Is a spin-off in store for Bob Evans?

by Monica Watrous
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Bob Evans Farms restaurant
Bob Evans Farms is researching its options for cutting costs.

NEW ALBANY, Ohio – Changes are coming to Bob Evans Farms, Inc., and a spin-off of the food processing business may be one of them. With a reconstituted board of directors, new executive leadership and an operational turnaround effort in place, the company is willing to “revisit past decisions with open minds,” said Mark Hood, CFO of Bob Evans, during a June 17 earnings call with financial analysts.

The potential separation of Bob Evans’ packaged food and restaurant businesses initially was pushed in September 2013 by investor Sandell Asset Management Corp., igniting a proxy battle that resulted in the resignation of CEO Steve Davis last December, shortly after four nominees proposed by Sandell were elected to the company’s 12-member board of directors.

In May, Bob Evans closed 18 underperforming restaurants, with two additional closings planned for later this year, and eliminated approximately 60 positions to reduce its cost structure by $14 million. The company also is pursuing one or more sale-leaseback transactions for its New Albany, Ohio, headquarters and BEF Food facilities in Lima, Ohio, and Sulphur Springs, Texas, with proceeds to be used to repurchase shares under its $150 million share repurchase authorization. Additionally, Bob Evans intends to sell some of its restaurant properties, which could take the form of either a sale-leaseback transaction or a tax-free spin-off and real estate investment trust (REIT) conversion. Factors governing the type of transaction the company chooses include the performance of Bob Evans’ business segments; market values for restaurant real estate; performance of publicly traded real estate companies; interest rates and domestic economic conditions. Either form of transaction is expected to result in reduced investment in lower-return assets and enable flexibility to pursue a separation of the foods and restaurant segments in the future, the company said.

Meanwhile, Bob Evans continues to search for its next CEO.

“Each of these actions better position Bob Evans Restaurants and BEF Foods for long-term, profitable growth and improved operating results in the near term,” Hood said. “These efforts are only a beginning. Much work remains to be done as we improve our operational execution, and continue to look for opportunities to reduce our cost structure.”

Segment sales for Bob Evans Restaurants rose 3.1 percent to $238,187,000 for the quarter and 1.4 percent to $969,877,000 for the year. Same-store sales increased 2.1 percent during the quarter and 0.9 percent for the year, slightly lagging family-dining industry growth. The company reported an operating loss for the segment of $9,194,000 in the quarter, which compared with operating income of $2,161,000 for the year-ago period, and an operating loss of $2,752,000 for the year, which compared with operating income of $27,134,000 the year before. The negative results included one-time charges and were driven by higher food costs due to commodity inflation, discounts on menu items, increases in labor and benefit costs, and increased advertising and utility costs.

Priorities for the year ahead in the restaurant segment include the continued roll-out of a broasted chicken platform introduced last year and efforts to improve breakfast day part performance.

“Last quarter, we announced Bob Evans Restaurants was evaluating all aspects of its go-to-market and operating strategies, including a redesigned menu, and a more balanced day part marketing strategy, new product offerings, improved guest service, and employee engagement strategies,” Hood said. “Our fourth-quarter results show early progress from these actions.”

Segment sales for BEF Foods dipped 1.2 percent to $94,206,000 for the quarter and climbed 2 percent to $379,313,000 for the year. Low double-digit increases in side-dish and sausage volumes were offset by a 44 percent decline in food service volume and a $6.3 million increase in trade spending during the fourth quarter.

Operating income for the segment surged 379 percent to $10,131,000 for the quarter and 241 percent to $20,438,000 for the year, driven by lower sow costs, a higher mix of retail items and improved production yields.

The segment’s priorities for the year ahead include a more than $20 million expansion of the facility in Lima, a reinvestment in marketing of refrigerated side-dish products, new “all-natural” side dish launches “consistent with the needs of today’s health-conscious consumer,” and a recovery of sausage market share in core markets, said Mike Townsley, president of BEF Foods.

For fiscal 2016, the company is projecting low-single-digit same-store sales growth for Bob Evans Restaurants and net sales of $380 million to $400 million for BEF Foods. Management expects savings and efficiencies to deliver a 25 percent to 35 percent increase in operating income and a 7 percent to 20 percent increase in earnings per share, reflecting a higher tax rate.

The company’s share price on Nasdaq closed nearly 2 percent higher to $48.34 on June 17 from the previous close of $47.50.

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