Tag Archives: NASDAQ:BOBE

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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Bob Evans: Zacks’ Bear of the Day Play

Bob Evans Farms (BOBE – Snapshot Report) reported its fiscal 2014 fourth quarter results on July 8. In the Q4 press release, the company blamed the following factors for negatively impacting its results:

Severe winter weather
An “activist” investor
Supplier disruption issues
Higher than expected plant startup “inefficiencies”, and
Historically high sow costs.

Management also provided fiscal 2015 guidance well below consensus, prompting analysts to revise their estimates significantly lower for both 2015 and 2016. This sent the stock to a Zacks Rank #5 (Strong Sell).

Bob Evans Farms owns and operates 561 restaurants in 19 states, primarily in the Midwest, mid-Atlantic and Southeast regions of the United States. It also produces and distributes refrigerated and frozen side dishes, convenience food items and pork sausage under the ‘Bob Evans’ and ‘Owens’ brands.

Fourth Quarter Results

Bob Evans delivered results for its fiscal 2014 fourth quarter on July 8. Adjusted earnings per share came in at 61 cents, which actually beat the Zacks Consensus Estimate of 42 cents. However, it was a “messy” quarter will several adjustments to GAAP earnings.

Net sales from continuing operations fell -2% to $326 million, which was below the consensus of $333 million. This was driven by a -4.1% decline in same-store sales. The company estimated that “adverse severe winter weather” had an impact of approximately -3.4% on same-store sales. You can see that the declines did, in fact, moderate as the quarter rolled on:

February: -6.7%
March: -3.6%
April: -2.7%

Meanwhile, adjusted gross profit declined from 67.3% to 65.8% of sales.

It wasn’t just sales that were negatively impacted by weather though, according to the company. Management stated that “[s]evere winter weather adversely impacted… cost of sales, operating wages and other operating expenses including utilities and snow removal. All-in-all, the company estimated the weather negatively impacted EPS by approximately $0.21.

But that wasn’t all. The company also cited “[c]osts associated with responses to an activist stockholder (i.e., Thomas Sandell); supplemental tax and internal audit staff resources; strengthening the Company’s internal processes and controls over financial reporting; and recruiting and relocation costs, net of short-term offsets, adversely impacted results, reducing 4Q 2014 diluted GAAP and non-GAAP EPS by approximately $0.04.”

The company also cited supplier disruption issues, higher than expected plant startup “inefficiencies”, and historically high sow costs as having a negative affect on earnings in the quarter.

Estimates Plummet

Although the company blamed a lot of its issues in fiscal 2014 on weather and other one-time items, management still significantly lowered its earnings guidance for fiscal 2015. The company now expects to earn between $1.90-$2.20 per share, down from previous guidance of $2.80-$3.00. It also expects full year same-store sales growth of 1.5%-2.5%.

This prompted significant negative estimate revisions from analysts, which sent the stock to a Zacks Rank #5 (Strong Sell). The 2015 Zacks Consensus Estimate is now $1.92, down from $2.52 before the Q4 report. The 2016 consensus is currently $2.40, down from $3.00 over the same period.

You can see the dramatic drop in consensus estimates in the company’s “Price & Consensus” chart:

Valuation

Shares of Bob Evans are down more than 6% since the Q4 report, but the stock does not look like a value at these levels. It trades at 23x 12-month forward earnings, well above its 10-year median of 14x. And its price to book ratio of 3.0 is double its historical median of 1.5.

The Bottom Line

It appears that Bob Evans has bigger problems than simply the weather and an “activist” investor. Investors should consider staying away from this stock at least until its earnings momentum turns around.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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