Bloomin’ Brands, Inc. (NASDAQ: BLMN) is a prominent player in the restaurant industry, known for its well-established brands like Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, and Fleming’s Prime Steakhouse & Wine Bar.
Recently, the company’s stock has experienced a significant drop, largely due to the conversion of convertible notes into equity. Despite this, the fundamentals of the business remain strong, presenting a compelling investment opportunity.
Pressure On Stock Price Due To Issuance Of ~7.5 Million Shares
On February 29, 2024, Bloomin’ Brands entered into exchange agreements with holders of its 5.00% convertible senior notes due 2025. This resulted in the issuance of approximately 7.5 million shares of common stock and a cash payment of $3.3 million.
This substantial share issuance has put downward pressure on the stock price, as these new shares were issued at a significant discount to the market price.
Repurchase Of Shares To Offset Dilution
To mitigate the dilution impact from the conversion of the 2025 notes, Bloomin’ Brands initiated a new $350 million share repurchase program in February 2024. Under this program, the company entered into an accelerated share repurchase agreement with Wells Fargo Bank for $220 million worth of its common stock.
This repurchase strategy, executed around the same time as the note conversions, helped offset the dilution effect, demonstrating management’s proactive approach to maintaining shareholder value.
Strong Business Fundamentals
Despite the recent stock price decline, Bloomin’ Brands continues to show robust business fundamentals. In Q1 2024, the company experienced a 4% revenue decline compared to the same period last year. However, this should be viewed in the context of the company’s impressive performance over the past three years.
For FY 2023, Bloomin’ Brands reported a 13% increase in revenues and a 76.5% increase in net earnings on a diluted basis compared to 2019, the last pre-COVID full-year results.
Management has reaffirmed its guidance for 2024, expecting adjusted diluted earnings per share to be between $2.51 and $2.66. Additionally, Outback Steakhouse, one of its flagship brands, continues to outperform industry benchmarks, a trend that is expected to continue throughout the year.
Potential Catalyst: Brazil Operations
A potential major catalyst for Bloomin’ Brands is the ongoing review of strategic alternatives for its operations in Brazil. Management has indicated that discussions with interested parties are ongoing, and a deal could be highly beneficial.
The Brazil operations are viewed as having significant growth potential, and a strong valuation from a sale could unlock substantial shareholder value.
Risks To Consider
The primary risk to this investment thesis is the potential for inflation to reverse course, leading to prolonged high-interest rates. This scenario could delay the anticipated growth in revenues and earnings for Bloomin’ Brands.
Additionally, any adverse economic conditions or changes in consumer spending patterns could impact the company’s performance.
Conclusion
The recent decline in Bloomin’ Brands’ stock price, primarily due to the issuance of new shares following the conversion of convertible notes, presents a compelling investment opportunity. The company’s robust fundamentals, proactive share repurchase strategy, and potential catalyst from the sale of its Brazil operations all point to significant upside potential.
With a current Forward P/E ratio of approximately 7.5 based on the mid-range of management’s 2024 guidance, Bloomin’ Brands appears undervalued. Investors should consider this opportunity as the company continues to demonstrate resilience and strategic foresight in navigating market challenges.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
