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| BOBE > SEC Filings for BOBE > Form 10-Q on 3-Dec-2008 | All Recent SEC Filings |
3-Dec-2008
Quarterly Report
Consolidated Restaurant Food Products
Results Segment Segment
(dollars in Q2 Q2 Q2 Q2 Q2 Q2
thousands) 2009 2008 2009 2008 2009 2008
Net sales $ 435,455 $ 426,255 $ 357,230 $ 356,168 $ 78,225 $ 70,087
Operating income $ 20,282 $ 25,964 $ 19,370 $ 19,829 $ 912 $ 6,135
Cost of sales 31.5 % 30.0 % 25.3 % 25.6 % 59.7 % 52.4 %
Operating wages 34.5 % 35.1 % 39.7 % 39.7 % 11.1 % 11.4 %
Other operating 16.3 % 16.4 % 18.8 % 18.5 % 5.2 % 5.6 %
S,G&A 8.3 % 8.0 % 5.6 % 5.8 % 20.3 % 19.0 %
Depr. & amort. 4.7 % 4.4 % 5.2 % 4.8 % 2.5 % 2.8 %
Operating income 4.7 % 6.1 % 5.4 % 5.6 % 1.2 % 8.8 %
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The second quarter results for fiscal 2009 and fiscal 2008 include the impact of
the following:
• Consolidated and restaurant results for the second quarter of fiscal 2009
and 2008 included net pre-tax gains of $0.7 million and $1.0 million,
respectively, on the sale of various real estate assets, which is reflected
as a reduction of S,G&A.
Restaurant Segment Overview
The ongoing economic and industry-wide factors most relevant to our
restaurant segment include: labor and fringe benefit expenses, commodity prices,
energy prices, competition, consumer acceptance, restaurant openings and
closings, governmental initiatives, food safety and other risks such as the
economy and weather. For the second quarter of fiscal 2009, the factors that had
the greatest positive impact on our restaurant segment profitability were an
improvement in food costs and effective labor management. The factor that had
the greatest negative impact was weaker than expected same-store sales at Bob
Evans Restaurants and Mimi's.
Second quarter fiscal 2009 same-store sales decreased 0.5% at Bob Evans
Restaurants and decreased 8.3% at Mimi's compared to the corresponding period
last year. Restaurant segment operating income decreased $0.5 million, or 2.3%,
in the second quarter of fiscal 2009 compared to the corresponding period last
year. Restaurant segment operating income was impacted by pre-tax gains on the
sale of real estate of $0.7 million and $1.0 million in the second quarter of
fiscal 2009 and fiscal 2008, respectively. We remain focused on improving
same-store sales at Bob Evans Restaurants and Mimi's. We are also continuing our
efforts to control labor and food costs, which we believe have been effective in
mitigating the impact of increasing commodity costs and higher minimum wages at
the federal level and in many of the states where we operate.
Food Products Segment Overview
The ongoing economic and industry-wide factors most relevant to our food
products segment include: sow costs and other commodity costs, transportation
and energy costs, governmental initiatives, food safety and other risks such as
the economy, weather and consumer acceptance. While we are pleased with the food
products segment's strong sales growth in the second quarter of fiscal 2009,
profitability was negatively impacted by a significant increase in sow costs in
the second quarter.
Food products segment net sales increased 11.6% in the second quarter of
fiscal 2009 compared to the same period last year. The higher net sales were
largely driven by an 11.3% increase in pounds sold of comparable products
(principally sausage and refrigerated mashed potatoes).
Sow costs represent the majority of food products segment cost of sales,
and the volatile nature of sow costs greatly impacts the profitability of the
segment. In the second quarter of fiscal 2009, average sow costs increased 27.1%
compared with the corresponding period last year. During a 35-day period in the
second quarter of fiscal 2009, sow costs nearly tripled, from $19.00 to $59.00
per hundredweight. While we expected an increase in sow costs, the speed and
magnitude of the increase were much greater than we had anticipated. The
increase in sow costs, slightly offset by improved sow yields, resulted in an
increase in cost of sales in the food products segment from 52.4% in the second
quarter of fiscal 2008 to 59.7% of net sales in the second quarter of fiscal
2009.
Operating income in the food products segment decreased $5.2 million, or
85.1%, in the second quarter of fiscal 2009 compared to the corresponding period
last year. Operating income in the second quarter was negatively impacted by the
increase in sow costs and an increase in promotional expense, as we honored
commitments with retailers for promotional price discounts that were made in the
first quarter when sow costs were significantly lower.
In the food products segment, we are in the process of converting from a
direct-store-delivery distribution system to a warehouse system, in response to
retailers' needs in certain key markets. As of the end of the second quarter of
fiscal 2009, we had converted approximately 70% of our distribution to a
warehouse system, and we plan to move increasingly towards this distribution
model. The conversion to a warehouse system initially results in some severance
costs and higher slotting fees, but is expected to result in a lower cost
structure in the long-term.
Sales
Consolidated net sales increased 2.2% to $435.5 million in the second
quarter of fiscal 2009 compared to the corresponding period last year. The
increase was comprised of sales increases in the restaurant segment and food
products segment of $1.1 million and $8.1 million, respectively. Restaurant
sales accounted for 82.0% of consolidated sales in the second quarter of fiscal
2009. For the six-month period ended October 24, 2008, consolidated net sales
increased $24.9 million, or 2.9%, compared to the corresponding period last
year.
Restaurant sales increased $1.1 million, or 0.3%, in the second quarter of
fiscal 2009 and $9.0 million, or 1.3%, through six months of fiscal 2009
compared to the corresponding periods last year. The sales increase in the
second quarter was due to more restaurants in operation at Mimi's, but was
partially offset by same-store sales declines at both of our restaurant
concepts. For the six-month period, the sales increase is due to more
restaurants in operation at Mimi's and a year-to-date same-store sales increase
for Bob Evans Restaurants, partially offset by a year-to-date same-store sales
decline at Mimi's.
Bob Evans Restaurants experienced a same-store sales decrease of 0.5% in
the second quarter of fiscal 2009, which included an average menu price increase
of 2.9%. This broke a string of eight consecutive quarters of positive same
store sales at Bob Evans Restaurants. We are committed to the ongoing
development of new homestyle products with a Bob Evans twist, operations
excellence and compelling marketing to help regain our same-store sales
momentum.
Mimi's experienced a same-store sales decrease of 8.3% in the second
quarter of fiscal 2009, which included an average menu price increase of 2.7%.
We believe these results reflect the challenging environment in the casual
dining sector, as well as pressures on consumer spending in certain key areas,
particularly in California, Arizona, Florida and Nevada, which account for
approximately 75% of Mimi's same-store sales. We are looking at a variety of
initiatives to help re-energize same-store sales at Mimi's restaurants over the
near term. See the "BEST Brand Builders" section for further discussion of these
initiatives.
Same-store sales computations for a given year are based on net sales of
stores that are open for at least two years prior to the start of that year.
Sales of stores to be rebuilt are excluded for all periods in the computation
when construction commences on the replacement building. Sales of closed stores
are excluded for all periods in the computation.
The following chart summarizes the restaurant openings and closings during
the last six quarters for Bob Evans Restaurants and Mimi's:
Bob Evans Restaurants:
Beginning Opened Closed Ending
Fiscal 2009
1st quarter 571 0 0 571
2nd quarter 571 0 1 570
Fiscal 2008
1st quarter 579 0 0 579
2nd quarter 579 0 0 579
3rd quarter 579 1 0 580
4th quarter 580 1 10 571
Mimi's:
Beginning Opened Closed Ending
Fiscal 2009
1st quarter 132 3 0 135
2nd quarter 135 4 0 139
Fiscal 2008
1st quarter 115 1 0 116
2nd quarter 116 2 0 118
3rd quarter 118 8 0 126
4th quarter 126 6 0 132
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Consolidated Restaurants:
Beginning Opened Closed Ending
Fiscal 2009
1st quarter 703 3 0 706
2nd quarter 706 4 1 709
Fiscal 2008
1st quarter 694 1 0 695
2nd quarter 695 2 0 697
3rd quarter 697 9 0 706
4th quarter 706 7 10 703
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In the second quarters of fiscal 2009 and 2008, we did not open any new Bob Evans Restaurants. We opened four new Mimi's Cafés in the second quarter of fiscal 2009 compared to two openings in the corresponding period a year ago. For fiscal 2009, we plan to build one new Bob Evans Restaurant and to
rebuild four existing restaurants. At Mimi's, we expect to open a total of 12
new restaurants in fiscal 2009 compared to 17 openings in fiscal 2008.
The food products segment experienced a sales increase of $8.1 million, or
11.6%, in the second quarter of fiscal 2009 and $15.8 million, or 11.8%, through
six months of fiscal 2009 compared to the corresponding periods a year ago. The
second-quarter sales increase was due largely to a 11.3% increase in the volume
of comparable pounds sold (principally sausage and refrigerated mashed potatoes)
compared to the corresponding period a year ago, making this the 27th
consecutive quarter of positive comparable pounds sold. Comparable pounds sold
is calculated using the same products in both periods and excludes new products.
We plan to continue our strategy of growing through successful product
introductions and additional points of distribution. We are making solid
progress in penetrating supercenter retail stores, which provides another
high-volume sales channel for our food products. See the "BEST Brand Builders"
section for further discussion of new products and distribution.
Cost of Sales
Consolidated cost of sales (cost of materials) was 31.5% of sales in the
second quarter of fiscal 2009 and 30.6% through six months of fiscal 2009
compared to 30.0% and 29.8% of sales, respectively, in the corresponding periods
a year ago.
In the second quarter of fiscal 2009, restaurant segment cost of sales
(predominantly food cost) was 25.3% of sales (25.4% year-to-date) versus 25.6%
of sales (25.5% year-to-date) in the corresponding periods last year. As a
result of a favorable shift in product mix and our purchasing and procurement
initiatives, we were able to mitigate the impact of commodity price increases in
the quarter. The shift in product mix is primarily attributable to Mimi's "Just
Enough" menu, which features higher-margin items.
The food products segment cost of sales ratio was 59.7% of sales in the
second quarter (55.3% year-to-date) versus 52.4% of sales (52.5% year-to-date)
in the corresponding periods a year ago. The increase in the food products
segment cost of sales ratio in the second quarter was due to a 27.1% increase in
sow costs this quarter versus the same quarter last year (sow costs averaged
$51.19 per hundredweight in the second quarter of fiscal 2009 compared to $40.29
per hundredweight in the second quarter of fiscal 2008). The impact of higher
sow costs on the food products cost of sales ratio was slightly offset by
productivity initiatives that improved sow yields.
Operating Wage and Fringe Benefit Expenses
Consolidated operating wage and fringe benefit expenses ("operating wages")
were 34.5% of sales in the second quarter of fiscal 2009 and 34.6% of sales
through six months of fiscal 2009 compared to 35.1% and 35.6% of sales,
respectively, in the corresponding periods last year. In the second quarter of
fiscal 2009, the operating wage ratio remained flat in the restaurant segment
and decreased in the food products segment when compared to the corresponding
period last year.
In the restaurant segment, operating wages were 39.7% of sales in the
second quarter and 39.4% of sales through six months of fiscal 2009 compared to
39.7% and 40.1% of sales, respectively, in the corresponding periods last year.
Effective labor management at both of our restaurant concepts and lower health
care expenses more than offset the negative leverage due to same-store sales
declines at Bob Evans Restaurants in the second quarter and at Mimi's in the
second quarter and year-to-date. See the "BEST Brand Builders" section for
further discussion of labor management.
In the food products segment, operating wages were 11.1% of sales in the
second quarter and 11.6% of sales through six months of fiscal 2009 compared to
11.4% and 11.8% of sales, respectively, in the corresponding periods last year.
The decrease in the operating wage ratio was due to improved leverage as a
result of increased sales volume, as discussed in the "Sales" section above.
Other Operating Expenses
More than 94% of other operating expenses ("operating expenses") occurred
in the restaurant segment in the second quarters of both fiscal 2009 and fiscal
2008. The most significant components of operating expenses were utilities,
restaurant marketing and advertising, restaurant supplies, repair and
maintenance, rent, non-income taxes and credit card processing fees.
Consolidated operating expenses were 16.3% of sales in the second quarter and
16.5% of sales through six months of fiscal 2009 compared to 16.4% and 16.3% of
sales, respectively, in the corresponding periods last year.
In the restaurant segment, operating expenses were 18.8% of sales in the
second quarter and 18.9% of sales through six months of fiscal 2009 compared to
18.5% and 18.3% of sales, respectively, in the
corresponding periods last year. The second-quarter increase was primarily a
result of higher utility costs, which were partially offset by a $1.2 million
reduction in marketing expenses in the second quarter of fiscal 2009 as a result
of a shift in media spend to the first fiscal quarter this year.
In the food products segment, the operating expense ratio was 5.2% of sales
in the second quarter and 5.3% through six months of fiscal 2009 compared to
5.6% and 5.7% of sales, respectively, in the corresponding periods last year.
The decrease was due to better leveraging of costs as a result of increased
sales volume, as discussed in the "Sales" section above.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative ("S,G&A") expenses were
8.3% of sales in the second quarter of fiscal 2009 and 8.7% of sales through six
months of fiscal 2009 compared to 8.0% and 8.2% of sales, respectively, in the
corresponding periods last year. The most significant components of S,G&A
expenses in the second quarter of fiscal 2009 were wages and fringe benefits,
food products advertising expense and food products transportation costs.
Additionally, there were $0.7 million in pre-tax gains on the sale of real
estate in the second quarter of fiscal 2009 compared to $1.0 million in the
corresponding period last year. Year-to-date, net pre-tax gains on the sale of
real estate totaled $0.7 million this year compared to $2.0 million last year.
Also year-to-date, S,G&A was negatively impacted by an approximately
$0.7 million charge for a legal settlement in the first quarter of 2009.
We adopted FAS No. 123 (R), "Share-Based Payment," in the first quarter of
fiscal 2007. The most significant aspect of this accounting pronouncement was
the requirement to expense the fair value of stock option grants. We
significantly reduced the issuance of stock options and implemented a
performance incentive plan that predominantly uses restricted stock, stock
grants and cash awards. Pre-tax expense associated with stock options and the
performance incentive plan was $1.0 million in the second quarter of fiscal 2009
and $5.8 million through six months of fiscal 2009 compared to $0.7 million and
$4.7 million, respectively, in the corresponding periods last year. Of the
fiscal 2009 amount, $0.8 million ($4.5 million year-to-date) was recorded in the
restaurant segment and $0.2 million ($1.3 million year-to-date) was recorded in
the food products segment. Of the fiscal 2008 amount, $0.5 million ($3.6 million
year-to-date) was recorded in the restaurant segment and $0.2 million
($1.1 million year-to-date) was recorded in the food products segment. Nearly
all of this expense is reflected in S,G&A. We expect the expense associated with
stock options and the performance incentive plan to approximate $7.7 million for
all of fiscal 2009 compared to $6.3 million recorded for the full year in fiscal
2008.
Additionally, in the food products segment, SG&A was negatively impacted by
a $1.2 million increase in marketing expense in the second quarter of fiscal
2009 compared to the corresponding period a year ago. The increase in the
quarter is due to the timing of marketing spend, which was weighted more heavily
in the second quarter this year.
Interest
Net interest expense for the second quarter of fiscal 2009 and through six
months of fiscal 2009, compared to the corresponding periods last year, was as
follows:
Three Months Ended Six Months Ended
(dollars in thousands) Oct. 24, 2008 Oct. 26, 2007 Oct. 24, 2008 Oct. 26, 2007
Gross interest expense:
Fixed-rate debt $ 2,629 $ 1,670 $ 4,492 $ 4,036
Variable-rate debt 852 1,142 1,939 1,286
$ 3,481 $ 2,812 $ 6,431 $ 5,322
Gross interest income (47 ) (151 ) (112 ) (444 )
Net interest expense $ 3,434 $ 2,661 $ 6,319 $ 4,878
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The increase in interest expense is primarily the result of additional debt
incurred to fund our share repurchase program.
At Oct. 24, 2008, our outstanding debt included $102.7 million on our
variable-rate revolving lines of credit and $203.1 million on our fixed-rate
unsecured senior notes. A change in market interest rates will not impact
interest expense associated with our fixed-rate debt, but will impact our
variable-rate debt. For
example, a 1% increase in the benchmark rate used for our revolving line of
credit would increase our annual interest expense by approximately $1.0 million
assuming the $102.7 million outstanding at the end of the second quarter was
outstanding for the entire year.
At the beginning of the second quarter of fiscal 2009, we completed a
private placement of $70.0 million in senior unsecured fixed-rate notes. We used
the proceeds to replace existing debt.
Taxes
The combined federal and state income tax rates were 32.7% in the second
quarter of fiscal 2009 versus 33.6% a year ago. The year-over-year decrease is
primarily due to the impact of federal tax credits, mainly work-opportunity and
FICA tip credits, which have remained relatively consistent with prior periods
despite the decrease in pre-tax income. We anticipate the annual effective tax
rate for the entire year of fiscal 2009 to approximate 33.0%. We re-evaluate the
combined federal and state income tax rates each quarter. Therefore, the current
projected effective tax rate for the entire year may change.
Liquidity and Capital Resources
Cash generated from operations and draws on our revolving lines of credit
have been used as the main source of funds for working capital requirements and
capital expenditures. Cash and equivalents totaled $14.6 million at Oct. 24,
2008. The bank lines of credit of $180.0 million are available for liquidity
needs, capital expansion and repurchases of Bob Evans common stock, and
$102.7 million was outstanding on these lines of credit at Oct. 24, 2008. Draws
on the lines of credit are limited by the amount ($2.5 million at Oct. 24, 2008)
on certain of our standby letters-of-credit.
During the second quarter of fiscal 2009, we repurchased 104,000 shares of
our outstanding common stock. We plan to repurchase approximately one million
shares this fiscal year, and are authorized to repurchase up to three million
total shares under the program in fiscal 2009.
Capital expenditures consist of purchases of land for future restaurant
sites, new and rebuilt restaurants, production plant improvements, purchases of
new and replacement furniture and equipment, and ongoing remodeling programs.
Capital expenditures were $47.3 million through six months of fiscal 2009
compared to $62.1 million in the corresponding period last year. For fiscal
2009, we decreased the growth rate of Bob Evans Restaurants and Mimi's to
approximately 1 and 12 new locations, respectively. Bob Evans Restaurants and
Mimi's openings in fiscal 2008 were 2 and 17 new locations, respectively. We
expect capital spending to approximate $100.0 million for all of fiscal 2009,
compared to the fiscal 2008 level of $121.0 million. The decrease in capital
needs is due to the lower number of expected Mimi's openings. Declining sales
trends coupled with poor economic trends and high operating costs in certain
parts of the country, particularly in California, Florida, Arizona and Nevada,
could affect our future development plans and capital spending for Mimi's.
At the beginning of the second quarter of fiscal 2009, we completed a
private placement of $70 million in senior unsecured fixed-rate notes. We used
the proceeds to replace existing debt.
BEST Brand Builders
In 2007, we introduced an overall internal approach to managing the
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