Is It Time to Chow Down on Bob Evans?


For Bob Evans Farms , purveyor of all things fried and buttery and in copious amounts, business has been (predictably) strong. The stock agrees, having risen nearly 30% over a two-year period. In tough economic times, the idea of high-caloric foods for a rock-bottom price gets to be very appealing, but what about when downturns reverse? The company recently released its third-quarter earnings report to a hungry group of analysts and investors, and it certainly showed progress in the company's ongoing transition. Here's what you need to know about Bob Evans going forward.

No more Mimi
The first talking point for the company's report was the sale of Mimi's Cafe. For those unfamiliar, Mimi's Cafe is a New Orleans-theme chain with 144 restaurants across the United States. Bob Evans bought the company back in 2004 for $182 million. Throughout Bob Evans' ownership, Mimi's Cafe had been a drag on the income statement and balance sheets. The sale closed last week for $50 million.

As far as the financials go, Bob Evans was about in line with expectations. Same-store sales grew moderately -- up 1.6%. This is the third consecutive quarter the company has generated positive comps -- impressive, considering the devastating snowstorms that management estimates hurt same store sales growth by 0.5%. Net sales grew almost identically, up 1.4% year over year. Non-GAAP EPS hit $0.56, which adjusts for restructuring and other costs. Otherwise, EPS came in at $0.20. Bottom-line earnings came in lower than the year before, based almost solely on the dismal performance of Mimi's Cafe. In the year-ago quarter, Mimi's brought in $3.2 million in sales. This year, that number shrank to just $300,000.

Perhaps most encouraging is the company's ongoing renovation of its restaurants, which now stands at 249 Bob Evans locations. At restaurants renovated in a year or less, same-stores sales grew an impressive 3.1%. If we extrapolate that number out companywide, Bob Evans could be headed for some serious growth. The food-service business as a whole grew 40% in the quarter.

Back in August, the company paid for $50 million for Kettle Creations, which has been making macaroni and cheese and mashed potatoes products for Bob Evans since 2009. The company wisely realized it should integrate the side-order supplier the same it has for years with its meats and restaurants.

Overall, it looks like Bob Evans is turning a corner -- leaving its anchor-weight chain in the dust, refreshing its stores, and further vertically integrating all business units.

Looking forward
Bob Evans takes a wise approach to capital allocation. Management reaffirmed that its No. 1 priority is reinvesting in the business, followed by dividend payouts and, finally, acquisitions. The company has less than $5 million of cash on its balance sheet as of the end of third quarter, but overall the balance sheet remains conservative.

Looking out, the company is targeting 8%-12% EPS growth. For the current quarter, the company is expecting $0.60-$0.65 in EPS and for top-line revenue growth to be flat or 1% higher year over year. While not the most encouraging guidance (and probably the reason the stock didn't react favorably), it does incorporate $10 million per year in transition costs regarding Mimi's Cafe. The harsh weather in the Midwest is probably keeping customers at home more often and thus inhibiting sales growth, but we can expect that situation to lessen as winter comes to an end. The company will continue to invest $130 million to $150 million in refreshing its existing restaurants.

Bob Evans Foods, the company's grocery segment, is likely to continue driving growth in the near to medium term as the macroeconomic environment and lasting costs from Mimi's Cafe should keep restaurant growth in check. However, with the seemingly profitable renovations in the works and ahead of schedule, the restaurants could become a value driver further down the line.

At 14.8 times one-year forward earnings, Bob Evans doesn't appear to be a huge bargain. However, with 8%-12% EPS growth in the near future and possibly more looking further out, any short-term dip in stock price could create a buying opportunity. A recent Bloomberg article pointed out that the company could be ripe for takeover itself, based on the fact that it trades at only 6 times EBITDA -- the cheapest of any restaurant chain with a market value over $1 billion.

Investors will want to keep a close eye on the progressing same-store sales figures of recently renovated stores and the transition costs regarding Mimi's Cafe. As always, only invest in that which you are comfortable.

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