Bob Evans Battles Internal and External Headwinds

The casual-dining restaurant and food seller was hit hard by winter weather, but there are issues on the fundamental level as well.

Mar 6, 2014 at 5:03PM

As has been commonly reported during this earnings season, adverse weather was a main factor in many businesses' recent results. Bob Evans Farms (NASDAQ:BOBE) was no exception, as the company on Tuesday posted lackluster numbers for its fiscal third quarter and attributed a 3% adverse same-store sales impact to the extreme winter conditions on the East Coast. More troubling was the company's food distribution arm, BEF Foods, which saw higher costs and operating inefficiencies take the wind right out of its sales. The market sent the stock down roughly 8% on Wednesday, leaving some asking whether Bob Evans Farms' tough quarter has opened up a stock-buying opportunity.

Earnings go stale
In Bob Evans' third quarter, same-store sales declined 1.8% companywide. Management was quick to note, though, that the negative sales growth was directly linked to the rough winter weather. The company pointed to its 47 locations in Florida, which hit same-store sales growth of 4.4%.

The news likely wouldn't have been taken as harshly had it not been a surprise relative to management's guidance issued at the end of January. After accounting for the lower sales and higher cost of sales (in addition to operating expenses such as snow removal), Bob Evans' adjusted earnings came in $0.05 per share lower than its Jan. 21 guidance. The bottom line of $0.30 per share is $0.26 lower than in the year-ago quarter.

Adding more fuel to the market's ire, the company guided for even worse results in the current quarter, including a 9% same-store sales impact in February due to weather and a February same-store sales decrease of 6.7%.

If it were just a pure weather event that brought sales and earnings down, the market sell-off that has the stock trading a good 28% less than its 52-week high might indeed create an opportunity. The restaurants seem to be in good shape for the long run, especially with the company's Farm Fresh Refresh program that includes systemwide renovations and new products such as bakery goods.

But the company has an operating-level problem with its food production and distribution arm, BEF Foods. Startup costs at new plants, higher input expenses for the food (sow costs rose 23%), and a supply chain issue kept the segment from achieving good results. The company took a $0.17 per share hit in BEF Foods alone, and led to an operating income of just $2.2 million. 

While management said it remained confident when speaking about the long-term prospects of both BEF and Bob Evans Restaurants, the message was slightly derailed with the announcement of layoffs. The company cited its determined goal of 300 to 350 basis-point improvement for SG&A expenses as the reason.

With long-term annual EPS guidance of 10% to 12% and substantial free cash flow, Bob Evans could be an appealing stock. But clearly not all is well with the company -- and it's not just snowstorms hurting the business. Investors may continue to call for a spinoff of BEF Foods or some form of reorganization. If so, the company will not be able to improve operations substantially while waging war with activists and shareholders.

If the stock was trading at a meaningful discount to its intrinsic value, the short-term adversity might indicate a buy today, but there isn't much to suggest that Bob Evans is particularly undervalued. Bottom line, at this point there are better casual-dining options for investors.

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