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Bob Evans' weak 4Q could heighten shareholder unrest

Bob Evans' weak 4Q could heighten shareholder unrest

Activist investor Sandell Asset Management sparred with the company before its earnings report came out.

Bob Evans Farms Inc.’s difficult fourth quarter and drastically reduced earnings guidance for fiscal 2015 could foment more shareholder unrest, especially if its namesake family-dining chain misses aggressive sales growth targets projected for the second half of the year.

This week, Bob Evans not only reported same-store sales declines of 4.1 percent and 2.1 percent for its fourth quarter and fiscal 2014, respectively — in an earnings filing delayed by internal financial reporting problems, no less — but it also traded dueling press releases with activist investor Sandell Asset Management in a nearly yearlong proxy fight.

Bob Evans disclosed its latest settlement offer with Sandell for more representation on the New Albany, Ohio-based company’s board of directors. It also expressed confidence in its initiatives for the 561-unit chain this year, including the phased rollout of a potential breakthrough menu item, Broasted Chicken.

But ultimately, one analyst wrote, the company must face growing skepticism after lowering its earnings-per-share outlook for fiscal 2015 to between $1.90 and $2.20, down from its prior guidance between $2.80 and $3 per share.

“In light of the disappointing fiscal 2015 guidance provided by yesterday’s earnings report, we think more investors may be willing to side with the activists,” Miller Tabak + Co. analyst Steve Anderson wrote in a research note.

Sandell refuses to settle

In a press release published Wednesday, just before Bob Evans’ fourth-quarter earnings call, Sandell expressed concern over “bewilderingly high expenses” embedded in the restaurant company’s lowered earnings guidance, including $5.5 million associated with responding to Sandell’s demands for change, $2 million related to strengthening internal processes for financial reporting, and $8 million of increased performance-based incentive compensation for Bob Evans officers.

The investor further criticized Bob Evans as “a company in urgent need of effective oversight,” citing the negative sales results of fiscal 2014.

“Chairman and CEO Steven Davis conveniently cites many ‘challenges beyond the company’s control’ to explain away the disappointing results at Bob Evans in fiscal 2014,” Sandell wrote, “but these results are due in no small part to a wasteful culture sanctioned by the company’s board of directors, as well as the poor decisions made by Mr. Davis, which contributed to many issues that plagued Bob Evans in fiscal 2014.”

The investor reiterated its plan to seek the election of eight new directors for Bob Evans’ 12-person board at this summer’s annual shareholder meeting.

However, two days before, Bob Evans had released its own press release detailing its latest offer to Sandell to settle the dispute and avoid an expensive proxy battle, which Sandell reportedly rejected.

According to Bob Evans’ accounting of events, Sandell approached the company July 2 with a proposal requiring the resignation of three current directors and the nomination of five new directors chosen solely by Sandell. The proposal assumed that the three people to be jettisoned were long-serving directors closed to Sandell’s strategic suggestions, Bob Evans indicated. Also, the five Sandell-nominated directors potentially would join three other people who joined Bob Evans’ board this past April, resulting “in two-thirds of the board and all of the finance committee being comprised of directors who joined in 2014.”

Bob Evans countered with a proposal July 3 that would have added three of Sandell’s nominees to the board, putting a quarter of the 12-person board under Sandell’s influence. Under the counterproposal, two of Sandell’s nominees would join the finance committee, making half of the six-person committee comprised of directors added in 2014.

“At that point, fully half of the board, including a majority of the independent directors, would have been added to the board this year, ensuring another fresh and independent review of Sandell’s proposals,” Bob Evans wrote in its release. “Under this proposal, the finance committee would then be charged with reviewing and making recommendations to the full board with respect to Sandell’s proposals, as well as other opportunities to enhance stockholder value.”

The reconstituted board also would have considered whether to split Davis’ role of chairman from his role as chief executive.

Sandell rejected Bob Evans’ proposal, the restaurant company said. During the earnings call, Davis reiterated that the company’s leaders do not agree with Sandell’s two major strategic suggestions: the sale or spinoff of Bob Evans Farms Foods, and a major sale-leaseback transaction of the company’s owned real estate.

Davis could not comment on what kind of price for the packaged-foods division might motivate Bob Evans to spin it off and said there was “no need to monetize the real estate.”

“I’ve come behind sale-leasebacks before, and if your goal is to improve margins, you’re just going to increase your lease expense, which escalates over time,” Davis said. “Do that and it becomes one of your most expensive forms of debt.”

Boasting about Broasted

Bob Evans is banking on Broasted Chicken to lift results.

(Continued from page 1)

Through the first quarter of fiscal 2015, Bob Evans’ restaurant sales have yet to meaningfully recover, even as the severe winter weather it cited for its recent troubles started to abate. The brand forecast same-store sales to decrease between 2.5 percent and 3 percent for the quarter, due in part to a pullback in marketing spending the company executed in order to deal with other costs it was incurring, such as the Sandell proxy fight and resolving issues with the supply chain for Bob Evans Farms Foods.

However, the company is targeting aggressive sales recovery in the rest of the fiscal year, with flat to low-single-digit same-store sales increases expected in the second quarter and high-single-digit gains in the second half of the fiscal year.

Davis was especially bullish on a new menu item that would make its way across the Bob Evans system this year: Broasted Chicken. The item was tested in the Cincinnati market, improving dinner traffic trends and reaching a sales mix of 6 percent. With TV advertising in the market, Broasted Chicken reached 12 percent of sales mix.

The product will roll out in stages, starting with the Dayton, Ohio, market this month and reaching the entire Ohio market, where most of Bob Evans’ restaurants are located, by Thanksgiving. The company expects the product to be available systemwide by the end of fiscal 2015.

“We’re getting in position to better leverage Broasted Chicken because we know sales mix can go up to 12 percent, and we’re going to have our operations in a better position of readiness,” Davis said. “That’s why we’re doing a phased rollout, to get our carryout and nighttime operations ready. In Cincinnati, we never dreamed we’d see 12-percent mix, but it did. In 30 years in the this business, I’d never seen mix double like that.”

Bob Evans will shift its marketing mix and add as much as $1 million in incremental marketing spending, Davis said, and it will transition away from its email club toward more direct-mail drops to entice new customers.

A new labor initiative will train staff around growing sales in the afternoon and evening dayparts, and more managers and field-level staff will be dedicated to nighttime operations.

“Our best guest loyalty scores are at breakfast, and our TV messaging is on breakfast, but our biggest daypart challenge is dinner,” Davis said. “If you fix that, you get lunch right, so we’re getting our nighttime operations against that. The work we’ve done on breakfast will hold, and we’ll start making traction on lunch and dinner, and we’ll get carryout right as well.”

The company has completed its “Farm Fresh Refresh” remodeling program, and expects to build eight new restaurants in fiscal 2015. Bob Evans also plans to complete licensing agreements for as many as 10 Bob Evans Express locations this year. Four of those onsite units are expected to open in two malls and two airports.

Bob Evans’ operates its family-dining restaurants in 19 states.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

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