Bloomin’ Brands, Inc. (NASDAQ:BLMN) Q4 2023 Earnings Call Transcript
Bloomin' Brands, Inc. (NASDAQ:BLMN) Q4 2023 Earnings Call Transcript February 23, 2024
Bloomin' Brands, Inc. 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 Fourth Quarter 2023 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. It is now my pleasure to introduce your host, Tara Kurian, Vice President, Corporate Finance and Investor Relations. Thank you, 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 Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal fourth 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 fourth quarter 2023, 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 Q4 2023 diluted earnings per share was $0.75. This compares to $0.68 in Q4 2022, reflecting a growth of 10% year-over-year, combined U.S. comparable sales were down 20 basis points. Our fourth quarter and 2023 results were largely in line with expectations. Importantly, we had a sequential U.S. comp sales and traffic improvement from Q3 into Q4, and within Q4, a softer October was offset by progressively improving comp sales, ending with the strong holiday season. Before we discuss 2024 and more specifically our plans at Outback Steakhouse, I would like to recognize two businesses that had outstanding results in 2023, Carrabba's in Brazil.
Carrabba's continues to take share versus the industry. Carrabba's posted comp sales growth of 3.9% and positive traffic growth for the year. In 2023 Carrabba's outperformed the industry in sales by 90 basis points and in traffic growth by 300 basis points. They continue to demonstrate strength, specifically in their off-premises channel and growing catering business. Carrabba's Bistro, which we launched in 2023 is a lunch focused catering option featuring a wide variety of sandwiches that reflect Carrabba's Italian heritage. I is now offered in our restaurants as a compelling lunch offer, either within the restaurant or to go. Bistro continues to outperform expectations. Brazil had another great year with significant growth in sales and profits.
This is especially impressive given the lapping of pent-up demand in 2022. We continue to expand this business throughout the country and opened 18 new restaurants in 2023. We look forward to capitalizing on our leading position and doubling our restaurant footprint in the coming years. Our 2023 results would not have been possible without our great teams in the restaurants and in our restaurant support port center. Thank you for delivering outstanding hospitality and excellent service to our guests. As we move forward, we remain focused on the strategic priorities that are making us a stronger and leaner operations centered Company. These priorities include, first, driving in restaurant same store sales growth, which remains our top priority, especially at Outback.
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 improve infrastructure and drive growth while preserving margins. Our primary focus remains improving in restaurant sales and traffic at Outback. We've done a lot of work to better understand our ever evolving post COVID customer. We believe we have a better idea of who our customer is and as a result, we continue to sharpen our brand's positioning. The first step of this effort was the launch of Outback's No Rules, Just Right campaign. This is built on our brand equity and heritage and it brings back the adventure and irreverence as expected from Outback.
I especially like the just right part of that phrase as it reinforces the food and service promise to our customers. In addition, we spent more on marketing and advertising in 2023 to improve our share of voice in a highly competitive marketplace. During Q4, we saw positive response to our additional marketing spend. We plan to increase our 2024 spending by approximately $20 million. This investment will improve our share of voice and build traffic, utilizing a blend of television, and high return digital tactics. The advertising highlights Bloomin' innovation, accessible price points and great value. We also recognize the consumer may be more careful with their discretionary spending. Our current LTO, a 3-course Aussie dinner for $16.99, offers the customer a great value.
We will continue to be thoughtful about our approach to overall pricing and discounting. The No Rules, Just Right campaign and the marketing investment are just the start of the work underway at Outback. There'll be more to unveil in our strategy at Outback in the coming quarters. Since we are going to spend more on marketing in 2024 at Outback, we must make sure our operations are best-in-class. We will continue to focus on delivering a differentiated guest experience, specifically improved service and consistently great food. We are solving this through investments in technologies such as server handheld and new ovens and grills, as well as relentlessly focusing on key operational behaviors. As a result of this work, our internal customer measures have meaningfully improved.
A couple of key leading indicators that we track are steak accuracy and consistency of experience. Over the last year baking accuracy is up 400 basis points and consistency of experiences up 700 basis points. This progress is further validated by casual dining industry metrics, which have continued to improve. Friendly service and food quality are now 300 and 360 basis points ahead of our casual dining peers, respectively. We are confident in the strategy at Outback, and it is working. In 12 of the last 14 weeks, Outback has beaten the industry in comp sales growth. Based on recent trends, we expect to see Outback perform above the industry and this is reflected in our guidance. Onto our second priority, new unit development and improving our asset base.
We are upgrading our assets through new openings, relocating and remodeling restaurants. We opened six new domestic units in 2023 and are on track to nearly triple that in 2024. And we're upgrading our assets as a big part of improving our traffic trends, especially at Outback. Our development pipeline for new restaurants and relocations remains very robust. We are opportunistic on relocations and continue to see outsized sales lift on these investments. We successfully completed over 100 green miles in 2023 and we'll continue to work our way through the system in 2024. Our development efforts provide a runway for future growth, offer good returns and are a key part of our strategy. The last priority I'll discuss today is our leading off-premises channel.
The business has more than doubled since 2019 and currently represents 24% of our U.S. sales. We are pioneers in the developed space and we continue to see robust demand in this highly incremental location. In addition, the success of our catering business at all of our brands, but particularly Carrabba's provides a runway for future growth. Next, let me comment on our restaurant closure initiative. We periodically review our asset base and in our latest review we made the decision to close 41 underperforming locations. The majority of these restaurants were older assets with leases from the 90s and early 2000s. This decision considered a variety of factors, including sales and traffic, trade areas and the investments that would have to be made to improve the restaurants.
Despite this initiative, our confidence in our portfolio remains high, as we plan to open 40 to 45 new restaurants across the system in 2024. These are promising trade areas with great potential. It's critical to add that these closures are not a reflection of the hard work of our team members. As always, we will take care of our people, offering many of the opportunity to transfer to another restaurant and severance for those who do not. Importantly, the sales growth initiatives I described are supported by a solid foundation with healthy margins, robust cash flow and a strong balance sheet. This strength give 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.
Before I turn the call over to Chris, I just wanted to comment on the 8-K we sent out this morning, regarding Chris' retirement from Bloomin' Brands. Chris has been a great partner to me the last five years as CFO. He has made many, many contributions to our Company, and he will be missed. The Company is considering various options for his replacement. Chris is expected to continue in his current role until such a time his successor is named and otherwise assist in the transition. Chris, thank you for everything you have done for the Company and for me. Over to you to discuss our financial performance and 2024 guidance.
Chris Meyer: Thanks, Dave for the kind words. It's been a privilege working with you and serving as our CFO for the last five years. I would like to start by providing a recap of our financial performance for the fiscal fourth quarter of 2023. Total revenues in Q4 were $1.19 billion, which was up 9% from 2022. This was primarily driven by an additional $83.5 million of revenue from our 53rd week, favorable foreign exchange translation, and the net impact of restaurant openings and closures. U.S. comparable restaurant sales came in just slightly below our expectations at negative 20 basis points. This reflects a comparable 14 week view versus 2022. Traffic in Q4 was down 3.1%, which represented a 160 basis point improvement in traffic from Q3.
Average check was up 2.9% in Q4 versus 2022. As we mentioned in our prior calls, check average benefit decreased steadily throughout the year, as we chose not to replicate the amount of menu pricing that had been taken in 2022. We remain very cautious about taking additional menu pricing, particularly at Outback. Q4 off-premises was approximately 24% 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 Q3, driven by our growth in catering. As it relates to other aspects of our Q4 financial performance, GAAP diluted earnings per share for the quarter was $0.45 versus $0.61 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.75 versus $0.68 of adjusted diluted earnings per share in 2022.
The primary difference between GAAP and adjusted diluted earnings per share is due to restaurant closing and asset impairment costs related to our restaurant closure initiative. Q4 adjusted restaurant level operating margins were 15.9% versus 16.8% last year. The reduction in restaurant margin from last year was driven by a couple of factors. First, as we mentioned on the last call, in Q4 we were lapping significant beef favorability from 2022. This lapping, coupled with a smaller benefit from average check did not allow us to leverage the COGS line like we had throughout the first three quarters of 2023. Second, inflation levels remained somewhat elevated in Q4 and drove additional year-over-year margin unfavorability. Labor inflation was up 4.4% in Q4, and restaurant operating expense inflation was up 4.7%.
Total Company adjusted operating income margin was 7.5% in Q4, compared to 8.2% in 2022. Depreciation expense and general and administrative expense were both up in Q4, consistent with our increased levels of capital spending and our investments in infrastructure to support growth. As it relates to the 53rd week, we estimate that the benefit from the extra week was worth $0.16 of diluted EPS to our 2023 results. The week between Christmas and New Years includes many of our busiest days of the year, and this is reflected in the large EPS amount from this week. The operating margin for the 53rd week is higher than our normal operating margin, because some of our fixed expenses, such as rent and depreciation are recorded on a monthly basis, and were not allocated to the 53rd week.
Turning to our capital structure, total debt was $786 million at the end of Q4. We have worked very hard coming out of COVID to reduce our debt levels and are pleased that our lease adjusted leverage ratio is solidly below our goal of three times with significant levels of liquidity. In terms of share repurchases, we repurchased 2.8 million shares of stock in 2023 for $70 million. As indicated in this morning's earnings release, the Board has cancelled the existing $125 million authorization, and approved a new $350 million authorization, expiring in August of 2025. This is a larger authorization than we would normally put in place. The purpose of the authorization is two-fold. First, $150 million of this authorization allows us to continue to repurchase a typical volume of shares over the next 18 months.
Second, our convertible bond matures in May of 2025. The remaining $200 million of this authorization allows for flexibility to retire the convert, sometime between now and next May. There are a number of ways to structure a potential transaction, and these additional dollars give us the flexibility to retire the remaining $105 million of principal on the convert and remove the dilution from the convert that currently exists in our share count. In our 2024 guidance, we are assuming approximately 4 million shares related to the convert are included in our adjusted EPS calculation. The Board also declared a quarterly dividend of $0.24 a share payable on March 20th. Before I turn to 2024, I wanted to remind everyone that our full year 2023 adjusted results include the benefits from the Brazil tax legislation in the 53rd week.
The Brazil tax legislation benefit was worth approximately $0.26 and the 53rd week was worth approximately $0.16. On a comparative 52-week basis, our 2023 adjusted diluted earnings per share result was $2.51. Now, turning to our 2024 and Q1 guidance. We expect the full year U.S. comparable restaurant sales to be flat to 2% on a comparable calendar basis. Adjusted diluted earnings per share are expected to be between $2.51 and $2.66. We expect commodities' inflation to be between 3% and 4%, driven in large part by beef inflation. We expect our full year tax rate assumption to be between 14% and 16%. Capital expenditures are expected to be between $270 million and $290 million. Our level of capital spending accelerated late in 2023, as our new restaurant pipeline has grown.
The 2024 capital plan includes dollars to support approximately 40 to 45 new restaurant openings, including significant Q4 spending for 2025 openings, as well as ongoing funding of remodel, relocation and infrastructure projects. The 53rd week in 2023 creates some complexity in comparing year-over-year results, both for the full year and by quarter. Each fiscal quarter of 2024 will be comparing to a fiscal quarter from 2023, that includes a one week shift. This shift is especially impactful in the first quarter. Please refer to the fiscal and comparable calendar dates table provided in our earnings release this morning, to help you better understand our 2024 calendar. As it relates to the first quarter, similar to the rest of the industry, we experienced negative impacts from weather in the first few weeks of the year.
This represents a 1.3% comparable sales headwind in to the quarter. We have included this thinking in our comparable sales guidance. As such, we expect U.S. comparable restaurant sales to be down between 50 basis points and 200 basis points on a comparable calendar basis. The good news is, we've seen continued sales growth ahead of the industry. In addition, our Valentine's Day week represented the strongest week in our Company's history. This trend, including the weather impact from the first three weeks, are included in our guidance. We expect Q1 adjusted diluted earnings per share to be between $0.70 and $0.75, which includes a negative $0.06 impact due to the calendar shift, and an approximate $0.05 impact from weather at the beginning of the quarter.
In addition, the removal of the Brazil tax exemption is a headwind of $0.08 in Q1 versus 2023. In summary, we successfully navigated a challenging environment in Q4. We will remain disciplined in executing against our strategy in 2024 and will emerge a better, stronger, operations focused Company. And with that, we will open up the call for questions.
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