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Bob Evans Farms (NASDAQ: BOBE) is a company in transition. It is trying to turn around its struggling restaurant business, which is weighing on its quarterly earnings.
The Bob Evans earnings report reflects its plight. Not only did it miss revenue estimates for last quarter, but it also lowered its outlook for full-year sales. That news sent Bob Evans stock down 5% in early trading Wednesday, though the stock scraped its way back during the trading session. This comes despite the fact that the company beat on earnings, increased its share buyback and raised its dividend for the second quarter in a row.
In a market that is increasingly hard to please, Bob Evans couldn’t measure up. However, for value and income investors, there is still a lot to like about the company.
Bob Evans Earnings Report Comes Up Short
Last quarter, Bob Evans earned $0.41 per share on $325 million of revenue. Analysts, on average, expected $0.39 per share on $329 million.
Equally troubling is that Bob Evans also reduced expectations for the full year. For the year, the company forecasts adjusted earnings of $1.85 per share to $2 per share. The midpoint of this range is below the average $1.94 per share expected by analysts.
The major driver of the weak forecast is that same-restaurant sales, a crucial metric for restaurants which measures sales at locations open at least one year, are expected to decline 1% to 2.5% for the full year. This is driven by weaker-than-expected traffic as a result of the company’s decision to curb its menu discounting.
The good news is that the restaurant business continues to perform well. Bob Evans reported operating income of $13 million last quarter in the foods business, up from $6 million in the same quarter last year.
More Cash Coming to Shareholders
In an effort to keep investors satisfied, Bob Evans is putting more cash into shareholders’ pockets. The company recently increased its dividend by 9%, and after this quarter’s earnings results, management upped its share buyback authorization by $100 million.
This is a very significant buyback. $100 million represents approximately 11% of the company’s current market capitalization. As a result, this buyback demonstrates the cash-generating abilities of the business. And, it should be a strong catalyst for future earnings growth, since fewer shares outstanding gives each remaining share a bigger piece of Bob Evans’ earnings.
In addition, the company recently raised its quarterly dividend to $0.34 per share, a 9% increase from the previous level. On an annualized basis, Bob Evans’ $1.36 per share dividend represents a solid 3.5% yield based on its current stock price.
Management Says ‘No’ to Spinoff
In addition to the dour forecast, another reason why investors are selling the stock may be the decision to scrap plans for a spinoff. Bob Evans had attracted the attention of institutional investors because of its unique operating structure.
Bob Evans operates two distinctly different business, a restaurant business and a grocery food business, and the performances of those businesses are diverging. Last quarter, operating profit in the restaurant segment fell 35% year over year, while BEF Foods reported 120% operating profit growth in the same period.
This compelled investors like Sandell Asset Management, Bob Evans’ second-largest shareholder with a 7% stake in the company, to push for a spinoff or sale of certain restaurant real estate. Sandell believed a transaction of this nature could get as much as $1 billion, which is more than the entire market capitalization.
Bob Evans resisted this move. Management believes the company is better together, and that having both the restaurant and grocery business provides valuable diversification. However, Bob Evans did eventually agree to consider options for some of its real estate. It intends to monetize some real estate through either a REIT structure or a sale-leaseback agreement.
Plenty of Value in This Stock
The Bob Evans earnings report reflects a company having a tough year. It is in the middle of a turnaround in the restaurant business. In order to drive traffic, the company had to resort to significant menu discounting, which eroded margins. Now, it is attempting to reverse this decline, and is investing more aggressively in remodeling its restaurants.
Fortunately, Bob Evans is still highly profitable, and its grocery food business is still growing. The stock still presents value for investors, trading at 19 times earnings, which is a slight discount to the average S&P 500 multiple. And, Bob Evans yields 3.5%, which is strongly above the 2% yield offered by the S&P.
As a result, for investors willing to exercise patience during the company’s turnaround, Bob Evans could be a rewarding long-term investment.
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