Bob Evans Farms betting on poultry
by Monica Watrous
NEW ALBANY, OHIO – Bob Evans Farms is betting big on broasted chicken. Amid higher sow costs and restaurant traffic declines that hampered the company’s fourth quarter and fiscal year, Bob Evans hopes to improve earnings with the introduction of a new poultry platform designed to lift dinner sales in its restaurants.
Marinated and hand-breaded, “broasted” chicken is prepared using a proprietary cooking method that combines frying and pressure cooking to impart both juiciness and crispiness, according to the company.
“The goal is to bolster dinner and overall same-store sales performance and reestablish Bob Evans Restaurant as a top dinner destination,” said Steve Davis, chairman and chief executive officer, during a July 9 call with financial analysts to discuss fiscal earnings. “Currently, dinner represents 30% of our sales mix. The broasted platform is ideal for future expansion to other categories beyond chicken as we develop guest awareness and operational experience.”
The item is being tested with plans for a system-wide rollout by the end of fiscal 2015.
“Ultimately, the broasted cooking process is ideally suited to other proteins as well as appetizer items,” Davis said. “Furthermore, the broasted platform is well positioned for carryout and catering, and we expect it to be a key component of our continued off-premise sales growth.”
The company’s confidence behind broasted chicken comes from successful results in initial tests. After launching in 31 restaurants with support from TV spots, the company said the menu item soared.
“Once we turned the TV on, we doubled the mix,” said Mark Hood, chief financial officer. “All of a sudden, we started running out of product. So we didn't even push carryout, because we wanted to take care of the dining room. We are now in a position to better leverage that broaster rollout because A, we know that the mix can go up to 12%; B, we know the times of the day when the product is going to hit. And then C, we are going to have the operators in a much better position of readiness…
“But as long as I have been in this business, I have never seen product mix double like this. There's only been a couple of products that I can think of in the 30 years that I have been with the business where I have seen this kind of a lift.”
Now for the bad news
Three factors drove a decrease in earnings and sales during Bob Evans’ fourth quarter: severe winter weather that affected restaurant traffic in Midwest markets, a slower-than-expected startup of the company’s expanded plant in Sulphur Springs, Texas, and higher costs of sausage materials, including sow and trim. A supplier dispute that restricted sales of Bob Evans Farms refrigerated side dishes also negatively affected fiscal results.
Net income for the fiscal year ended April 25 was $33,685,000, equal to $1.27 per share on the common stock, which compared with a loss of $821,000 in the prior year. Net sales totaled $1,328,552,000, down from $1,330,226,000 the year before.
For the fourth quarter, net income fell 56% to $13,009,000, equal to 53c per share on the common stock, which compared with $29,781,000, or $1.07 per share, in the prior-year period. Net sales for the quarter declined 4.4% to $231,000,000 from $241,700,000 the year before.
Also weighing on earnings were legal and professional expenses related to discourse with activist shareholder Thomas Sandell of Sandell Asset Management Corp., which last September began pressuring Bob Evans to break up its business.
“Many of our investors have asked is there a way to settle with Sandell instead of engaging in a costly, divisive proxy contest,” Davis said. “We believe we have done our part to address our investors' concerns.”
In response to Bob Evans’ earnings release issued on June 8, Sandell called for a reconstitution of the company’s board of directors, citing a lack of effective oversight for the disappointing results.
Company cautiously optimistic
Though optimistic about the broasted chicken rollout, Bob Evans has lowered its expectations for fiscal 2015, reflecting a more cautious outlook on topline trends in restaurant traffic and sales, as well as continued high price levels in the sow market.
Still, the company expects to realize benefits from a series of significant investments completed last year, which included its Farm Fresh Refresh restaurant remodels, the development of Bob Evans Express units in such nontraditional venues as airports and malls, and plant consolidation and expansion.
“With the transformational investments behind us, Bob Evans Restaurants and Bob Evans Farms Foods are operating under the same mandate: to leverage revitalized asset bases with topline growth and continued effective management of cost drivers, most importantly input and labor costs,” Mr. Davis said. “As an enterprise, we are committed to achieving returns on our recent investments by supporting both business segments with sustained strategic marketing spending throughout the year.”
Following a supplier dispute that restricted sales of refrigerated side dishes, the company hopes to restore the business to double-digit growth in fiscal 2015.
Operating income for Bob Evans Restaurants in the fiscal year fell to $27,134,000, which compared with $69,317,000 in the previous fiscal year, resulting from lost sales due to severe winter weather and increased pork, bakery and beef costs. Net sales for the segment were $956,579,000, down from $981,418,000, resulting from sustained winter weather from November through February that dragged down traffic.
For the quarter, operating income for Bob Evans Restaurants fell sharply to $2,161,000 from $18,856,000 in the same quarter a year ago. Net sales for the segment during the quarter were $240,506,000, down from $245,494,000.
“Throughout the fourth quarter, the Bob Evans Restaurant teams worked to wrap up the Farm Fresh Refresh program; to finalize new media and menu innovation; and to refine the Bob Evans Express concept to drive sales in fiscal 2015,” Mr. Davis said. “As a result of these efforts, we expect to effectively leverage the Farm Fresh Refresh remodeled restaurant as well as our new restaurant designed to drive fiscal 2015 same-store sales and net sales growth.”
For the BEF Food segment, operating income for the fiscal year decreased to $5,991,000 from $18,637,000 a year before, reflecting higher costs for sausage materials, as well as expenses related to the Sulphur Springs facility expansion and the supplier dispute. Net sales for the segment in the fiscal year rose to $371,973,000 from $348,808,000 the year before.
For the fourth quarter, operating income for BEF Food decreased to $2,116,000 from $3,383,000 a year before. Net sales for the segment rose to $99,626,000 from $97,827,000 in the prior-year period.
The BEF Food segment is focused on four initiatives in fiscal 2015, which include restoring refrigerated side dish sales to double-digit growth following the supply dispute, expanding retail distribution, realizing benefits of the plant network optimization project that was completed in fiscal 2014, and realizing higher margins on the sausage business as pricing and trade spending strategies catch up to historically high sow cost pricing.
“As for sow costs, growth of our refrigerated side dish business remains one of the best methods for hedging exposure to continued high sow costs,” Mr. Davis said. “With that said, we believe we have appropriate pricing in place for the current sow cost environment and will adjust as necessary throughout fiscal 2015.”