Bob Evans Farms Provides Ammunition to Activist Investor

Source: Bob Evans Farms.

Yesterday's after-hours earnings report from Bob Evans Farms (NASDAQ: BOBE  ) will only serve to add fuel to the fire that activist investor Sandell Asset Management has been stoking. 

Although the family dining chain swung to a profit for the full fiscal year following last year's loss due to selling its Mimi's Cafe casual-dining concept, fourth-quarter earnings plunged 48% as same-store sales dropped 4.1% from the same period in 2013. The hedge fund that's been agitating for a big shake-up in the company, advocating both a wholesale cleansing of the board of directors as well as the sale or spinoff of the restaurant's packaged foods division, will likely see this quarter's effort as yet another reason that its plan needs to be implemented.

Bob Evans blamed the decline in comps on poor winter weather, the go-to excuse for many retailers this year, regardless of whether they're in the restaurant industry or selling apparel. It said the "snow in winter" phenomenon was responsible for $7.6 million, or  "approximately 3.4%," of the decline it experienced (a pretty precise approximation, if you ask me), but that does explain the poor showing at BEF Foods, which contributed to a $5 million, or $0.14 per share, drop in profits. For that underwhelming performance, the restaurateur said it suffered from higher than expected plant start-up inefficiencies as well as the continuing ill effects of high input costs, including sow and trim costs.

The fourth quarter saw net sales decrease to $326.4 million from $333.9 million, generating profits of $0.53 per share. Adjusted earnings from continuing operations fell to $0.48 per share from $0.69 per share. Analysts, however, expected earnings of $0.41 per share on revenues of $333 million.

Worse, though, was the reduced guidance management issued for 2015, lowering expectations for full-year earnings to $1.90 to $2.20 per share, down from previous forecasts of $2.80 to $3 per share. That's because consumer confidence continues to be negatively affected by an economy that just can't get onto its feet. As protracted levels of high unemployment linger, and households feel the effects of the substantial new costs of the Obamacare reforms, lower- and middle-income consumers bear the brunt of the malaise.

Sandell Asset Management says Bob Evans Farms is suffering from a "conglomerate discount," that management's divided attention between its two disparate divisions is affecting the whole. It wants the chain to become a pure-play restaurant stock with a simplified corporate structure and a significantly reduced share count. 

While there are elements of Sandell's claims that ring true, particularly where it comes to actions taken by the board that are not friendly to shareholders -- for example, investors voted to eliminate Bob Evans' supermajority requirements to amend its bylaws only to see the board unilaterally reimpose the threshold -- it's also true the restaurant is suffering the effects that have swept over the entire restaurant industry, particularly casual dining outfits like itself.

Diner preferences have changed significantly as they seek out fresher, more convenient options, as represented by the fast-casual trend that has proved to be resilient and is one of the only concepts that have consistently gained sales over the past few years. Yet that alone could argue in favor of the changes Sandell is arguing for, saying management needs to be focused on running its business, not divided between two masters.

The proxy battle between both sides is potentially shaping up to be a nasty one. Although Bob Evans Farms says it's extended an olive branch to its nemesis, offering to give it two seats on its board of directors to replace two retiring members, Sandell has rejected the offer outright, saying it's simply an attempt to co-opt opposition to management. It wants at least four board seats and assurances its full program for change will be adopted.

The dreary earnings report ensures that Sandell Asset Management will be loaded for bear when the two sides clash, and Bob Evans Farms will be the one that delivered the ammunition to its opponent.

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