Investors in Bob Evans Farms (BOBE, Financial) were not happy after the company posted a modest loss for the first quarter of 2015, triggering a 10% sell-off on the exchange. In the past 12 months, the stock has slid approximately 28% due to declining performance and missing Wall Street expectations. The company reported $0.10 EPS for the quarter, meeting the Thomson Reuters consensus estimate. The company had revenue of $326.3 million for the quarter, compared to the consensus estimate of $328.61 million. During the same quarter in the prior year, the company posted $0.54 earnings per share. The company’s quarterly revenue was down 0.9% on a year-over-year basis. Analysts expect that Bob Evans Farms will post $1.86 EPS for the current fiscal year.
The oncoming of activist investors has also been creating stories and the shares have experienced considerable volatility because of the claims being made by these activists. Quite recently, Bob Evans Farms’ shares jumped on a further push for a breakup Wednesday from activist shareholder Thomas E. Sandell. Sandell, who controls more than 9 percent of the restaurant chain, said a private equity firm he didn't name may acquire Bob Evans BEF foods unit. Several other investment firms are interested in a deal involving Bob Evans' real estate, Sandell said in a filing Wednesday with the Securities and Exchange Commission.
What is in store?
Bob Evans Farms is confident that its business will see meaningful progress in the coming days. Management finds the company immune to the existing macroeconomic pressures. But, the recent results reveal another story that Bob Evans is struggling and is facing challenges due to various factors. The restaurant chain is now focusing on various aspects to improve its profitability.
For the full year of the new fiscal year, the company continues to foresee 1.5-2.5% growth in comparable store sales. After falling in the first quarter, comparable sales were flat in the second quarter, followed by an anticipated growth in the high-single digits for the final two quarters of the year.
Bob Evans is closely focusing on its remodelling program. The company is suffering in regions such as the East North Central, the South Atlantic and the mid-Atlantic, which have most Bob Evans restaurants. To overcome this, the company has innovative plans to attract more customers. Bob Evans is making good innovations in the breakfast menu.
It is focusing on adding a diverse range of breakfast items that are different from the other brand’s menu. The recent example of addition of Sweet & Stacked platform is the most recent example of the innovation that Bob Evans has done. Moving on to the lunch category, Bob Evans is focused on offsetting the lower satisfactory customer scores that it has received in the past. It is now adding roasted chicken and slow-roasted chicken on the lunch menu, which is expected to attract more customers.
Challenges ahead
The company has seen a great deal of challenges in recent years with sales improving from $1.5 billion in 2005 to peak at $1.75 billion in 2009, to settle at little over $1.3 billion on a trailing basis. Earnings also have been very volatile, ranging from anything between a tiny profit and peak earnings of $70 million in 2010, although trailing earnings total just $35 million by now. It is also significant to note that the business has retired a third of its shares outstanding over this time period while leverage has risen a lot. Worse, much of this debt is of a shorter term nature posing significant risks given the leverage if the business does not improve.
Takeaway
Looking at the fundamentals, with a trailing P/E of about 56.96, the company reflects an over-the-roof valuation. In addition to that, the forward P/E of about 20, is also close to the industry average and suggests an over-valuation. Also, note that the company has some $463 million in debt, and holds just $3 million in cash which results in a rather sizable net debt position. Despite shares being down by nearly a third from a peak at close to $60 in 2013, to levels in the low 40s at the moment, there are considerable risks associated with the stock and hence, my advice would be to stay away from investing in the company.
