Bob Evans Farms, Inc. reports net sales increase of 1.4%. Bob Evans Restaurants achieves positive same-store sales of 1.6%, its third consecutive quarter with positive same-store sales, despite approximately 50 basis points of weather-related impact. BEF Foods' net sales increase 7.5%; volume up 13.1%. Partially offsetting these increases, Mimi's Cafe's same-store sales decline 4.0%
Company announces 3Q 2013 earnings per diluted share of $0.20; non-GAAP EPS, adjusted for restructuring and other items, is $0.56 for the quarter
Farm Fresh Refresh restaurant remodeling program continues to drive performance with positive same-store sales of 3.1% at remodels completed within one year. Remodels completed more than a year ago report positive same-store sales of 2.7%, reflecting long-term sales lift impact of the program
Kettle Creations' integration progressing ahead of schedule, accretive $0.02 per diluted share to 3Q 2013 earnings. Vertical integration at 87% as BEF Foods continues to expand internal production capabilities to drive its refrigerated side dish business
Company achieved interest expense savings through retirement of its private placement notes
Company expects organizational efficiencies and a $53 to $63 million cash tax benefit to result from the recent conversion of its restaurant operating entities to limited liability companies
Company reports closing the sale of Mimi's Cafe restaurant chain on February 15, 2013
Company provides fourth-quarter fiscal year 2013 diluted EPS guidance of $0.60 to $0.65, which includes $0.03 per share of costs associated with providing Mimi's Cafe with transition support services
Bob Evans Farms, Inc (NASDAQ: BOBE) today announced its results for the fiscal 2013 third quarter ended Friday, January 25, 2013.
Third-quarter fiscal 2013 commentary
Commenting on third-quarter fiscal 2013 results, Chairman and Chief Executive Officer Steve Davis said, "I am very proud of our highly disciplined teams this quarter. In the midst of several complex transformational projects, we did not lose sight of driving positive sales results in Bob Evans Restaurants and BEF Foods. While successfully accelerating the Farm Fresh Refresh remodeling program at Bob Evans Restaurants; insourcing a product line formerly produced by a third party for BEF Foods; and completing the sale of Mimi's Cafe, we simultaneously drove sales growth in both of our Bob Evans-branded business segments.
"While there have been significant investments and expenses associated with transforming our Company for growth this quarter, all have been undertaken with an eye on positioning Bob Evans Restaurants and BEF Foods for sustainable growth in the years ahead, and driving returns on invested capital. Not only did we successfully execute transformational projects in each of our business segments, from a corporate perspective we improved our operational flexibility, and reduced the cost of our debt structure substantially, by pre-paying our private placement notes with cash on hand and funds from our lower-cost credit facility. We also restructured our restaurant operating entities by converting them to limited liability companies, which streamlined our organizational structure and generated an estimated tax benefit of $53 to $63 million, the majority of which we expect to realize during the next two years. We believe we are now well-positioned to deliver on our long-term annual non-GAAP EPS growth guidance of 8 to 12 percent in the years ahead through a combination of positive top-line results and ongoing cost initiatives to leverage sales growth in both businesses."
Davis continued, "The Farm Fresh Refresh remodeling program continues to drive positive sales and return on invested capital trends at Bob Evans Restaurants. This was the third consecutive quarter of same-store sales gains at Bob Evans Restaurants. Importantly, restaurants that have been remodeled for more than a year are building on their already impressive first-year sales gains as this group generated positive same-store sales of 2.7 percent during the quarter. The Farm Fresh Refresh remodeling program was designed to drive dine-in sales, as well as develop new sales layers including bakery, carryout, and catering. We believe the continued strong sales performance of remodeled restaurants reflects progress in meeting those objectives, and it gives us confidence in our decision to accelerate the completion of the remodeling program in fiscal 2014, one year earlier than originally anticipated. Accelerating the Farm Fresh Refresh remodeling program not only provides an opportunity to realize the financial benefits of the program early, it enables us to transition sooner to a more meaningful level of sales layer development and new restaurant openings beginning in fiscal 2015.
"At BEF Foods, we grew for a third straight quarter with net sales and volume gains of 7.5 percent and 13.1 percent, respectively. Our second-quarter fiscal 2013 acquisition of the Kettle Creations brand and manufacturing facility is already accretive to earnings, and we believe will become more so after its current expansion is complete. During the third quarter, we grew refrigerated side dish sales by 9.2 percent compared to the same period last year. Expansion and innovation at Kettle Creations' manufacturing facility was a key element in driving that growth. BEF Foods is now nearly 90 percent vertically integrated, and we believe that provides us with tremendous advantage as we improve our operating cost structure. It also enhances our product innovation capabilities as we continue to grow the refrigerated side dish business, now our largest product category."
Davis added, "We announced an agreement to sell our Mimi's Cafe business segment on January 28, 2013, and subsequently closed the transaction on February 15, 2013. The transaction represents a turning point for our Company as we are now better focused on driving growth of our two Bob Evans-branded businesses. We have tremendous respect for the team at Mimi's Cafe, and wish them success as they continue their brand transformation under the ownership of LeDuff America, Inc. We will provide transitional services to Mimi's Cafe for approximately a year."
Third-quarter fiscal 2013 consolidated results and GAAP to Non-GAAP reconciliation
The Company reported net income of $5.5 million, or $0.20 per diluted share. The third-quarter results include the negative net pretax impact of $32.3 million of costs, or $10.3 million after-tax, from the following GAAP to non-GAAP reconciling items related primarily to the Company's restructuring activities and the sale of Mimi's Cafe:
Mimi's Cafe sale-related net costs of $19.9 million include the following items:
The conversion of our restaurant operating companies to a limited liability company structure, and private placement retirement costs of $6.2 million include the following items:
Earnings per diluted share for the third quarter of fiscal 2012 were $0.69. There were no non-GAAP adjustments during the third quarter of fiscal 2012.
A number of large items, not permanent in nature, impacted quarterly performance compared to last year and are included in both the $0.20 per diluted share and $0.56 non-GAAP diluted earnings per share. Those items include:
Partially offsetting the above listed items are: profitability associated with Kettle Creations performance, lower interest expense and lower share count, each of which was favorable $0.02 per diluted share, for a total contribution of approximately $0.06 per diluted share.
During the third quarter of fiscal 2013, the effective tax rate recorded by the Company was 160.8 percent primarily as a result of restructuring activity, compared to 28.6 percent in the third quarter of fiscal 2012. The effective tax rate in fiscal 2012 reflects the impact of a state income tax settlement. The dollar value of the settlement was $1.4 million, or $0.05 per diluted share. Excluding the restructuring activity, on a year-to-date basis, the company would have experienced a tax rate of approximately 32 percent. The Company utilized the 32 percent rate in calculating the non-GAAP third quarter fiscal 2013 results.
As a result of the items noted above, the Company uses non-GAAP financial measures excluding those items. These financial measures are used by management to monitor and evaluate the ongoing performance of the Company. The Company believes that the additional measures are useful to investors for financial analysis. However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. Please see the table in this release for a reconciliation of non-GAAP measures to GAAP results. Results in the following discussion are presented on a non-GAAP basis excluding the items noted above.
Third-quarter fiscal 2013 consolidated income statement summary
Below is a summary of the Company's consolidated third-quarter fiscal 2013 income statement.
Bob Evans Restaurants' fiscal 2013 third-quarter non-GAAP operating income was $19.5 million, or 8.0 percent of net sales, compared with $19.9 million, or 8.2 percent of net sales, last year. The most significant driver of the decrease in profitability was a $2.4 million increase in SG&A due primarily to higher costs associated with the Company's 401k Plan match and long-term incentives. Additional SG&A costs included incremental restaurant supplies and pre-opening expenses for the Farm Fresh Refresh remodel program. Other drivers of the decrease in profitability included $1.3 million in incremental depreciation related primarily to the Farm Fresh Refresh remodel program, and the estimated $0.5 million net negative effect resulting from adverse December and favorable January weather events. These items were partially offset by positive same-store sales of 1.6 percent.
During the quarter, an additional 28 restaurants from the Farm Fresh Refresh markets of Detroit and Toledo moved into the category of restaurants remodeled for more than a year. Those restaurants join the 27 restaurants from the Dayton market that completed a remodel more than one year ago. The 2.7 percent same-store sales growth of these restaurants is demonstrating the sustained power of the program in markets remodeled more than one year. Additionally, 40 restaurants were remodeled during the quarter, compared with 15 restaurants during last year's third quarter. As a result, the Company experienced 258 closed restaurant days in the quarter compared with 118 closed restaurant days in last year's third quarter, which equates to an approximately $0.5 million negative impact of incremental lost sales. Each restaurant to be remodeled is closed from five to seven days. Overall, the remodeled markets, including the effect of closed days, continued to outpace the non-remodeled restaurants. The Company plans to complete the Farm Fresh Refresh remodeling program for the entire chain by the end of fiscal 2014.
Net sales – Bob Evans Restaurants' net sales were $245.5 million in the third quarter of fiscal 2013, compared with sales of $242.4 million in the corresponding period last year. The increase was driven by the 1.6 percent increase in same-store sales, which exceeded the Midscale Family Style segment, according to The NPD Group's SalesTrack Weekly.
During the third quarter of fiscal 2013, Bob Evans Restaurants:
Operating wages – Bob Evans Restaurants' cost of labor was 37.5 percent of net sales in the third quarter of fiscal 2013, compared to 38.1 percent of net sales in fiscal 2012. The decline in operating wages as a percent of net sales in the third quarter of fiscal 2013 was due primarily to sales leverage from improvement in same-store sales of 1.6 percent and labor efficiency initiatives including more effective scheduling.
Other operating expenses – Bob Evans Restaurants' other operating expenses were 17.7 percent of net sales in the third quarter of fiscal 2013, compared to 18.4 percent of net sales in the third quarter of fiscal 2012. The decrease resulted primarily from a decline in advertising expenditures.
SG&A – Bob Evans Restaurants' non-GAAP SG&A expenses were $17.4 million, or 7.1 percent of net sales, in the third quarter of fiscal 2013, compared with $15.0 million, or 6.2 percent of net sales, in the third quarter of fiscal 2012. The $2.4 million increase was due primarily to higher costs associated with the Company's 401k Plan match and long-term incentives.
Third-quarter fiscal 2013 Mimi's Cafe segment summary
Mimi's Cafe's third-quarter fiscal 2013 non-GAAP operating income was $0.3 million, or 0.3 percent of net sales, compared to operating income of $3.2 million, or 3.4 percent of net sales in the third quarter of fiscal 2012. The primary reason for the decline in the operating income was the same-store sales decline in the third quarter of fiscal 2013.
Net sales – Mimi's Cafe's net sales were $91.1 million in the third quarter of fiscal 2013, down $3.8 million, compared to $94.9 million in the corresponding period last year. The decrease resulted from declines in same-store sales of 4.0 percent, which included 1.3 percent in average menu price increases. At Mimi's Cafe, the same-store sales decline trailed the Knapp Track™ casual dining index of -0.6 percent for the same period.
During the third quarter of fiscal 2013, Mimi's Cafe did not remodel, open or rebuild any restaurants.
Cost of sales – Mimi's Cafe's cost of sales was 25.7 percent of net sales in the third quarter of fiscal 2013, compared to 27.2 percent in the third quarter of fiscal 2012. The decrease in cost of sales as a percent of net sales was due to food cost initiatives, ongoing efficiency initiatives including the actual-versus-theoretical food cost program, and a new menu designed to drive product mix favorability, which were partially offset by commodity increases.
Operating wages – Mimi's Cafe's cost of labor was 37.7 percent of net sales in the third quarter of fiscal 2013, compared to 35.9 percent in the third quarter of fiscal 2012. The increase in operating wages as a percent of net sales was due to deleverage from declines in same-store sales.
Other operating expenses – Mimi's Cafe's non-GAAP other operating expenses were $20.5 million, or 22.5 percent of net sales, in the third quarter of fiscal 2013, compared to $20.1 million, or 21.2 percent of net sales, in the third quarter of fiscal 2012. The increase in other operating expenses as a percent of net sales was primarily due to deleverage from declines in same-store sales.
SG&A – Mimi's Cafe's non-GAAP SG&A expenses were $6.7 million, or 7.3 percent of net sales, in the third quarter of fiscal 2013, compared to $5.8 million, or 6.2 percent of net sales, in the third quarter of fiscal 2012. The increase in SG&A was the result of increases in corporate allocations driven by higher costs associated with the Company's 401k Plan match, long-term incentive compensation, and incremental legal accruals.
Third-quarter fiscal 2013 BEF Foods segment summary
BEF Foods' third-quarter fiscal 2013 non-GAAP operating income was $4.7 million, or 4.8 percent of net sales, in the third quarter of fiscal 2013, compared to $7.1 million, or 7.9 percent of net sales, in the corresponding period last year. The primary driver of the decrease in operating income was an increase in SG&A of $3.5 million as a result of the timing shift of marketing expenditures from the first and second quarters to the third quarter, partially offset by an increase in total pounds sold of 13.1 percent, and a 3.0 percent decline in sow costs.
Additionally, total cost of sales and operating wages, although favorable to last year, were not as favorable as expected. During the quarter, a supplier notified the Company that it would cease providing an integral component of the Company's side-dish business. Given the timing of the notification coupled with the Company's desire to avoid supply interruption to its customers during a major production period, the Company incurred additional expenses reconfiguring its existing production lines to insource production of this product. The capital cost of this new equipment was approximately $1.7 million. The disruption to the Company's production lines coupled with initial inefficiencies in manufacturing adversely impacted profitability during the quarter. The Company continues to refine Kettle Creations' operations to improve efficiencies.
Furthermore, the same supplier imposed a unilateral price increase on other products, which it continues to supply to the Company. Currently, the Company estimates the cumulative effect of the two actions related to this supplier have impacted its results by approximately $0.03 per share for the quarter. Continued and contemplated impacts from these items for the fourth quarter have been reflected in the Company's guidance, and efforts continue to minimize additional, if any, adverse impacts.
The acquisition of Kettle Creations during the second quarter of this year impacted cost of sales, operating wages, and other operating expenses. Prior to the acquisition of Kettle Creations, all costs were included in cost of sales. Subsequent to the acquisition, as an owned facility, rather than as a supplier, labor costs are included in operating wages; and utilities, freight, and hauling costs are included in other operating expenses.
Net sales – The BEF Foods segment's third-quarter fiscal 2013 net sales were $97.8 million, an increase of 7.5 percent, compared to $91.0 million in the third quarter of fiscal 2012. Total pounds sold increased 13.1 percent. Promotional discounts and other selling allowances are included as a reduction to gross sales. The Kettle Creations acquisition accounted for $1.7 million of the net sales increase and 3.5 percentage points of the volume increase.
Cost of sales – The BEF Foods segment's third-quarter fiscal 2013 cost of sales was 52.9 percent of net sales, compared to 58.7 percent of net sales in the third quarter of fiscal 2012. The decrease was due primarily to the acquisition of Kettle Creations and the decline in sow costs. A unilateral price increase taken by one of the Company's suppliers impacted this line unfavorably by approximately $0.02 per share.
Operating wages – The BEF Foods segment's third-quarter fiscal 2013 cost of labor was 11.1 percent of net sales, compared to 7.8 percent of net sales in the third quarter of fiscal 2012. As noted above, the increase was primarily due to the Company's acquisition of Kettle Creations.
Other operating expenses – The BEF Foods segment's other operating expenses were 7.9 percent of net sales in the third quarter of fiscal 2013, compared to 5.7 percent of net sales in the third quarter of fiscal 2012. As noted above, the increase was primarily due to the Company's acquisition of Kettle Creations, partially offset by manufacturing productivity initiatives. A production disruption attributable to one of the Company's suppliers impacted this line unfavorably by approximately $0.01 per share.
SG&A – The BEF Foods segment's non-GAAP SG&A expenses were 19.7 percent of net sales in the third quarter of fiscal 2013, compared to 17.3 percent of net sales in the third quarter of fiscal 2012. The increase resulted primarily from a shift of marketing expenditures from the first and second quarters to the third quarter.
Fiscal year 2013 and long-term outlook
Commenting on the Company's outlook for the remainder of fiscal 2013, and looking ahead to the long-term outlook, Steve Davis said, "During the third quarter, we undertook extremely significant restructuring and repositioning activities while growing the core business. We believe these initiatives position us well for sustainable profitable growth going forward. To summarize:
The Company updated its guidance for the fourth quarter of the year to be in the range of $0.60 to $0.65 per diluted share. This includes approximately $0.03 per share of costs associated with transition support services being provided to Mimi's Cafe at less than cost. It also excludes Mimi's Cafe's results in the fourth quarter.
This outlook relies on a number of important assumptions, including the risk factors discussed in the Company's securities filings. Particular assumptions for the Company's full-year outlook include the following:
Consolidated company highlights
About Bob Evans Farms, Inc.
Bob Evans Farms, Inc. owns and operates full-service restaurants under the Bob Evans Restaurants and Mimi's Cafe brand names. At the end of the third fiscal quarter (January 25, 2013), Bob Evans Restaurants owned and operated 565 family restaurants in 19 states, primarily in the Midwest, mid-Atlantic and Southeast regions of the United States, while Mimi's Cafe owned and operated 145 casual restaurants located in 24 states, primarily in California and other western states. Bob Evans Farms, Inc., through its BEF Foods segment, is also a leading producer and distributor of refrigerated side dishes, pork sausage and a variety of complementary convenience food items under the Bob Evans and Owens brand names. Note that effective on February 16, 2013, Mimi's Cafe is no longer owned by Bob Evans Farms, Inc.
Logos, product and company names mentioned are the property of their respective owners.