Bob Evans looks to bounce back from tough winter

Executives for Bob Evans Farms Inc. noted during the company’s third-quarter earnings call that forces outside their control, namely bad weather and a viral epidemic in the nation’s pork supply, have coincided with major investments and cost reduction plans to make fiscal 2014 a tough, transitional year.

However, leaders of the New Albany, Ohio-based company were more upbeat about a bounce-back year in fiscal 2015, as the completion of its Farm Fresh Refresh remodel program and the consolidation of its manufacturing plants are meant to deliver efficiencies that drive margin growth of 3 percent to 3.5 percent over time.

“A lot of the transformational work is going to be complete [next year],” chief executive Steve Davis said. “So instead of remodeling restaurants, people will be focused on driving sales and taking care of our guests. We’ll go from eight plants to four, which is easier to run, and then they’ll be focused on filling orders.”

For the third quarter of fiscal 2014, ended Jan. 24, the company achieved a $5.7 million net income despite an estimated hit to the bottom line of $5.6 million from the restaurant division from lost sales and profitability, unfavorable food and labor costs, and extra maintenance resulting from snow and ice storms throughout the quarter.

Bob Evans said it managed through another $600,000 in negative impact during the period from higher sow costs, which largely affected its Bob Evans Foods division that manufactures sausage and side dishes for sale in grocery stores and foodservice channels. An ongoing supplier dispute for the foods division cost the company another $2.5 million during the quarter, and the inefficient startup of an expanded production facility in Sulphur Springs, Texas, cost another $2.1 million.

“Despite the nearly $11 million impact of the challenges we encountered during the third quarter of fiscal 2014 … our confidence in and commitment to our long-term growth strategies are in no way diminished,” Davis said.

Winter of discontent

As the company reported Tuesday with the release of its third-quarter earnings [http://nrn.com/corporate-news/bob-evans-swings-profit-3q-despite-weather], severe snowstorms and cold weather have had a chilling effect on Bob Evans’ restaurant sales. The brand’s same-store sales declined 1.8 percent during the quarter, but weather accounted for -3 percent of that result. In February, when same-store sales fell 6.7 percent, the weather accounted for -9 percent, the company said.

“In my lifetime I haven’t seen storms like this,” Davis said. “Usually, you get snow or you get cold, but [this past quarter] we got both, and then when you throw in ice storms [in the Southeast], you get a tough period.”

Meanwhile, the 47 restaurants located in Florida, where winter weather was not a factor, reported a 4.4-percent gain in same-store sales. Executives held up that market as one where the remodeling program — which allows for added sales layers with new bakery and carryout sections in the restaurants — and new menu items produced their intended sales-driving effects without bad weather derailing progress.

“We’ve done a good job of training our people up front and remarketing the restaurant after we reopen it,” Davis said. “We’re past the learning curve, so as we get to the end of the Farm Fresh Refresh, we expect those gains to continue.”

Off-premise sales were a bright spot for Bob Evans during the third quarter, as takeout sales and catering sales grew 3 percent and 17 percent, respectively, compared with a year earlier. The $5 Soup to Go program alone increased its sales by 9 percent compared with a year earlier, Davis said.

One securities analyst covering the company, Stephen Anderson of Miller Tabak + Co., wrote in a research note that the weather-related weakness in same-store sales during Bob Evans’ third quarter largely fell in line with projections.

“However, the culprit for the earnings miss in the quarter in our view was at the Bob Evans Foods division, which registered a paltry 1.6-percent sales gain and fell well short of consensus estimates of a double-digit sales gain,” he wrote.

Both the restaurant division and consumer packaged-good division are off to an “inauspicious start” for the fourth quarter of 2014, Anderson wrote, as the winter weather drove negative comparable sales in February and early March, and the Bob Evans Foods division continues to deal with an inefficient startup of its expanded manufacturing facility in Texas and the supplier dispute.

Reasons for optimism

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Bob Evans officials released guidance for fiscal 2015 that would indicate the realization of the benefits of initiatives in the restaurant and packaged-foods divisions, as well as moving past the severe weather of 2014 and high sow costs.

Bob Evans projects annual earnings per share between $2.80 and $3 in fiscal 2015. By contrast, the company’s forecast for earnings per share in fiscal 2014 is between $1.60 and $1.75 per share, which has been lowered twice in the past four months from an original range between $2.60 and $2.65 per share.

The company also forecasts full-year same-store sales growth between 3 percent and 3.5 percent.

Chief financial officer Paul DeSantis said next year’s bullish outlook has as much to do with lapping 2014’s severe weather and the porcine epidemic diarrhea virus, or PEDv, affecting the nation’s pork supply as the initiatives like restaurant remodeling and plant consolidation.

“All of those investments have to one extent or another impacted us this year, so our expectation is that next year we’re back to more of a normal trend,” he said.

Anderson of Miller Tabak wrote that he was similarly optimistic for Bob Evans in 2015, though he was less certain PEDv would be contained next year.

“We expect the company to realize more consistently positive same-restaurant sales, in part from the completion of the Farm Fresh Refresh renovation program and additional operating-cost savings,” he wrote.

DeSantis and Davis countered that Bob Evans’ guidance for next year assumes high sow costs once again, which the company could combat with a combination of price increases in its consumer packaged goods and a reduction in trade advertising.

Bob Evans Farms Inc. operates 562 family-dining restaurants in 19 states.

Contact Mark Brandau at [email protected].
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