restaurant closing expenses in the first half of 2018.
China was another topic. Barington said Bloomin’ shut all eight of its restaurants in Mainland China in Q2 and recorded impairment losses and restaurant closing expenses in the international segment of $7.9 million. The company asked for more transparency since the issue didn’t come up in the Q2 call.
Barington said Bloomin’s corporate costs have risen as well. “In fiscal 2017, unallocated corporate expenses were $180.1 million, a 17.6 percent increase over the $153.1 million in unallocated corporate expenses reported in fiscal 2016. Likewise, total general and administrative (G&A) expenses in fiscal 2017 were $307 million, a 14.5 percent increase over the $268 million in G&A expenses incurred in fiscal 2016,” the letter read. “Furthermore, G&A expenses were 7.3 percent of sales in fiscal 2017, well above the 5.9 percent median of the company’s peers. We believe that the company’s centralized corporate functions have resulted in excessive general and administrative costs, slower decision making and less effective operating execution at the brand level.”
Barington said it identified at least $95 million of potential G&A savings, including measures to decentralize functions that increased the complexity of the company. It pointed to Darden’s 2015 plan to cut expenses by $145 million to $165 million as an example. Darden’s G&A expenses as a percentage of sales have declined from 6.6 percent in fiscal year 2014 to 5.1 percent in the fiscal year that ended May 27, 2018. Darden’s stock has also ballooned from $46.74 on December 16, 2013, “the day before we released our plan to increase shareholder value,” Barington said, to its latest closing price of $106.33, or a 127 percent increase excluding dividends.
“We believe that a similar opportunity exists for Bloomin’, and are convinced that if the recommendations made in our February letter are effectively executed, the company’s common stock could increase in value to approximately $41 per share within the next three years,” it added.
Bloomin's stock has fallen 8.34 percent this year and was trading at $19.85 Monday.
Bloomin’ is set to report third-quarter earnings on October 29. The brand has witnessed some decent momentum in sales and traffic in recent reviews. Traffic increased 0.1 percent in Q3 last year, which was the first quarter of improved traffic in over a year. Since it’s gone up 2.2 percent, 4.3 percent, and 0.6 percent (all year-over-year comps). Same-store sales gained 4 percent in Q2 at Outback. Same-store sales fell 0.6 percent at Carrabba’s in Q2, year-over-year, while Bonefish saw a 1.5 percent rise, and Fleming’s comps climbed 0.3 percent.
Overall, Bloomin’s earnings per share of 38 cents beat Zacks Consensus Estimates of 30 cents. The company has beat Wall Street expectations three of the last four quarters on the metric, and posted revenues of $1.03 billion in Q2.
Bloomin’ has also cut back its discounting—19 percent collective last quarter—and seen average check increases, per person, across the board (3.4 percent at Outback, 5.2 percent at Carrabba’s, 2.7 percent at Bonefish, and 8 percent at Fleming’s).
Deno said it’s, “part of our overall strategy to provide value for the customer, but at the same time drop our reliance on specific LTOs and coupons.”
“As the second half of the year unfolds, we will continue to wean promotional traffic from the base and replace it with more-sticky, high-value consumers,” Smith added. “We are confident this is the correct strategy to continue to build healthy traffic and grow margins.”