Bob Evans Farms: Zacks’ Bull of the Day Play

With an improving economy, tightening labor market and low gas prices, consumers have been spending more on eating out. The outlook for the Restaurant industry remains positive for the coming months as well as we approach the holiday season, when people tend to dine out more.

About the Company

Head quartered in New Albany, Ohio, Bob Evans Farms (BOBE) currently owns and operates more than 550 full-service family restaurants in 19 states, primarily in the Midwest, Mid-Atlantic and Southeast regions. Their grocery segment offers a wide variety of home-style food products, including sausage and bacon products, as well refrigerated and frozen convenience foods. These products are sold at more than 30,000 retail locations across US and Canada.

Excellent Quarterly Results and Improved Guidance

The company reported its fiscal 2016 first quarter results on September 1. Operating income was $0.51 per share, up from $0.10 per share in the prior-year quarter and significantly beating the Zacks Consensus Estimate of $0.30 per share. The company has beaten Zacks Consensus Estimates in three out of last four quarters, with an average quarterly surprise of 23%.

Restaurants operating income was up 21% from the same quarter last year while Food segment profit surged 327%. The management said that they are currently implementing the strategy of improving the quality of food offering while significantly lowering discounts that were earlier utilized to drive transactions, Same-store sales declined by 0.3% thanks mainly to reduced discounts but sales were more profitable with cost controls.

The management raised their fiscal 2016 EPS guidance to $1.85 to $2.00 from the previous guidance of $1.75 to $1.95.

Rising Estimates

After a strong quarterly report and upgraded guidance, analysts have raised their estimates for the company. Zacks Consensus Estimates for the current and the next fiscal year now stand at $1.94 per share and $2.22 per share respectively, up from $01.87 per share and $2.05 per share, 30 days ago.

Turnaround Remains on Track

The company remains focused on executing its turnaround plan, which includes improving the brand experience for customers; increasing sales; reducing costs particularly at the corporate level; and allocating capital efficiently.

They also continue to make progress on their “Best-in-Class Breakfast” initiative with continued menu innovation and food quality improvements planned throughout remainder of year.

During the quarter, the management completed a review of their owned restaurant properties and decided a sale leaseback transaction of up to $200 million would further enhance shareholder value. They expect net proceeds of $165 million to $170 million from such a transaction.

Returning Cash to Shareholders

The company has been consistently increasing its dividend. They repurchased more than $60 million of stock during the reported quarter and expect to complete the remainder of the current $150 million authorization during the balance of fiscal 2016. The company also plans to use the proceeds from real estate monetization transaction for buying back shares in addition to paying down debt.

The Bottom Line

Thanks to favorable industry trend and successful execution of several strategic and operating turnaround initiatives, the company is moving in the right direction. The Restaurant industry is currently ranked 62 out of 265 Zacks industries (top 23%), indicating further upside potential for this hot industry. Further, in addition to top Zacks stock rank, the stock also has favorable Style Score Rank of “B” each in Growth, Value and Momentum.

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