Bob Evans’ Earnings Nosedive on Store Closures, Low Traffic

Revenue fell 2.8% to $315.96 million from $325.02 million in the year-ago period

b1Bob Evans Farms Inc. (NASDAQ: BOBE) announced its financial results for Q2 FY17 on December 5th, 2016.

The Company owns and operates full-service restaurants under the Bob Evans Restaurants brand name. As of October 28th, 2016, Bob Evans Restaurants owned and operated 522 family restaurants in 18 U.S. states, primarily in the Midwest, mid-Atlantic and Southeast regions. Through its BEF Foods segment, the Company also produces and distributes refrigerated and frozen convenience food items under the Bob Evans and Owens brand names. Read more about Bob Evans’ financial performance below.

Q2 FY17 financial highlights

During Q2 FY17, Bob Evans’ revenue fell 2.8% to $315.96 million from $325.02 million in the year-ago same period, owing to lower customer traffic at stores and closure of many of its restaurants. Despite the Company’s efforts at redesigning the restaurant menu to include farm-fresh value menu lunch combos, improving core menu items, price-value equation, and selective food quality upgrades, same-store sales fell 1.8% during the reporting quarter. The company also faces competition from The Wendy’s Company (NASDAQ: WEN), Chipotle Mexican Grill Inc. (NYSE: CMG), and Five Guys Burgers and Fries as well as other quick service restaurants. As a result, Bob Evans closed 41 restaurants during FY16 and expects to close 7 more during FY17. To spur restaurant sales, Bob Evans introduced a new menu in September 2016, while promoting its current specials.

On a GAAP basis, the Company’s Q2 FY17 operating income plunged to $1.4 million from $11.4 million in the year-ago comparable period due to severance, restructuring, and loss on sales of assets. As a result, Bob Evans’ net income nosedived to $0.2 million, or $0.01 per diluted share, compared to net income of $6.4 million, or $0.29 per diluted share, in the corresponding period last year. After adjusting for the note impairment, non-GAAP net income was $11.2 million, or $0.56 per diluted share, compared to net income of $9.2 million, or $0.41 per diluted share, in Q2 FY16.

Segmental highlights

Bob Evans Restaurants: This segment’s Q2 FY17 net sales fell 4.7% to $219.8 million compared to $230.7 million in the corresponding period last year. Same-store sales declined 1.8%, with the balance of the net sales decline due to net restaurant closures during the past year. No restaurants were closed and no new restaurants opened during the reporting quarter. The Company operated 522 restaurants at the end of the quarter.

b2Bob Evans Restaurants’ GAAP operating income was $13.5 million compared to $13.3 million last year, while non-GAAP operating income was $13.5 million compared to $13.6 million last year. Non-GAAP operating income declined due to lower sales and increased hourly wage rates along with investment in labor hours to support efforts to improve guest hospitality, partially offset by lower commodity costs, reduced discounting, and lower healthcare costs. Additionally, the April 2016 sale-leaseback transaction of 143 restaurant properties reduced operating income by $0.4 million due to a $2.7 million increase in rent, partially offset by a $2.3 million decline in depreciation compared to the prior year’s same period.

BEF Foods: This segment’s Q2 FY17 net sales grew 2% to $96.2 million compared to $94.3 million in the corresponding period last year. Pounds sold increased 6.9%, while average net selling price per pound declined 4.6% compared to the year ago same period. The decline in average net selling price reflects higher sales mix of lower-priced, although higher-margin, side-dish products relative to sausage, as well as reduced net sausage pricing through increased trade spending. From a net sales perspective, a 13.7% increase in side-dish pounds sold and a 7.6% rise in sausage pounds sold were partially offset by a $4.1 million increase in trade spending (reduces net sales), a 17.4% decline in frozen product pounds sold, and a 5.8% decline in food service pounds sold compared to Q2 FY16.

BEF Foods’ Q2 FY17 GAAP operating income was $18.7 million compared to $14.0 million last year. Prior year’s GAAP operating income included a $3.6 million charge to reflect the loss on the sale-leaseback of the Sulphur Springs manufacturing facility. Non-GAAP operating income rose to $18.7 million compared to $17.6 million in the corresponding period last year, mainly due to increased volume, $2.5 million of lower sow costs, favorable sales mix, and lower SG&A costs; partially offset by $4.1 million of increased trade spending, increased freight expenses, and an increase in advertising expenses. Additionally, the October 2015 sale-leaseback transaction of two industrial properties reduced operating income by approximately $0.6 million due to a $1.0 million increase in rent, partially offset by a $0.4 million decline in depreciation compared to Q2 FY16.

Corporate and Other: This segment’s Q2 FY17 GAAP operating costs jumped to $30.7 million compared to $15.9 million last year. Excluded from the operating costs are a $16.5 million resulting from the $16.0 million related to the impairment of the note receivable from the 2013 sale of Mimi’s Café and $0.5 million related to costs associated with strategic initiatives. Non-GAAP operating costs declined to $14.2 million from $15.9 million last year, due to lower legal and professional fees, partially offset by increased incentive compensation costs and depreciation and amortization resulting from technology-related capital expenditures.

Other highlights

Cash balance: The Company’s cash balance and outstanding debt at the end of the quarter were $4.9 million and $361.8 million, respectively, compared to $5.4 million and $471.4 million at the end of the corresponding period last year. The Company was able to decrease its borrowings since it was able to use the proceeds from recent real estate monetization transactions and operating cash flow to reduce debt. However, these positives were partially offset by share repurchases, capital expenditures, and dividend payments. On a pro-forma basis, assuming the 2016 sale-leaseback transactions occurred at the beginning of fiscal 2016, the Company’s quarter-end leverage ratio was 3.00.

b3Share repurchases and dividend: The Board of Directors announced a quarterly dividend of $0.34 per share payable on December 23rd, 2016, to stockholders of record at the close of business on December 12th, 2016. Additionally, the current share repurchase authorization has been extended through December 31st, 2017.

Lima facility: During FY16, the Company progressed with the expansion of its Lima, Ohio, refrigerated side-dish manufacturing facility. The new production capacity will enable the Company to meet peak holiday demand and achieve sales growth in the years ahead.

Guidance for FY17

For FY17, Bob Evans reduced its outlook for GAAP and non-GAAP EPS ranges. As such, the company reduced its GAAP diluted EPS guidance range to $1.54 to $1.72 from its previous guidance range of $2.00 to $2.17, to reflect the impairment of the note receivable from the 2013 sale of Mimi’s Café, partially offset by improved operating performance in H1 FY17. The company also raised its non-GAAP diluted EPS guidance range to $2.15 to $2.30, from $2.05 to $2.20 previously.

For BEF Foods, Bob Evans lowered its sow cost forecast to $42 to $45 per hundredweight from its previous range of $50 to $53, to reflect expectations for the remainder of FY17. As a consequence of lower projected sow costs, the company expects lower sausage pricing and has lowered BEF Foods sales outlook to $390 million to $410 million, from its previous range of $400 million to $420 million.

Stock Performance

b4Bob Evans’ stock stood at $52.93, slipping 2.29%, at the close on Tuesday, December 13th, 2016, having vacillated between an intraday high of $54.67 and a low of $51.89 during the session. The stock’s trading volume was at 476,720 for the day. The Company’s market cap was at $1.05 billion as of Tuesday’s close.

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