Bob Evans Farms Inc. said Wednesday that it has retained advisory firms to analyze its productivity, cost structure and overall strategy in an effort to improve profits.
The advisors include Lazard, which advised the company during its recent proxy fight. Executives said the board has retained Lazard as a financial advisor.
In addition, the company said it has hired Deloitte to review Bob Evans’ sales, general and administrative (SG&A) cost structure as part of an overall effort to improve margins by 300 to 350 basis points by 2018.
A “comprehensive review is taking place” at the New Albany, Ohio-based company, which operates a 562-unit family-dining chain and the food manufacturing business BEF Foods, Steve Davis, Bob Evans’ CEO, said in a call Wednesday discussing second-quarter earnings.
“The entire board, and particularly the finance committee, is taking a fresh look at the company’s overall strategy,” Davis said. “We’re taking ideas from all stockholders.”
Bob Evans is coming off a tough proxy fight against Sandell Asset Management, which in August won four seats to Bob Evans’ board. Sandell pushed for major changes at Bob Evans, including selling the company’s real estate and spinning off BEF Foods.
It already appears as if those members are having an impact. Among the cost cuts the company is planning to make is selling its corporate aircraft, which had been an issue during the proxy fight.
The family-dining chain completed a quarter in which sales missed analyst expectations and disappointed investors on Wall Street. Same-store sales at Bob Evans restaurants were flat in the second quarter ended Oct. 24, the company said. Total restaurant sales increased 0.3 percent, to $241.2 million.
While the company insisted that sales were improving, that didn’t assuage investors. Many of Bob Evans’ family-dining rivals, like Denny’s, IHOP and Cracker Barrel, have recently reported strong sales, and low gas prices were expected to provide a bigger boost.
Bob Evans’ stock, which recently hit a new 52-week high, fell more than 10 percent in trading Wednesday morning.
Christopher O’Cull, analyst at KeyBanc Capital Markets, downgraded the company’s stock from hold to underweight, citing weak same-store sales and disappointing margins at BEF Foods, among other things.
But Miller Tabak + Co. analyst Stephen Anderson, who has a buy rating on the stock, suggested that underlying trends are encouraging and aggressive cost cuts could follow. He suggested that Bob Evans has “considerable margin upside” heading into its 2016 fiscal year if costs remain under control and same-store sales can grow into the low single digits.
“We are pleased to see management consider more aggressive (sales, general and administrative spending) reductions, including the company’s stake in a corporate jet, though we would prefer to see more concrete steps to reduce SG&A in the next couple of quarters,” Anderson wrote.
Overall, Bob Evans’ net income fell 1.3 percent in the second quarter. A $4 million reduction in operating income at the restaurants, to $9.6 million, from $13.6 million the same period a year ago, contributed to the decline.
That reduction was due largely to higher food costs, which had a $4.1 million “negative impact” on operating income. Executives said high costs were a reason the company is working to sell more turkey and Broasted Chicken.
Broasted Chicken outperforms
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Bob Evans has high hopes for Broasted Chicken, a breaded, pressure-fried chicken menu item. The company said restaurants serving the item saw same-store sales increase 1.8 percent in the second quarter. By contrast, those that didn’t sell the item saw a decline of 0.5 percent.
Locations serving Broasted Chicken outperformed those without the item by 130 basis points at lunch and 690 basis points at dinner, the company said. Customers are apparently taking the chicken to go. Off-premise sales at units with the chicken increased 21.3 percent in the quarter, while off-premise sales at other locations grew 10.7 percent.
But the chain appears now to be struggling at breakfast and with dine-in sales.
Breakfast sales fell 0.3 percent for the system, at a time when consumers are dining out more in the morning. Dine-in sales fell 1.7 percent for the system. Those sales decreased for restaurants serving Broasted Chicken and those that were not.
Analyst O’Cull expressed concern that Bob Evans’ focus on dinner sales has caused the company to lose focus on breakfast, its “core equity,” he said. He also said he estimated that the company has seen declines in dine-in customers for 14 straight quarters. Bob Evans’ sales plan, he wrote, “is missing the mark.”
Still, Bob Evans had a strong Thanksgiving. The company’s fiscal month of November ended Nov. 26, and same-store sales rose 0.8 percent for the period. But including Thanksgiving Day, Nov. 27, same-store sales for the chain have risen 2.7 percent so far in the third quarter. Thanksgiving Eve and Thanksgiving Day combined same-store sales increased 25 percent, the company said.
Contact Jonathan Maze at [email protected].
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