Despite a decline in comparable same-store sales at Bob Evans (NASDAQ:BOBE) restaurants, total revenues for the company increased 4% to $382.6 million in the fourth quarter. Fool contributor Jim Mueller highlighted that declines in labor expenses and cost of sales led to improvements in profitability. The net result was earnings of $0.57 per share, far exceeding the $0.37 that Wall Street anticipated. Despite the successes, it's hard to look past its sagging comps situation. To gain a better understanding of both its recent successes and areas of improvement, Hank Schofield and Bodhi Zappa will join me as we analyze the company's latest earnings conference call. We'll pay special attention to the Bob Evans restaurants segments.
Bodhi, what's working for Bob Evans?
Bodhi: Well, Hank, the hog-tying, chicken-frying, "I'm a red meat eater till I'm dying" man that he is, is probably best suited to comment on Bob Evans' biz. But since he's incapable of seeing the light of day with a cloudless sky, I'll most certainly take the lead. One thing that's helping Bob Evans is its operational efficiencies. For example, the company is managing its restaurant labors more effectively by adjusting "staffing levels where possible and by curtailing hours of operation in many cases." Consequently, restaurant labor costs were 40.2% of sales, down from 41.8% in the year-ago period. And the good news is that while staffing levels have tightened, customer satisfaction scores this quarter improved. This tells me that management isn't haphazardly cutting back hours but is rather using a sound strategy to improve efficiency, while at the same time better its service to customers. I'll add, restaurant labor hours weren't the sole area of improvement. Other operating costs and SG&A expenses were both lower from last year's levels, due in large part to a reduction in advertising.
Hank: My vegetarian buddy, can I get a word in? Firstly, I just call them like I see them. Take, for instance, the restaurant labor improvements you've highlighted. Management had to find a way to reduce costs, because lately it has been unable to figure out a way to spur customer traffic at its Bob Evans sites. Yes, net sales increased nearly 4%, but this is due in large part to new store openings; it opened 24 new Bob Evans locations over the past fiscal year, as well as 10 Mimi's Cafes. But management realizes that it cannot continue relying on the strategy of opening new units without first identifying what's not working with existing sites. While same-store sales increased for Mimi's by 1.1%, Bob Evans restaurants saw a 0.9% decline in this metric. Considering it only has about 100 Mimi's in operation compared to nearly 600 Bob Evans units, it's not hard to understand why management took so much time in this call addressing its lagging comps situation. Until comps get back in gear, the nickel-and-diming on the labor line will be of little use.
Jeremy: It's hardly nickel-and-diming, Hank. Excluding one-time items, restaurant margins for the quarter were 5.9%, compared to 2% a year ago. In concert, income from its Restaurant Segment increased to $21.5 million, from $6.5 million in the comparable period a year ago. That's millions, not nickels and dimes. But you're right to point to Bob Evans' restaurant comps as an area of real concern. Cost reductions can take you only so far -- ultimately, they have to get sales going in the right direction again. Management realizes this. Steve Davis said pointedly, "You can only make so much money without adding dollars on the top line."
That said, the negative pressure on comps, in conjunction with increased development costs, has forced management to reevaluate its restaurant growth strategy. In fiscal 2007, the company now anticipates opening fewer than 15 Bob Evans sites. Leadership is currently researching the "positioning of the Bob Evans brand," and this evaluation process is expected to be complete in August.
Bodhi: The current research should lead to some areas of improvement, but it should be noted that external pressures are a major factor in the weakening comps. On top of rising interest rates, management identified a direct correlation between spiking gasoline prices in April to sagging sales. Bob Evans is not the only one dealing with a tough market environment, Cracker Barrel (NASDAQ:CBRL) and Denny's (NASDAQ:DENN) also struggled in the recent period.
Hank: Sure, high gas prices stink -- it has me nostalgic for the horse-and-buggy days -- but this is a situation everyone faces, and the mark of a championship-level restaurant concept is one that can rise to the challenge. Even CEO Steve Davis acknowledges, "Too many of our competitors have been outperforming us in these markets under the same conditions." Bob Evans' leadership clearly believes there are areas within their power they can improve upon.
In the coming months, shareholders should expect to see a shift in its marketing strategy from a TV-centric model to radio. Increased repetitions from radio, they believe, will "drive more traffic" to its restaurants. On top of its transition in marketing strategies, the company also realizes customer service needs to improve. Bodhi, you pointed out that recent customer satisfaction surveys improved despite a reduction in labor hours. Well, it hasn't been enough -- the same surveys suggests that "more than 50% of consumer concerns" are related to service. In response, the company is in the process of upgrading its training programs to empower its employees to "execute at a higher level."
Foolish bottom line
Jeremy: One might get the sense from this discussion that Bob Evans has nothing savory to offer potential investors. On the contrary, its Mimi's Cafe acquisition is maintaining momentum, while its food (retail) business is now in roughly 16,000 grocery stores -- the latter of which, according to Davis, is "a great cash generator with an extremely low cost basis." As the company benefits from lower commodity expenses (hog costs were $37 per hundredweight compared to $49 in the year-ago period), a shift in its marketing strategy, tightening labor costs, and improvements to customer satisfaction could add up to success in the coming quarters -- assuming it can come up with the key ingredient to entice customers back to Bob Evans.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned.
