Don’t Rush Into Bob Evans Farms Just Yet

Bob Evans has lined up a number of cost-reduction strategies, but investors should stay away from the stock for the time being.

Apr 8, 2014 at 7:00AM

Bob Evans Farms (NASDAQ:BOBE), a full-service restaurant chain, has had a topsy-turvy ride this year. The company's shares are flat year to date, which is not surprising as its recently-reported third quarter was weak. However, Bob Evans has done better than its peers Denny's (NASDAQ:DENN) and DineEquity (NYSE:DIN) this year. But will Bob Evans be able to get its business back on the growth path after seeing significant declines in revenue and earnings, and is it really a better buy than peers?

Beaten down badly
In the most recent quarter, Bob Evans' revenue declined 21.7% to $340.1 million, missing analysts' estimates of $350.5 million. Shares fell 8.9% in response to the weak performance, which was a result of severe cold weather in the U.S. and a subsequent drop in foot traffic. Furthermore, Bob Evans' earnings of $0.30 per share trailed the $0.57 per-share consensus by a wide margin.  

So, the present scenario for Bob Evans is not a good one. The company is trying hard to get back on its feet and out of a weather-induced slump by using different strategies. Since most of its restaurants are situated in the Midwest, Bob Evans felt a big impact from the cold weather.

Apart from lower revenue, Bob Evans suffered due to other reasons, such as labor inefficiencies and food wastage. It also incurred expenses for snow removal and faced additional costs for maintaining frozen pipes, water heater replacements, and heating, ventilation, and air conditioning expenses. 

Trying to turn around
This scenario should improve as we move into the hotter periods of the year, resulting in lower costs. The company's new Sulphur Springs, Texas facility is expected to reduce production and labor costs. Bob Evans also struggled with high sow costs that ate into its bottom line. So, in order to reduce sow costs, the company has reduced its trade spending and increased prices.

Bob Evans expects the good times to return in fiscal 2015, and it is engaged in different activities to ensure the same. The company is focusing on margin expansion by analyzing areas where costs can be reduced.

In the restaurant business, Bob Evans expects sales growth on the back of the addition of a bakery segment. Additionally, it expects its food business to do well in the future and deliver productivity savings of $6 million-$7 million.

As a result of plant consolidation and the shutdown of Richardson, Texas, Bidwell, Ohio, and Springfield, Ohio facilities -- along with the efficiencies from Sulphur Springs, Texas, -- Bob Evans expects its profits to grow once again in 2015. 

In addition, Bob Evans authorized a share-repurchase program of up to $100 million for fiscal 2015. Along with the cost-reduction initiatives, share buybacks will help Bob Evans get its earnings growth back on track. 

Bob Evans is also optimistic about its long-term prospects. That's why it has increased its long-term diluted earnings-per-share growth rate guidance to 10%-12%.

In addition, Bob Evans' knife and fork sandwich platform is also seeing good sales growth. Around 40% of its patrons who order a $7.99-priced knife and fork sandwich meal also opt for the $2 make-it-a-three-course-meal option. The company expects this strategy to attract more customers to its restaurants. So, driven by its cost-reduction strategies and other growth-oriented moves, Bob Evans should be able to deliver earnings growth next year.

Don't rush in yet
But currently, Bob Evans doesn't look like a good investment option. The stock is very expensive at 30 times last year's earnings. In comparison, Denny's has a P/E ratio of 25; DineEquity is even cheaper at 21 times earnings. In addition, Bob Evans' dividend yield of 2.5% is lower than DineEquity's 3.8%. Also, DineEquity is seeing good sales growth at its IHOP chain. DineEquity is focused on simplifying its menu and bolstering its social media presence, so it could be a better pick than Bob Evans.

On the other hand, while Denny's doesn't pay a dividend, it is expanding rapidly. Denny's same-store sales have now grown for 10 consecutive quarters, Also, Denny's $4 breakfast sandwiches introduced in January have clicked with customers. Thus, a lower pricing than Bob Evans' sandwich offering could help Denny's gain an advantage in this space.

Bottom line
Bob Evans Farms is in a weak position at present as a result of the cold weather. The company is exploring many cost-reduction programs to increase its earnings. But a steep valuation and better-positioned peers make an investment in Bob Evans a risky proposition.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers