The Exchange

Bloomin’ Brands Sizzles as First Edible IPO This Week

The Exchange

Bloomin' Brands (BLMN), the owner of Outback Steakhouse and smaller chains Fleming's Prime Steakhouse, Bonefish Grill and Carabba's Italian Grill, is seeing a 17% pop for its Nasdaq debut Wednesday afternoon.

The Tampa-based company, which has about 1,400 restaurants across 48 states in the U.S. (along with eateries in 20 international markets), sold 16 million shares at $11 on Tuesday night, well below its initial target of 21 million shares in a range of $13 to $15. Bloomin' raised $176 million in the offering, which is the first of two edible IPOs this week. CKE Restaurants (CK), which owns fast food joints Hardees and Carl's Junior, is set to trade later this week on the NYSE. CKE has more than 3,000 locations across 43 U.S. states and 13 countries.

View photo

.

The IPOs follow a string of recent restaurant debuts that has generated a mixed appetite among investors.  Tex-Mex chain Chuy's (CHUY) and Ignite Restaurant Group (IRG) -- both serving up healthy returns so far, particularly Chuy's, which is up more than 40% since its debut -- were successes compared with Del Frisco's (DFRG), which has seen flat returns since its $13-a-share debut in late July.

Both Bloomin' and CKE are returning to the market after going private; Bloomin', formerly known as OSI Restaurant Group and now named in homage to the signature Bloomin' Onion served at its Outback restaurants, was taken private in a $3.2 billion deal with Catterton Partners and Bain Capital in 2006, while CKE was bought for nearly $700 million by Apollo Group in 2010.

Catering to Different Crowds

With Bloomin' catering to the casual lunch and dinner crowd and CKE serving up burgers and fries in the QSR (quick-service restaurant) space, Wedbush Securities restaurant analyst Nick Setyan sees better things ahead for the burger-joint brand, especially in the current economic climate.

About Bloomin', he says, "It will be difficult for them to follow in line" with the recent successful restaurant IPOs. In an economic downturn, he says, the casual dining sector -- with an average check in the high- to mid-teens -- struggles as consumers cut back on sit-down meals and opt for cheaper venues like Hardees and Carl's Jr.

The casual dining space, Setyan says, is also extremely cutthroat. He cites Chuy's as an example of a casual dining competitor that has hit the "sweet spot" Bloomin' lacks. The average check at Chuy's is in the low teens, less than Bloomin' and many others in that market, and it also generates a higher percentage of sales through alcoholic drinks. Comparing Bloomin' to the higher-end Del Frisco's (which, to be fair, is in a much pricier place than Bloomin', with an average bill closer to $80), he says investors are less interested in the casual dining names that are not in that "sweet spot," and Bloomin's deflated pricing seems to reflect that.

Its lower pricing is one reason Netyan isn't surprised to see the pop in Wednesday's trade, even though he isn't positive on the offering overall. Given both the economy and the competition, he says, it is "not a favorable situation for casual dining."

Burger Joints Positioned Better in This Economy

As for CKE, Setyan says its stronger appeal lies in the fact that burger havens such as Carl's Jr. offer a price "on the lower end of the burger chain group." In this climate, such brands, he says, are simply positioned  better.

However, as McDonald's (MCD) lackluster same-store sales report for July demonstrates, even lower-priced fast food venues can feel the pain in a struggling economy. McDonald's stock is trading down more than 1% midday, following the report. The company's exposure to Europe (McDonald's chief market for sales, just ahead of the U.S.) has been a major factor in its recent struggles, including disappointing earnings in July.

One thing both Bloomin' and CKE have in common: They are saddled with quite a bit of debt. CKE has a debt load of about $730 million and Bloomin' has a whopping $1.5 billion, although Bain and Catterton were able to slash much more of Bloomin's debt than Apollo was of CKE's. In an interview with TheStreet.com, Francis Gaskins, president of IPO Desktop, noted that CKE's financials include "interest payments that exceed their operating earnings," which he sees as a cause of concern for investors.

In documents sent by email, Gaskins gives a slightly higher rating to the Bloomin' IPO than he does to CKE, noting that the CKE debut is "designed to benefit Apollo management, not new investors."

But Setyan says CKE's debt picture is actually typical and not terribly worrisome for a QSR brand. "They will not be in an abnormal situation with capital structure," he says. Brands such as Wendy's (WEN) and Jack in the Box (JACK), he notes, have "higher debt to equity ratios  -- relatively more debt -- than casual dining chains."

"Given the comparables," he says, "investors may be more lenient with QSR chains having more debt relative to a casual dining chain."

The Drought Factor

Meanwhile, restaurants across the board are expected to feel some heat from the drought -- the worst in the U.S. in 56 years -- currently affecting corn crops in the Midwest, leading to a 50 percent rise in price over the past two months. Eateries and supermarkets are likely to start feeling the drought's impact at the end of this year and into early 2013. With meat, poultry and dairy prices rising, restaurants are going to either have to pass the price on to customers -- which could be difficult in this economy -- or "margins will have to compress," Setyan says.

Stay tuned for CKE's pricing, set for Thursday. The expected range at this time is between $14 and $16 per share.

View Comments