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Full-service restaurant chain Bob Evans Farms Inc. (BOBE - Snapshot Report) recently posted lackluster second-quarter fiscal 2014 results missing the Zacks Consensus Estimate for both earnings and revenues. The company also provided a weak outlook for fiscal 2014.

The company’s adjusted earnings of 35 cents per share missed the Zacks Consensus Estimate of 54 cents by 35.2% and declined 34% year over year. Earnings in the quarter were hurt by lower operating income and higher costs resulting from increased sow prices.

Bob Evans posted adjusted net sales of $332.6 million which fell short of the Zacks Consensus Estimate of $339 million by 1.9% but grew 1.0% year over year. The year-over-year rise in revenues was driven by the sales growth at the BEF Foods segment offsetting the lower sales at Bob Evans Restaurants.

Revenue Discussion

Columbus, Ohio-based Bob Evans divested the Mimi's Cafe restaurant segment on Feb 15, 2013. The company is now operating under two segments — Bob Evans Restaurant and BEF Food. The company operates 561 restaurants under the Bob Evans Restaurant brand.

In the second quarter, segment-wise net sales at Bob Evans Restaurant were down 2.4% year over year at $240.5 million due to the shutdown of six restaurants and a 1.9% fall in comparable sales (comps). Owing to the implementation of the company’s Farm Fresh Refresh renovation program, its restaurants were closed for 411 days which pressurized the comps during the quarter.

BEF Food segment’s net sales increased 10.6% year over year to $92.1 million, driven by favorable mix and rise in total pounds sold.

However, during the quarter, the company cut down its orders as one of its suppliers stopped refrigerated side dish sales. This factor adversely affected the segment’s sales.

Operating Income Declines

Adjusted operating income of Bob Evans fell 51.5% year over year to $14.2 million with the decline in the same at both Bob Evans Restaurants and BEF Foods segments.

Bob Evans Restaurants’ adjusted operating income was down nearly 34% year over year to $13.6 million as a result of lower sales, higher selling, general and administrative expenses, increased wages due to the implementation of workforce management initiative and rise in depreciation costs. 

BEF Foods’ adjusted operating income dropped 93.0% year over year to $0.6 million due to higher sow prices and disrupted supply.  

Share Repurchase

During the quarter, Bob Evans bought back 1.2 million shares worth $68.6 million. The company also extended its current share repurchase authorization by an additional $50 million bringing it to a total of $225 million.

Outlook Narrowed  

For fiscal 2014, the company lowered the higher end of its earnings guidance. Bob Evans expects its earnings per share to lie within the range of $2.60 to $2.65 versus its prior range of $2.60 to $2.67. The current expectation is lower than the Zacks Consensus Estimate of $2.67 for fiscal 2014.

The new guidance includes 9–11 cents per share benefit from the company’s share repurchase. Excluding this benefit, the earnings expectation has declined substantially. The current guidance reflects a year-over-year increase of 8.8% to 10.9%.  

However, Bob Evans maintains the revenue outlook for fiscal 2014. The company expects its revenues to be $1.4 billion. Commodity inflation is expected to be within 2%–3% down from prior estimates of 3%–4%.

Same-store sales at Bob Evans Restaurants expected to be flat to up 1%, down from prior expectation of a growth of 1%–2%. The company also reduced the segment’s operating margin guidance to a range of 7.5%–8.0% from 8.0%–8.5% expected previously due to higher pork, gravy, sauces and soup costs.

In fiscal 2014, net sales at the BEF Foods segment are projected in the range of $380 million to $400 million. However, the company has lowered the segment’s operating margin guidance from the range of 8.5%–9.0% to 7.5%–8.0%.

Our Take

We remain concerned about the company’s sluggish comps growth. Low operating income also remains a major headwind. We believe that this Zacks Rank #4 (Sell) company is still in a transitional stage and will take some time to stabilize.

Restaurants Stocks That Warrant a Look

Investors interested in the restaurant industry may consider stocks like Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report), DineEquity, Inc. (DIN - Snapshot Report) and Famous Dave's of America Inc. (DAVE - Snapshot Report). All these companies hold a Zacks Rank #2 (Buy).

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