In the depths of the recession, restaurant chains were not getting much love. The macro trends were merciless for many sit-down joints starting in 2008.
But now we're seeing signs that investors are warming to the sector. Fast food is starting to heat up with the news of the coming Burger King IPO.
Now, the private equity owners of Outback Steakhouse, led by Bain Capital, are off to market with its parent, Bloomin' Brands. They recently filed an IPO document that should whet the appetite of those with a stomach for risk and a notion to play the economic-recovery card. As Fools have noted, dining is a volatile sector even in the best of times.
Few details are available, except that the ticker will be BLM (no idea in which exchange), and the proceeds of the IPO will be used to retire about $248 million in notes, with the rest going into the business. That's always good news, as the company plans to remodel 450 Outback restaurants by the end of next year. It will need cash on hand to pull it off -- without piling on costs that the market won't currently allow restaurants to pass on to customers.
Bloomin' Brands hasn't priced the IPO yet, but its filing notes that the company's compensation plan set a fair value of $10 per share when granting options to management. So using that as a proxy and the income of $0.94 per share, we get a P/E of almost 11. That's compared to more than 16 for Chili's parent, Brinker Intl. (NYSE: EAT ) , and more than 14 for Darden Restaurants (NYSE: DRI ) , the parent of Olive Garden and Red Lobster.
Bloomin' Brands' net income nearly doubled from $53 million in 2010 to more than $100 million in 2011 as revenue increased slightly from $3.6 billion to $3.8 billion. Research firm Technomic reported that full-service casual restaurants like Outback saw sales grow 2.8% last year after a flat 2010, and within that group, steakhouses were up 5.1%, so the macro outlook is promising.
But keep an eye on gas prices as a wild card, as they hit the frequency of restaurant visits right away. A Harris Poll just found cutting back on dining out is the first thing Americans do to deal with rising prices at the pump; 75% of households said they already have done it.
And yet, in spite of those cutbacks, casual dining is holding up. One reason could be that the higher their household income, the less likely Americans are to cut back. Not surprisingly, the Harris poll found that slightly more than one-third of households earning more than $100,000 a year -- the definition of "wealthy" outside most major cities -- had cut back, compared to two-thirds of those making less than $35,000.
So we are in a recovery where those who still have disposable income are willing to spend it, unlike the dog days of 2008, when it was embarrassing to be seen indulging. But diners are still looking for value, which is where casual dining restaurants can find a sweet spot by offering an affordable splurge for the middle class.
Panera (NYSE: PNRA ) has done very well during the downturn by bridging the gap between fast food and casual dining with fancy sandwiches priced just above McDonald's fare in a nice environment. Even McDonald's (NYSE: MCD ) did a nice job of eating Starbucks' lunch during the recession by spiffing up its coffees as an affordable alternative to Seattle's $5 lattes. NPD Group noted recently that "fast-casual" eateries like Panera were the lone segment of the restaurant business that grew during the recession, and casual-dining restaurants are learning from that experience.
So, casual-dining chains have a good chance of profiting in this economy if they stick to their knitting. Investors adore Darden, but note that it has recently gone upscale after buying Rare Hospitality, the parent of the spiffy Capital Grille chain. Let the NPD report be a warning.
With the economic environment still in the touch-and-go phase, the Bloomin' Brands IPO will come down to pricing. The $10 mark looks pretty tasty, so let's hope there are no gluttons among the managers.
If you don't want IPOs in your plate, but want to know about other stocks that will benefit from this recovery, check out our analysts' "Top Stock Pick for 2012." This report is free for a limited time.