Bob Evans Farms' focus on fresh

by Monica Watrous
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Bob Evans is unveiling a new morning menu centered on fresh ingredients.

NEW ALBANY, Ohio — Bob Evans Farms, Inc. is betting big on breakfast after restaurant sales fell in the recent quarter. The company is unveiling a new morning menu centered on fresh ingredients and said it plans to simply lunch and dinner offerings.

For the first quarter ended July 24, Bob Evans had net income of $4,280,000, equal to 19c per share on the common stock, which compared with a loss of $1,016,000 for the prior-year period. Adjusted net income rose 409% to $11,704,000 from $2,312,000 the year before. Net sales declined 1.4 percent to $321,713,000 from year-ago sales of $326,341,000.

In August, the casual dining chain introduced new breakfast entrees featuring cracked shell eggs, fresh rather than frozen sausage, “fresh-baked” brioche breads and biscuits, not-from-concentrate orange juice and hand-scooped butter instead of margarine packets. Coming soon are improved hotcakes and omelet recipes.

Mark Hood, CFO of Bob Evans

“Guests continue to respond positively to our increasingly breakfast-centric menu, product offerings and marketing strategy as we leverage our strength and heritage with higher margin breakfast items, which represent 40% of total sales mix and deemphasize the lower margin items such as three-course dinners on our lunch and dinner menus,” said Mark Hood, CFO, during a Sept. 2 earnings call with financial analysts. “We continue building our lunch and day parts with menu innovation, but not at the expense of breakfast, where we have the most brand equity and highest margins.”

Operating income for the Bob Evans Restaurants segment during the quarter decreased 34 percent to $9,796,000, which included litigation expenses. The company said adjusted operating income for the segment increased 21 percent to $20,296,000 over the prior-year quarter. Net sales for the segment fell 0.6 percent to $238,669,000. Same-store sales declined 0.3 percent in the quarter. Bob Evans closed 18 restaurants during the quarter, bringing the total to 549 restaurants in 19 states.

“Restaurants offering broasted chicken, now comprising 54 percent of the chain, up from 48% last quarter, continued to outperform the balance of the chain, achieving a 2.1 percent same-store sales differential,” Hood said. “The platform was instrumental in offsetting the impact of last year's heavy (buy-one-get-one) discounting on three-course dinners. The roll-out of the broasted chicken platform will continue throughout fiscal 2016.”

For the BEF Foods segment, operating income advanced 421% to $15,851,000. Net sales for the segment fell 3.7 percent to $83,044,000. Total lbs. sold increased 0.4percent compared to the year-ago quarter, the company said. Bob Evans recorded a 17 percent increase in side-dish volume and a 15 percent increase in sausage volume that were offset by an increase in trade spending and a 43% decline in food service volume.

Bob Evans restaurants offering broasted chicken achieved a 2.1% same-store sales differential.

“Continued distribution gains and consumer acceptance resulted in BEF Foods achieving a milestone during the first quarter, a 50 percent market share of the refrigerated dinner side dish market, our highest market penetration to date,” said Mike Townsley, interim CEO and president of BEF Foods. “With the recent introduction of our natural line of refrigerated side dishes, we look forward to further growth as those products open up opportunities for additional points of distribution at current and new accounts.”

The Corporate and Other segment sustained a loss of $17,385,000, which compared to a loss of $17,908,000 for the year-ago quarter, reflecting higher performance-based compensation expense that was partially offset by cost savings initiatives.

The company said it is making progress against previously announced strategic initiatives to improve profitability and increase shareholder value. Bob Evans is pursuing a sale leaseback of up to $200 million, or roughly 30 percent of the company’s restaurants, with plans to complete the transaction in the second half of the year. The company expects to generate net proceeds of $165 million to $170 million.

“We have also made substantial progress in identification of counterparties for the sale and leaseback of our New Albany headquarters and the Lima, Ohio, and Sulfur Springs, Texas, manufacturing facilities for which we expect net proceeds of $85 million to $90 million,” Hood said. “We expect to use net proceeds from these transactions to pay down debt and repurchase shares while maintaining a prudent adjusted leverage level.”

Bob Evans' refrigerated side dish category performed well in the quarter.

Based on performance in the first quarter, the company has raised its fiscal 2016 diluted earnings per share guidance range to $1.85 to $2.00 from $1.75 to $1.95. Additionally, executives expect to achieve $17 million of cost savings during the year, which is $3 million higher than the prior estimate.

“However, our guidance remains cautious as a result of commodity headwinds associated with avian influenza, continued efforts to reduce restaurant discounts while growing transactions and general economic conditions, including volatility in the financial markets,” Hood said. “Our guidance includes the estimated impact of the previously announced pursuit of a sale-leaseback of our headquarters building and select industrial properties, but does not include the impact of a potential real estate transaction for our restaurant properties. Our guidance includes increased marketing investments in the second and third fiscal quarters, incentive compensation at targeted levels, higher interest costs and a higher effective tax rate relative to the prior year.”

The company recently announced a new leadership structure. Doug Benham, former president and c.e.o. of Arby’s Restaurant Group and a director of Bob Evans since last August, has been named executive chair, a new position. Reporting to Benham is an office of the chair, consisting of Mr. Hood; Townsley; John Fisher, executive vice president and chief concept officer; and Colin Daly, general counsel and secretary. The new leadership structure replaces the office of the interim CEO and will continue until a replacement is named.
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