Bob Evans Farms, Inc. announced its financial results for the fiscal 2017 second quarter ended October 28.
Second-quarter fiscal 2017 commentary
President and chief executive officer Saed Mohseni says, “BEF Foods delivered another excellent quarter with 13.7 percent volume growth of refrigerated side-dish products and 7.6 percent growth of our sausage business. Both product lines achieved market share gains during the quarter. Recent expansion of our side-dish production capacity and continued strategic use of our co-packer network, position us well for meeting peak holiday production demands during the third fiscal quarter. We are evaluating additional growth opportunities, including investments in our plant network as well as acquisitions, to further improve manufacturing efficiency and production capacities as we aggressively target new product authorizations at our existing retailers, and new retail account authorizations, particularly on the West Coast and with national big-box chains.
“Bob Evans Restaurants’ performance improved during the second quarter as same-store sales trends improved further and positive guest feedback trends reflected continued improvements to the guest experience. We are encouraged that six states in the chain achieved positive same-store sales during the second quarter, compared to one state in the prior quarter. Furthermore, the number of individual restaurants generating positive quarterly same-store sales increased 65 percent from the first quarter. Our new menu, launched September 1, continues to perform as expected. Although our value offerings have received more prominence in the new menu design, our average check has increased slightly as guests have taken advantage of the flexibility of the new menu to build a dining experience that best meets their appetite and budget.”
Mohseni continues, “The board continues to evaluate all options to create shareholder value and is working with J.P. Morgan to review and evaluate potential opportunities for value creation. There is no formal timeline for the completion of the review and there can be no certainty that the review will result in a particular outcome.”
Second-quarter fiscal 2017 Bob Evans Restaurants segment summary
Bob Evans Restaurants’ net sales were $219.8 million, a decline of $10.9 million, or 4.7 percent, compared to net sales of $230.7 million in the corresponding period last year. Same-store sales declined 1.8 percent with the balance of the net sales decline due to net restaurant closures during the past year. No restaurants were closed and no new restaurants opened during the quarter. The company operated 522 restaurants at the end of the quarter.
Bob Evans Restaurants’ GAAP operating income was $13.5 million, compared to GAAP operating income of $13.3 million last year. Bob Evans Restaurants’ non-GAAP operating income was $13.5 million, compared to $13.6 million last year, a decline of $0.1 million. The decline in non-GAAP operating income was due to lower sales and increased hourly wage rates along with investment in labor hours to support efforts to improve guest hospitality; partially offset by lower commodity costs, reduced discounting, and lower healthcare costs. Additionally, the April 2016 sale-leaseback transaction of 143 restaurant properties reduced operating income by approximately $0.4 million due to a $2.7 million increase in rent, partially offset by a $2.3 million decline in depreciation compared to the prior year period.
Second-quarter fiscal 2017 BEF Foods segment summary
BEF Foods’ net sales were $96.2 million, an increase of $1.9 million, or 2 percent, compared to $94.3 million in the corresponding period last year. Pounds sold increased 6.9 percent while average net selling price per pound declined 4.6 percent compared to the corresponding period last year. The decline in average net selling price reflects an increased sales mix of lower-priced, although higher-margin, side-dish products relative to sausage, as well as reduced net sausage pricing through increased trade spending. From a net sales perspective, a 13.7 percent increase in side-dish pounds sold and a 7.6 percent increase in sausage pounds sold were partially offset by a $4.1 million increase in trade spending (reduces net sales), a 17.4 percent decline in frozen product pounds sold and a 5.8 percent decline in food service pounds sold compared to the corresponding period last year.
BEF Foods’ GAAP operating income was $18.7 million, compared to $14 million last year. Prior year GAAP operating income included a $3.6 million charge to reflect the loss on the sale-leaseback of the Sulphur Springs manufacturing facility. BEF Foods non-GAAP operating income was $18.7 million, compared to $17.6 million in the corresponding period last year, an improvement of $1.1 million. The improvement was due primarily to increased volume, $2.5 million of lower sow costs, favorable sales mix, and lower SG&A costs; partially offset by $4.1 million of increased trade spending, increased freight expenses, and an increase in advertising expenses. Additionally, the October 2015 sale-leaseback transaction of two industrial properties reduced operating income by approximately $0.6 million due to a $1 million increase in rent, partially offset by a $0.4 million decline in depreciation compared to the prior year period.
Second-quarter fiscal 2017 Corporate and Other summary
Corporate and Other GAAP operating costs were $30.7 million, compared to $15.9 million last year. Corporate and Other GAAP operating costs include the $16.5 million combined impact of the following items excluded from non-GAAP results: $16 million related to the impairment of the note receivable from the 2013 sale of Mimi’s Café; and $0.5 million related to costs associated with strategic initiatives. Corporate and Other non-GAAP operating costs were $14.2 million, compared to $15.9 million last year, a decline of $1.7 million. The decline was due primarily to lower legal and professional fees, partially offset by increased incentive compensation costs and depreciation and amortization resulting from technology-related capital expenditures.
Second-quarter fiscal 2017 net interest expense—GAAP net interest expense was $1.7 million in the second quarter, a decline of $1.2 million, compared to $2.9 million in the corresponding period last year. Second-quarter non-GAAP net interest expense excludes the impact of $1.1 million of interest accretion related to the impairment of the note receivable from the 2013 sale of Mimi’s Café. The borrowing rate on the company’s outstanding debt was 2.28 percent at the end of the second quarter, compared to 1.95 percent for the prior year period.
Second-quarter fiscal 2017 balance sheet highlights –The company’s cash balance and outstanding debt at the end of the quarter were $4.9 million and $361.8 million, respectively, compared to $5.4 million and $471.4 million at the end of the corresponding period last year. The company was in compliance with its debt covenants at the end of the quarter. The decrease in borrowings was primarily the result of the use of proceeds from recent real estate monetization transactions and operating cash flow to reduce debt, partially offset by share repurchases, capital expenditures, and dividend payments. On a pro-forma basis, assuming the 2016 sale-leaseback transactions occurred at the beginning of fiscal 2016, the company’s quarter-end leverage ratio was 3.00.
Fiscal year 2017 outlook
Chief Administrative and chief financial officer Mark Hood says, "We have updated our GAAP and non-GAAP fiscal 2017 EPS guidance ranges. We have reduced our GAAP diluted EPS guidance range to $1.54 to $1.72, from $2.00 to $2.17 previously, to reflect the impairment of the note receivable from the 2013 sale of Mimi’s Café, partially offset by improved operating performance in the first half of fiscal 2017. We have raised our non-GAAP diluted EPS guidance range to $2.15 to $2.30, from $2.05 to $2.20 previously.
“While we continue to expect full-year negative low-single digit to flat same-store sales at Bob Evans Restaurants, we have adjusted our restaurant commodity pricing outlook to negative low-single digit to flat for the year, from approximately flat previously. As for BEF Foods, we have lowered our sow cost forecast to $42 to $45 per hundredweight, from $50 to $53 previously, to reflect expectations for the remainder of the fiscal year. As a consequence of lower projected sow costs, we expect lower sausage pricing (resulting from increases in trade spending to reflect an increased competitive pricing environment from lower sow costs) and have lowered our BEF Foods sales outlook to $390 to $410 million, from $400 to $420 million previously. At the corporate level, we have added GAAP tax rate guidance of 18 percent to 19 percent for fiscal 2017 as a result of the impact of the Mimi’s Café note impairment on taxable income, and increased our non-GAAP tax rate guidance 50 basis points to 24 percent to 25% to reflect the impact of higher taxable income on our tax preference items. We are also maintaining our focus on lowering corporate and other costs required to support our businesses.”