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BOBE > SEC Filings for BOBE > Form 10-Q on 30-Nov-2011All Recent SEC Filings

Show all filings for BOB EVANS FARMS INC

Form 10-Q for BOB EVANS FARMS INC


30-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

General Overview

In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we use the terms "Bob Evans," "Company," "we," "us" and "our" to collectively refer to Bob Evans Farms, Inc., a Delaware corporation, and its subsidiaries. The following terms used herein are registered trademarks or service marks of Bob Evans: Bob Evans®, Bob Evans Restaurants ®, Bob Evans Special Touch®, Best Brand BuildersSM, Mimi's®, Mimi's Café ®, Owens® and Taste of the Farm®.

As of October 28, 2011, we owned and operated 709 full-service restaurants, including 564 Bob Evans Restaurants in 18 states and 145 Mimi's Cafés ("Mimi's") in 24 states. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. Mimi's ® are primarily located in California and other western states. Revenue in the restaurant segment is recognized at the point of sale other than revenue from the sale of gift cards, which is deferred and recognized upon redemption. We also produce and distribute pork sausage products and a variety of complementary homestyle convenience food items under the Bob Evans and Owens brand names. These food products are distributed primarily to warehouses that distribute to grocery stores throughout the United States. Revenue in the foods segment is generally recognized when products are shipped to our customers' warehouses. All revenue is presented net of sales tax collections.

The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This MD&A and other written or oral statements that we make from time to time may contain forward-looking statements that set forth anticipated results based on management's plans and assumptions. Statements in this MD&A that are not historical facts are forward-looking statements. These statements are often indicated by words such as "expects," "anticipates," "believes," "estimates," "intends" and "plans." Forward-looking statements involve various important assumptions, risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including the assumptions, risks and uncertainties discussed in our Annual Report on Form 10-K for the fiscal year ended April 29, 2011, under the heading "Item 1A - Risk Factors." We note these factors for investors as contemplated by the Private Securities Litigation Reform Act of 1995. It is impossible to predict or identify all of the risk factors that we face. Consequently, you should not consider any such list to be a complete set of all potential assumptions, risks or uncertainties. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement for circumstances or events that occur after the date on which the statement is made. Any further disclosures we make in our filings with the SEC should also be consulted.

The following table reflects data for our second fiscal quarter ended October 28, 2011, compared to the prior year's second fiscal quarter ended October 29, 2010. The consolidated information is derived from the accompanying Consolidated Statements of Income. The table also includes data for our two industry segments - restaurant and foods. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amount.

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                                           Consolidated Results            Restaurant Segment             Foods Segment
(dollars in thousands)                    Q2 2012         Q2 2011        Q2 2012        Q2 2011       Q2 2012       Q2 2011
Net sales                                $  407,185      $ 417,046      $ 328,873      $ 338,079      $ 78,312      $ 78,967
Operating income                         $   21,330      $  13,910      $  17,358      $   9,202      $  3,972      $  4,708

Cost of sales                                  30.9 %         29.8 %         24.3 %         24.3 %        58.8 %        53.1 %
Operating wages                                32.5 %         33.6 %         38.1 %         38.9 %         9.2 %        10.8 %
Other operating                                17.0 %         16.4 %         19.7 %         19.1 %         5.4 %         4.8 %
S,G&A                                           9.4 %         11.9 %          7.2 %          9.6 %        18.4 %        22.0 %
Depr. & amort.                                  5.0 %          5.0 %          5.4 %          5.4 %         3.1 %         3.3 %

Operating income                                5.2 %          3.3 %          5.3 %          2.7 %         5.1 %         6.0 %

Restaurant Segment Overview

The ongoing industry-wide factors most relevant to our restaurant segment include: the economy, sales trends, labor and fringe benefit expenses, commodity prices, energy prices, competition, consumer acceptance, restaurant openings and closings, governmental initiatives, food safety and weather. For the second quarter of fiscal 2012, the factors that had the greatest positive impact on our restaurant segment performance was a reduction in labor hours, lower health insurance costs and gains on the sale of nonoperating restaurant property, plant and equipment (as discussed in Note 7). The factors that had the greatest negative impact were high commodity costs, lower same-store sales at Bob Evans Restaurants and Mimi's and impairment charges recognized in Bob Evans Restaurants.

In the second quarter of fiscal 2012, same-store sales decreased 1.5% at Bob Evans Restaurants and decreased 4.8% at Mimi's compared to the corresponding period last year. Restaurant segment operating income increased $8.2 million in the second quarter of fiscal 2012 compared to the corresponding period last year. The decline in same-store sales is due to a decline in customer traffic in our restaurants. We remain focused on improving same-store sales at Bob Evans Restaurants and Mimi's through menu and marketing initiatives designed to highlight our sales layers and value messaging, as well as through "Farm-Fresh Refreshes" in our Bob Evans Restaurants. We are also continuing our efforts to control labor and food costs, where possible, which can be effective in mitigating the impact of negative leverage from lower same-store sales. Our goal is to drive incremental profitable traffic in our restaurants.

Foods Segment Overview

The ongoing industry-wide factors most relevant to our foods segment include:
sow availability and costs, other commodity costs, transportation and energy costs, competition, governmental regulations, food safety, the economy and consumer acceptance. In the second quarter of fiscal 2012, net sales decreased $0.7 million, and total pounds sold increased 3.1%, compared to the corresponding period last year.

Operating income in the foods segment decreased $0.7 million, in the second quarter of fiscal 2012 compared to the corresponding period last year. Sow costs represent a significant part of the foods segment's cost of sales, and the volatile nature of sow costs greatly impacts the profitability of the segment. We estimate that a $1.00 change in the average cost per hundredweight of sows impacts the foods segment's annual cost of sales by approximately $1.0 million. In the second quarter of fiscal 2012, average sow costs increased 12.2% compared with the corresponding period last year. The decrease in operating income is mainly due to an increase in sow costs and a significant increase in promotional discounts (recorded as a reduction of net sales in the Consolidated Statements of Income). The increase in promotional discounts is due to the repositioning of our seasonal side dishes to be in stores for the holiday season only. As a result, we accelerated the cadence of our promotional discounts in anticipation of increased volume, such that the majority of the discounts negatively impacted sales in the second quarter of fiscal 2012, while such discounts mostly impacted the third quarter of fiscal 2011. Partially offsetting these items was the gain on sale of the Distribution Center ("DC"), as discussed in Note 7, and an increase in total pounds sold.

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Sales

Consolidated net sales decreased 2.4% to $407.2 million in the second quarter of fiscal 2012 compared to $417.0 million in the corresponding period last year. The net sales decrease was comprised of a decrease in the restaurant segment of $9.2 million and a decrease in the foods segment of $0.7 million. Restaurant sales accounted for 80.8% of consolidated net sales in the second quarter of fiscal 2012. For the six-month period ended October 28, 2011, consolidated net sales decreased $17.1 million, or 2.1%, compared to the corresponding period last year.

Restaurant sales decreased $9.2 million, or 2.7%, in the second quarter of fiscal 2012 or 2.8%, through six months of fiscal 2012 compared to the corresponding periods last year. The sales decreases were primarily due to negative same-store sales at both of our restaurant concepts. We have implemented menu and marketing initiatives designed to highlight our incremental sales layers and value messaging. At Bob Evans Restaurants, we introduced "$6 Farmhouse Deals" with a 99 cent side dish add-on, bakery items are available at our remodeled restaurants and carryout continues to grow with "Family-Meals-To-Go" coupled with $5 Soup-to-Go offers. At Mimi's, we introduced a new menu in mid-October to focus on value, "Mimi's My Way 1-2-3" utilizes the add-on strategy in the same manner as Bob Evans Restaurants and we continue to see increases in alcohol sales. We expect to convert 35 Mimi's restaurants with beer and wine only to now include limited liquor offerings in the third quarter of fiscal 2012 to grow alcohol sales further.

Bob Evans Restaurants experienced a same-store sales decrease of 1.5% in the second quarter of fiscal 2012, which included an average menu price increase of 2.0%. Mimi's experienced a same-store sales decrease of 4.8% in the second quarter of fiscal 2012, which included an average menu price increase of 4.2%.

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. Stores are not excluded if they are closed for our ongoing Bob Evans "Farm-Fresh Refreshes."

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 2012
          1st quarter                      563          -           -           563
          2nd quarter                      563           2           1          564

          Fiscal 2011
          1st quarter                      569          -           -           569
          2nd quarter                      569          -           -           569
          3rd quarter                      569          -           -           569
          4th quarter                      569           2           8          563




                Mimi's:        Beginning      Opened      Closed       Ending
                Fiscal 2012
                1st quarter           145          -           -           145
                2nd quarter           145          -           -           145

                Fiscal 2011
                1st quarter           146          -            1          145
                2nd quarter           145          -           -           145
                3rd quarter           145          -           -           145
                4th quarter           145          -           -           145

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--------------------------------------------------------------------------------
         Consolidated Restaurants:    Beginning      Opened      Closed       Ending
         Fiscal 2012
         1st quarter                         708          -           -           708
         2nd quarter                         708           2           1          709

         Fiscal 2011
         1st quarter                         715          -            1          714
         2nd quarter                         714          -           -           714
         3rd quarter                         714          -           -           714
         4th quarter                         714           2           8          708

In the second quarter of fiscal 2012, we opened two new Bob Evans Restaurants and closed one Bob Evans Restaurant. We did not open any new Mimi's. We expect to open at least six new Bob Evans Restaurants in fiscal 2012. We also plan to rebuild three existing Bob Evans Restaurants in fiscal 2012. Based on positive returns and sustained same-store sales of our "Farm-Fresh Refresh" remodel program, we expanded our initial number of remodels from 56 Bob Evans Restaurants to 90 Bob Evans Restaurants in fiscal 2012. The restaurants that have undergone the "Farm-Fresh Refresh" program continue to perform well. We will continue this program in Cincinnati, Ohio, which will be complete at the end of fiscal 2012. In fiscal 2013, we expect to extend the "Farm-Fresh Refresh" program to Columbus and Cleveland, Ohio. In total, we expect to refresh approximately 150 restaurants, which includes the Columbus and Cleveland, Ohio, markets. In fiscal 2012, we do not expect to open, rebuild or remodel any new Mimi's restaurants.

The foods segment experienced a sales decrease of $0.7 million, or 0.8%, in the second quarter of fiscal 2012, an increase of 1.4%, through six months of fiscal 2012 compared to the corresponding periods a year ago. The decrease in net sales in the second quarter of fiscal 2012 is a result of an increase in promotional discounts, which are presented as a reduction of net sales. The increase in promotional discounts is due to the repositioning of our seasonal side dishes to be in stores for the holiday season only. As a result, we accelerated the cadence of our promotional discounts in anticipation of increased volume, such that the majority of the discounts negatively impacted sales in the second quarter of fiscal 2012, while such discounts mostly impacted the third quarter of fiscal 2011. We gained distribution in the stores that we currently do business as a result of our seasonal side dish repositioning. Additionally, we added new points of distribution to our network. In the second quarter of fiscal 2012, we experienced a 3.1% increase in total pounds sold. We anticipate sow costs for all of fiscal 2012 to come in at the high end of the range of $60 to $65 per hundredweight. We intend to grow our foods segment, both organically through new product introductions and by expanding our retail distribution, as well with acquisition opportunities that play to our strength in sausage and sides.

Cost of Sales

Consolidated cost of sales (cost of materials) was 30.9% of sales in the second quarter of fiscal 2012 and 30.4% through six months of fiscal 2012 compared to 29.8% and 29.7% of sales, respectively, in the corresponding periods a year ago. We are in the early stages of menu management and SKU rationalization processes that are geared to reducing the complexity of our restaurants' menus and foods items. A reduction in complexity will allow us to manage food costs more effectively, which will lead to cost of sales improvements.

In fiscal 2012, restaurant segment cost of sales (predominantly food cost) was 24.3% of sales in the second quarter, 24.4% year-to-date, compared to 24.3% of sales, 24.2% year-to-date, in the corresponding periods last year. The restaurant segment cost of sales as a percent of sales was flat in the second quarter of fiscal 2012 due to the benefit of actual versus theoretical food cost programs implemented at both restaurant concepts, which was offset by increased food costs. The slight increase in restaurant segment cost of sales as a percent of sales through six months of fiscal 2012 is largely due to deleverage caused by same-store-sales declines.

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The foods segment cost of sales ratio was 58.8% of sales in the second quarter of 2012 (56.7% year-to-date) versus 53.1% of sales (55.1% year-to-date) in the corresponding periods a year ago. The increase in the foods segment cost of sales ratio in the second quarter was due primarily to a 12.2% increase in sow costs this quarter versus the corresponding period last year. Sow costs averaged $67.82 per hundredweight in the second quarter of fiscal 2012 compared to $60.47 per hundredweight in the second quarter of fiscal 2011. We expect sow costs to remain at the high end of the $60-$65 range.

Operating Wage and Fringe Benefit Expenses

Consolidated operating wage and fringe benefit expenses ("operating wages") were 32.5% of sales in the second quarter of fiscal 2012 and 32.7% of sales through six months of fiscal 2012 compared to 33.6% and 34.3% of sales in the corresponding periods last year. In the second quarter of fiscal 2012, the operating wage ratio decreased in both the restaurant segment and in the foods segment compared to the corresponding periods last year.

In the restaurant segment, operating wages were 38.1% of sales in the second quarter of fiscal 2012 and 38.0% of sales through six months of fiscal 2012 compared to 38.9% and 39.1% of sales, respectively, in the corresponding periods last year. The operating wage ratio in the second quarter decreased due to a reduction in labor hours and lower health insurance claims, partially offset by the negative leverage due to same-store sales declines at both Bob Evans Restaurants and Mimi's. We continue to revamp our labor management process to ensure proper tools are in place to better deploy labor during peak sales periods.

In the foods segment, operating wages were 9.2% of sales in the second quarter of fiscal 2012 and 9.6% of sales through six months of fiscal 2012 compared to 10.8% and 11.9% of sales in the corresponding periods last year. The decrease in the operating wage ratio in fiscal 2012 was due to cost reductions from the closure of two fresh sausage operations and our lean manufacturing productivity initiatives started in the second quarter of fiscal 2011.

Other Operating Expenses

Approximately 94% of other operating expenses occurred in the restaurant segment in the second quarters of fiscal 2012 and fiscal 2011. The most significant components of other operating expenses were utilities, restaurant advertising, restaurant supplies, repair and maintenance, rent, non-income based taxes, credit/debit/gift card processing fees and pre-opening expenses related to our "Farm-Fresh Refresh" program and new restaurants. Consolidated other operating expenses were 17.0% of sales in the second quarter of fiscal 2012 and 16.8% through six months of fiscal 2012, compared to 16.4% and 16.5% of sales, respectively, in the corresponding periods last year.

In the restaurant segment, other operating expenses were 19.7% of sales in the second quarter of fiscal 2012 and 19.3% of sales through six months of fiscal 2012 compared to 19.1% and 19.0% of sales, respectively, in the corresponding periods last year. The other operating expense ratio increased as a result of deleverage due to same-store sales declines at both Bob Evans Restaurants and Mimi's, higher advertising expenses, fees from increased gift card activity and credit card usage and higher pre-opening expenses from "Farm-Fresh Refresh" and new store openings, offset by lower restaurant supplies and utilities expenses.

In the foods segment, the other operating expenses ratio was 5.4% of sales in the second quarter of fiscal 2012 and 5.8% of sales through six months of fiscal 2012 compared to 4.8% and 5.2% of sales in both the corresponding periods last year. The increase in the other operating expense ratio was primarily due to increases in transportation costs, third-party distribution costs and repair and maintenance expenses, partially offset by our lean manufacturing productivity initiatives.

Selling, General and Administrative Expenses ("SG&A")

Consolidated S,G&A expenses were 9.4% of sales in the second quarter of fiscal 2012 and 9.1% of sales through six months of fiscal 2012 compared to 11.9% and 10.3% of sales, respectively, in the corresponding periods last year.

In the restaurant segment, S,G&A expenses were 7.2% of sales in the second quarter of fiscal 2012 and 7.0% of sales through six months of fiscal 2012 compared to 9.6% and 7.9% of sales, respectively, in the corresponding periods last year. In the second quarter of fiscal 2012, we recorded $2.8 million of impairment charges related to certain property, plant and equipment. In addition, we recorded $0.3 million of severance costs. Partially offseting these charges in the second quarter of fiscal 2012 was a gain on sale of assets of $0.4 million. The decrease in the S,G&A ratio in the second quarter of fiscal 2012 was primarily due to impairment charges on certain property, plant and equipment and severance/retirement costs in the second quarter of fiscal 2011 of $10.3 million and $0.8 million, respectively.

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In the foods segment, S,G&A expenses were 18.4% of sales in the second quarter of fiscal 2012 and 18.5% of sales through six months compared to 22.0% and 21.3% of sales, respectively, in the corresponding periods last year. The decrease in the S,G&A expense ratio in the second quarter of fiscal 2012 was a result of restructuring charges related to the closure of fresh sausage operations in Galva, Illinois, and Bidwell, Ohio, in the second quarter of fiscal 2011, the gain on the sale of the DC (Note 7) of $0.7 million and lower transportation costs. The decrease in restructuring charges in the second quarter of fiscal 2012 was partially offset by an increase in advertising costs.

Depreciation and Amortization

Consolidated depreciation and amortization expenses were 5.0% of sales in both the second quarter of fiscal 2012 and through six months of fiscal 2012 and in the corresponding periods last year.

In the restaurant segment, depreciation and amortization were 5.4% of sales in the second quarter of fiscal 2012 and 5.5% through six months compared to 5.4% of sales in both the corresponding periods last year.

In the foods segment, depreciation and amortization expenses were 3.1% of sales in the second quarter of fiscal 2012 and 3.0% through six months of fiscal 2012 compared to 3.3% and 3.4% of sales in the corresponding periods last year. The decrease in depreciation and amortization expense ratio in the second quarter of fiscal 2012 is due to reduced depreciation associated with the closure of fresh sausage operations in the second quarter of fiscal 2011 offset by depreciation on property, plant and equipment additions.

Interest

Net interest expense for the second quarter of fiscal 2012, compared to the
corresponding period last year, was as follows:



                                                        Three Months Ended                                       Six Months Ended
(dollars in thousands)                     October 28, 2011             October 29, 2010            October 28, 2011            October 29, 2010
Gross interest expense:
Fixed-rate debt                           $             1,922          $            2,116         $              4,033         $            4,569
Variable-rate debt                                         63                          88                           63                        133

                                                        1,985                       2,204                        4,096                      4,702
Gross interest income                                      (0 )                        (0 )                         (0 )                       (0 )

Net interest expense                      $             1,985          $            2,204         $              4,096         $            4,702

At October 28, 2011, $135.7 million was outstanding on our fixed-rate unsecured senior notes. We did not have any balances outstanding on our variable-rate revolving lines of credit during the second quarter of fiscal 2012. The decrease in interest expense was primarily the result of lower average borrowings in fiscal 2012. We reduced our total debt by $40.9 million during fiscal 2011 and by an additional $13.6 million during the first quarter of fiscal 2012. A change in market interest rates will not impact interest expense associated with our fixed-rate debt, but will impact our variable-rate debt when there is an outstanding balance.

We are in the process of obtaining a new $300.0 million revolving credit facility. The facility is intended to provide us with liquidity options and to support our primary growth and return initatives. The initiatives include our "Farm-Fresh Refresh" program and new unit openings at Bob Evans Restaurants, our organic and inorganic initiatives in our foods segment and for our share repurchase program. Our interest expense on variable rate debt may increase in future periods as the credit facility funding source is utilized. We expect to complete the refinancing of the revolving credit facility by December 2011.

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Taxes

The combined federal and state income tax rate was 34.1% in the second quarter of fiscal 2012 versus 33.5% a year ago.

The higher fiscal 2012 rate reflected the impact of lower federal income tax credits. We anticipate the annual effective tax rate for the entire year of fiscal 2012 to approximate 32.0% to 33.0%. We reevaluate 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 was the main source of funds for working capital, capital expenditures, debt repayments and share repurchases in the second quarter of fiscal 2012. Cash and equivalents totaled $38.2 million at October 28, 2011. Our bank lines of credit total $120.0 million, of which $12.3 million is reserved for certain standby letters-of-credit. The remaining $107.7 million of our bank lines of credit is available for liquidity needs, capital expansion and repurchases of Bob Evans common stock. At October 28, 2011, we did not have any balances outstanding on these lines of credit. During the second quarter of fiscal 2012, we repurchased 877,417 shares of our outstanding common stock at a cost of $26.6 million, using cash generated from operations. Our board of directors has authorized a share repurchase program of up to $50 million for the full year in fiscal 2012, which will double our authorized share repurchase program compared to fiscal 2011. We expect to repurchase the entire $50 million authorized by our board of directors. Our quarterly cash dividend was $0.25 per share on our outstanding common stock in the second quarter of . . .

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