Bob Evans Fails to Bring Home the Bacon

Often when you see an earnings report begin by discussing an increase in a stock buyback program rather than the results -- brace for a bad report. Bob Evans Farms (NASDAQ: BOBE  ) was no different. The family restaurant continues to deliver uninspiring results despite competitors such as Denny's Corporation (NASDAQ: DENN  ) and IHOP of DineEquity (NYSE: DIN  ) continuing to flourish.

Sandell Asset Management
Some investors haven't been all too pleased with Bob Evans management.  Hedge fund Sandell Asset Management accuses the company of "abysmal earnings performance" and plans to up the pressure to remove the board of directors.  Bob Evans management fired off a defensive press release of its own, but it still doesn't do much to address the disappointing earnings performance other than offering more of the same strategy.  

Bob Evans Farms results
Bob Evans Farms reported fiscal second-quarter results on Dec. 3. Net sales rose 1% to $332.6 million. Sales for its BEF foods segment jumped 10.6%, but sales for Bob Evans restaurants slipped by 2.4%. Adjusted, non-GAAP earnings missed expectations by a mile coming in at $0.35 per share, 36% lower than the $0.55 estimate and down 32.7% from last year.

Bob Evans guided for fiscal 2014 non-GAAP EPS of between $2.60 and $2.65 per share including the impact of stock buybacks.

CEO Steve Davis said that he expects that the "net costs" investments the company has made into its remodeling will begin to become "net benefits" investments going forward. The company also blamed increased costs of "bacon and other pork-related items, bakery, and poultry" for its weak results. Apparently Bob Evans will have to save the pig-roast celebration for another quarter.

In the conference call, CFO Paul DeSantis went into greater detail. He explained that a whopping $0.23 per share of the shortfall in earnings was due to sow costs alone. All of the other various "cost pressures" combined cost Bob Evans Farms another $0.09 per share. The good news is that beginning in January, DeSantis expects that "new higher pricing and lower trade spending will take effect" which will fully offset the high sow costs. Will guests negatively respond to the higher pricing? That remains to be seen.

Davies also blamed the economy. He stated, "We recognized restaurant guests remain cautious due to the continued uncertain economic environment." He said the company was in the process of changing the menu to "incorporate a tiered pricing structure." What a great idea! Denny's started doing that years ago with its "Make your own Grand Slam" option, and it's been working.

Denny's results
Denny's doesn't seem to be having the same problems as Bob Evans Restaurants. Though CEO John Miller does see current conditions as a "challenging economic environment," Denny's still brought home the bacon. Domestic systemwide sales increased 1.2% while net income jumped 31.1% to $7.0 million. Nowhere in its earnings press release nor its conference call did Denny's complain about bacon, pork, or sow prices. Are all the bacon lovers only heading over to Bob Evans Restaurants?

IHOP of DineEquity results
DineEquity owns and operates both Applebee's and IHOP. While Applebee's only showed a 0.4% same-store sales gain, IHOP was the bright spot with a 3.6% same-store sales gain. This blew away the results from both Bob Evans and Denny's. For the entire company, DineEquity reported non-GAAP earnings of $1.10 per share. Just as with Denny's, DineEquity's earnings release and conference call included no complaints about bacon, pork, or sow prices.

While CEO Julia Stewart used the exact same words as Denny's when she called it a "challenging economic environment," IHOP of DineEquity continues to deliver. DineEquity's original outlook for 2013 same-store sales at IHOP was between negative 1.5% and positive 1.5% and it is now between positive 2% and positive 3%.

In the conference call, Stewart pointed out that the same-store sales gain from IHOP was the biggest increase DineEquity has seen since the first quarter of 2008. Stewart credited the simple change in menu for helping create this success. Perhaps Bob Evans Restaurants has the right idea of changing its menu as well.

Foolish final thoughts
Bob Evans Restaurants may make a great success story in 2014, but for now it's mostly speculative. The company is remodeling restaurants and changing its menu and it expects these changes will bear fruit, but there is no way to know for sure if its plans will work out. Meanwhile, an activist investor in the form of a hedge fund wants to do a remodel of its own with Bob Evans' board of directors, adding more fuel to the uncertainty fire.  While we do know from Denny's and DineEquity that diner chains can grow despite the economy, this is not automatic. Foolish investors should consider waiting on the sidelines until there is solid confirmation of a turnaround in the form of actual reported numbers and not just future speculation.

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  • Report this Comment On January 08, 2014, at 8:00 PM, rmaza wrote:

    The problem with Bob Evans boils down to the people side. They have gotten away from the roots that made the company successful; taking care of their employees and their guests. Their employees no longer feel empowered which drifts down to the guests' experience. They have become a company that transform their people into a company that is only concerned about transactions. Larry Corbin and Joe Gillen said it best, "We are in the people business!" Davis and the the new Yum cohorts have transformed this company into just that.....transactions.

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