Bob Evans Farms Getting Bigger

GuruFocus.com
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- By Mrinalini Chaudhuri

Bob Evans Farms Inc. (BOBE), a leading producer, distributor and restaurateur, posted third-quarter results, including a 4.56% increase in net sales from continuing operations. Total net sales (includes continuing and discontinued operations) for the reported quarter decreased 3.04%.

Bob Evans Farms owns and operates full-service restaurants under the Bob Evans Restaurants brand name and operates 523 family restaurants in 18 states, primarily in the Midwest, mid-Atlantic and Southeast regions of the U.S. The company's reportable segments are Bob Evans Restaurants and BEF Foods (produces and distributes refrigerated side dishes, pork sausage and a variety of refrigerated and frozen convenience food items).


Third-quarter results

This New Albany, Ohio-based company reported on March 8 financial results for the fiscal 2017 third quarter ended Jan. 27. The company's net sales from continuing operations increased 4.56% to $112.82 million compared to $107.9 million for the comparable prior-year period. Net sales from discontinued operations and total sales (on a GAAP basis) decreased 6.49% to $223.13 million and 3.04% to $335.95 million, compared to $238.61 million and $346.5 million for the same period last year.

BEF's total pounds sold grew 9.6%, including intersegment sales to Bob Evans Restaurants. Retail side-dish, sausage pounds sold and food service volume grew 13%, 3% and 19%.

Gross profit for the reported quarter increased 14.97% to $63.89 million, compared to $55.57 million in the prior-year period. The gross profit margin increased to 56.63% from 51.5% in the same period last year.

Bob Evans' operating income increased 49.91% to $17.12 million, compared to $11.42 million in the year-ago quarter. Operating income as a percentage of net sales increased 15.17% from 10.58% in the same period last year. Net income decreased 36.43% to $8.22 million, or 41 cents per diluted share. Income from continuing operations increased 53.27% to $9.84 million, or 49 cents per diluted share, compared to $6.42 million or 31 cents per diluted share for the comparable prior-year period. Net income as a percentage of net sales decreased to 7.28% from 11.98% in the prior-year period.

The company's cost of sales decreased 6.5% to $48.93 million compared to $52.33 million. Further, the cost of sales as a percentage of net sales decreased to 43.37% compared to 48.5% in the prior-year period. Selling, general and administrative expenses and net interest expense for the reported quarter decreased 8.09% to $14.2 million and 9.7% to $2.14 million compared to $15.45 million and $2.37 million in the same period last year.

Bob Evans ended the quarter with cash and cash equivalents of $2.43 million, a sharp decrease of 79.07%, compared to $11.61 million in the year-ago quarter. Inventories increased 13.81% to $19.45 million and credit facility borrowings and other long-term debt decreased 2.68% to $326.63 million, compared to $335.64 million for the comparable prior-year period.

First nine months results overview

The following chart shows financial results for the first nine months of 2017.

Metrics

Nine months ended January 2017

Nine months ended January 2016

% change

Net sales from continuing operations

$294.92 million

$285.22 million

3.4%

Net sales from discontinued operations

$663.31 million

$708.02 million

(6.31)%

Total sales

$958.23 million

$993.24 million

(3.52)%

Gross profit

$167.75 million

$157.06 million

6.8%

Operating income

$20.62 million

$22.74 million

(9.32)%

Net income

$17.6 million

$23.64 million

(25.55)%

Income from continuing operations

$10.28 million

$10.28 million

---

Cost of sales

$127.17 million

$128.16 million

(0.77)%

Selling, general and administrative expenses

$39.18 million

$49.51 million

(20.86)%

Net interest expense

$4.96 million

$7.86 million

(36.89)%

Net cash provided by operating activities

$24.49 million

$62.73 million

(60.96)%



Projections

For fiscal 2017, Bob Evans expects its BEF Foods net sales in the range of $390 million to $410 million. BEF Foods' statement of work (SOW) cost and capital expenditures for continuing operations are expected in the range of $41 to $44 and $30 million to $35 million. The company expects its net interest expense and consolidated non-GAAP diluted EPS in the range of $9 million to $10 million and $2.22 to $2.32.

Growth

To serve well in the future, Bob Evans has increased household penetration (opportunity 3-4x), introduced new retail distribution and food service channel and focuses on product innovation. Additionally, the company is executing a strategy to further develop the national side-dish brand. Bob Evans' refrigerated dinner side-dish brand ranks top with highest repeat rate and the products are sold 3x faster than its peers.

Acquisition

On Jan. 24, this restaurateur announced the acquisition of Pineland Farms Potato Co. for $115 million, which will be closed by the end of fiscal 2017. This acquisition will support Bob Evans to focus exclusively on realizing the full potential of its BEF Foods business and to provide better returns to shareholders and an enhanced product line for customers. The acquisition includes a 900-acre potato farm surrounded by more than 55,000 acres of potato production annually. Further, it includes a manufacturing facility with current expansion to bring annual capacity to an estimated 180 million pounds. The company expects that its side-dish sales volume mix will increase to 73% of annual sales volume by fiscal 2020 from 57% in the reported quarter.

On the same date, Bab Evans announced the sale of Bob Evans Restaurants to an affiliate of Golden Gate Capital for $565 million plus assumption of certain net working capital liabilities at the time of closing estimated to be $40 million to $50 million. This divestiture will help the company focus on realizing the full potential of its BEF Foods business (the fastest-growing and most profitable segment).

On a concluding note

Overall, Bab Evans is a rock-solid company with remarkable white space opportunities, significant distribution opportunity, attractive margin profile, potential for merger and acquisition and an experienced management team.

From 2012 to 2016, the company's dividend grew at a compounded annual growth rate of 6.47%. With the recent quarterly release, the company is aiming for a better future and is set to deliver greater shareholder returns.

Disclosure: I do not hold any position in the company.

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