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BOBE > SEC Filings for BOBE > Form 10-K on 21-Jun-2013All Recent SEC Filings

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Form 10-K for BOB EVANS FARMS INC


21-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

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. This MD&A contains forward-looking statements that set forth our expectations and anticipated results based on management's plans and assumptions. These statements are often indicated by words such as "expects," "anticipates," "believes," "estimates," "intends" and "plans." 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 this Annual Report on Form 10-K under the heading "Item 1A - Risk Factors." 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. Please refer to "Part I, Item 1. Business." of this Form 10-K for more information regarding forward-looking statements.

As of April 26, 2013, we operated all 560 full-service Bob Evans restaurants in 19 states. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. Revenue in Bob Evans Restaurants is recognized at the point of sale.

Effective February 15, 2013, we completed the sale of the Mimi's Café restaurant chain to Le Duff America, Inc., a U.S.-based subsidiary of Groupe Le Duff, a global bakery and restaurant company headquartered in France. Mimi's Café results are included in our consolidated results of operations and reported as a separate operating segment through the sale date of February 15, 2013.

We produce and distribute pork sausage and a variety of complementary home-style convenience food items under the Bob Evans, Owens and Country Creek brand names. These food products are delivered to warehouses that distribute to grocery stores throughout the United States. We also manufacture and sell similar products to foodservice accounts, including Bob Evans Restaurants and other restaurants and food sellers.

References herein to 2013, 2012 and 2011 refer to fiscal years. All years presented are 52-week years.

General Overview

The following table reflects data for our fiscal year ended April 26, 2013, compared to the preceding two fiscal years. The consolidated information is derived from the accompanying Consolidated Statements of Operations. The table also includes data for three business segments - Bob Evans Restaurants, Mimi's Café and BEF Foods. Mimi's Café was sold in fiscal 2013, effective February 15, 2013, as noted above. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amount.

                                                     Consolidated Results
                                       Fiscal 2013       Fiscal 2012       Fiscal 2011
  Net sales                            $  1,608,909      $  1,654,413      $  1,676,906
  Operating (loss) income                   (43,857 )         107,874            88,540
  Cost of sales                                30.3 %            30.8 %            30.4 %
  Operating wages                              31.8 %            32.3 %            33.3 %
  Other operating                              16.6 %            16.2 %            16.1 %
  S,G&A                                        11.2 %             9.1 %             9.9 %
  Depr. & amort.                                4.9 %             5.0 %             5.0 %
  Impairment of assets held for sale            4.3 %             0.0 %             0.0 %
  Loss on sale of Mimi's Café                   3.6 %             0.0 %             0.0 %

  Operating (loss) income                      -2.7 %             6.5 %             5.3 %


Segment Results:



                                              Bob Evans Restaurants                             Mimi's Café                                   BEF Foods
                                      FY 2013        FY 2012        FY 2011        FY 2013        FY 2012        FY 2011        FY 2013         FY 2012        FY 2011
Net sales                            $ 981,418      $ 973,678      $ 976,666      $ 278,683      $ 366,015      $ 380,267      $  348,808      $ 314,720      $ 319,973
Operating income (loss)                 75,577         88,810         73,426         18,053         (1,436 )       (7,657 )      (137,487 )       20,500         22,771
Cost of sales                             24.1 %         23.7 %         23.7 %         26.2 %         26.8 %         27.3 %          50.8 %         57.5 %         54.7 %
Operating wages                           37.4 %         38.1 %         39.5 %         38.7 %         37.2 %         37.1 %          10.7 %          8.8 %         10.2 %
Other operating                           17.6 %         17.3 %         17.5 %         24.2 %         22.3 %         21.9 %           8.1 %          6.1 %          5.1 %
S,G&A(1)                                   7.7 %          6.8 %          6.8 %        -45.6 %          7.7 %          9.4 %          66.3 %         18.1 %         19.7 %
Depr. & amort.                             5.5 %          5.0 %          5.0 %          4.8 %          6.4 %          6.4 %           3.6 %          3.0 %          3.2 %
Impairment of assets held for sale         0.0 %          0.0 %          0.0 %         24.5 %          0.0 %          0.0 %           0.0 %          0.0 %          0.0 %
Loss on sale of Mimi's Café                0.0 %          0.0 %          0.0 %         20.7 %          0.0 %          0.0 %           0.0 %          0.0 %          0.0 %

Operating income (loss)                    7.7 %          9.1 %          7.5 %          6.5 %         -0.4 %         -2.0 %         -39.4 %          6.5 %          7.1 %

(1) Selling, general and administrative expenses ("S,G&A")

Restaurant Industry Overview

The ongoing industry-wide factors most relevant to our restaurants include: the economy, sales trends, labor and fringe benefit expenses, commodity prices, energy prices, competition, same-store sales, consumer acceptance, restaurant openings and closings, governmental initiatives, food safety and weather.

Bob Evans Farms, Inc. overview

Fiscal 2013 was a year of tremendous change for Bob Evans Farms, Inc. The Company took many significant strategic actions during fiscal 2013 that impacted profitability including: the conversion of the restaurant operating entities to limited liability companies; the sale of Mimi's Café; initiation of the consolidation of ready-to-eat production at the Sulphur Springs, Texas, facility; the acquisition of Kettle Creations; the early payment of the Company's private placement notes; the sale and leaseback of the corporate campus and other facilities; and other restructuring activities. These activities resulted in a negative net pretax operating loss of $149.5 million, and $6.2 million of costs in interest expense associated with the prepayment of the Company's private placement notes, resulting in a pretax charge totaling $155.6 million.

The pretax loss for fiscal 2013 was $55.3 million. Income taxes were a benefit of $52.5 million, primarily reflecting the income tax receivable the Company expects to realize from converting its restaurant operating entities to limited liability company structures. Loss per share for fiscal 2013 was $0.10. The Company does not expect restructuring and other corporate strategic actions to continue at this level in fiscal 2014.

Bob Evans Restaurants Segment Overview

The factors that had the greatest positive impact on Bob Evans Restaurants' performance in fiscal 2013 were the effect of our Farm Fresh Refresh remodeling initiative, pricing and improvements in same-store sales trends, which were offset by commodity cost increases, impairment on underperforming restaurants and nonoperating property, plant and equipment, increases in the employer match to the Company's retirement plans, long-term incentive plans expense and wages and severance payments.

In fiscal 2013, same-store sales increased 1.0 percent compared to fiscal 2012. Our same-store sales improved despite an incremental 684 lost sales days from the Farm Fresh Refresh remodel initiative. Closed store days reached more than 1,300 in fiscal 2013. We experienced positive same-store sales in each of our fiscal 2013 quarters largely due to our continued strong performance of the restaurants that have been remodeled as part of our Farm Fresh Refresh remodeling initiative. Average guest check increased to $8.92 compared to $8.69 in fiscal 2012 as a result of guest acceptance of our marketing and menu initiatives including our $9.99 value meal offerings. Off premise as a percent of overall sales continued to increase and now represents 11.6 percent of net sales compared to 10.9 percent last year.


In fiscal 2013, operating income decreased $13.2 million, or 14.9 percent, compared to the corresponding period last year. The decrease in operating income is largely a result of increases in depreciation expense and S,G&A expenses which include impairment costs and severance and restructuring. Additionally, the increase in S,G&A expenses was due to employer match to the Company's retirement plans; long-term incentive plans expense; legal fees; increased utilization of contract labor; wages; an increased corporate overhead allocation as a result of the Company's sale of Mimi's Café, which included providing transition services to Mimi's Café at less than cost, and spending to implement an Enterprise Resource Plan ("ERP") computer system.The increase in depreciation expense is primarily related to substantial capital improvements made as part of the Farm Fresh Refresh remodel initiative.

At Bob Evans Restaurants, sales growth is being driven by the Farm Fresh Refresh remodel initiative, in conjunction with value messaging, menu innovation, bakery and the off-premise sales layers. In fiscal 2013, we completed 195 Farm Fresh Refresh remodels at Bob Evans Restaurants. The sales increase provided by the Farm Fresh Refresh initiative is largely due to improving the dine-in experience while also adding the new bakery sales layer and enhancing the restaurants' ability to support carryout and catering. We are sustaining improvement of same-store sales in restaurants that were part of the initial Farm Fresh Refresh remodeling initiative, beyond the initial year after reopening. Farm Fresh Refresh restaurants contributed approximately 3.7 percent in sales increase, compared to non-refreshed restaurants, which recorded a same-store sales increase of 0.1 percent, as compared to fiscal 2012. We are on track to complete the Farm Fresh Refresh initiative for all Bob Evans Restaurants by the end of fiscal year 2014. During fiscal 2014, we expect to open up to four new restaurants.

Mimi's Café Segment Overview

Effective February 15, 2013, we completed the sale of Mimi's Café to Le Duff America, Inc. ("Le Duff"). Mimi's Café results of operations are included in our consolidated results of operations through the sale date of February 15, 2013. See Note 3 Sale of Mimi's Café for information concerning the sale. In fiscal 2013, the factors that had the greatest impact on Mimi's Café's performance were related to structural transactions in the business, including the conversion of the Mimi's Café restaurant entity to a limited liability company, impairment on assets held for sale and the loss on sale of Mimi's Café to Le Duff.

BEF Foods Segment Overview

The ongoing industry-wide factors most relevant to the BEF Foods segment include: sow costs, other commodity costs, transportation and energy costs, governmental regulations, food safety, the economy and consumer acceptance.

We are focused on delivering top line growth in the BEF Foods segment. We expect to attain this goal through expanded distribution of side dishes, frozen and precooked sausage product lines, and increasing the volume of foodservice sales which includes products insourced to our restaurants.

The BEF Foods segment's net sales increased 10.8 percent in fiscal 2013 compared to fiscal 2012. The increase in net sales is due primarily to a 14.6 percent increase in total pounds sold in fiscal 2013 compared to fiscal 2012. The increase in total pounds sold is largely due to the growth of both the foodservice categories and refrigerated side dishes. Our acquisition of Kettle Creations early in the second quarter of fiscal 2013, contributed 2.9 percentage points of the total pounds sold increase. The acquisition of the Kettle Creations brand and its food production facility helps us to support the rapid growth of our side dish business. We are in the process of expanding the Kettle Creations food production facility, as well as our plant in Sulphur Springs, Texas, to respond to growth in sales of our portfolio of refrigerated side dishes, precooked sausage and frozen breakfast offerings. We are focused on delivering top-line profitable growth in the BEF Foods segment. We expect to attain this goal through expanded distribution of side dishes, frozen, fresh and precooked sausage product lines, increased volume of foodservice sales, including continued insourcing of products used in our restaurants, and inorganic acquisition opportunities. An increase in gross sales was partially offset by an increase in promotional expenses of $7.3 million, or 15.6 percent in fiscal 2013. Promotional expenses and other selling allowances are reflected in the Consolidated Statements of Operations as a reduction of gross sales. The increase in promotional expenses is aimed at protecting market share in the category by assisting the retailer to reduce shelf prices as a response to significantly lower second quarter fiscal 2013 sow costs.


The operating loss in the BEF Foods segment was $137.5 million, a decrease of $158.0 million in fiscal 2013, compared to operating income of $20.5 million in the corresponding period last year. In fiscal 2013, the factor that had the greatest impact on BEF Foods performance was the extinguishment of intercompany debt of $156.9 million, which was the result of a conversion of the restaurant operating entities to limited liability companies.

Sow costs continue to represent a significant component of the BEF Foods segment cost of sales, and the volatile nature of sow costs greatly impacts the profitability of the segment. Sow costs decreased 12.5 percent compared to fiscal 2012. The decrease in sow costs to $53.87 per hundredweight from $61.58 per hundredweight resulted in a cost of sales decrease of $7.9 million in fiscal 2013, and is partially responsible for the decrease in the cost of sales ratio to 50.8 percent from 57.5 percent in the corresponding period last year. The Kettle Creations acquisition during the second quarter of fiscal year 2013 decreased cost of sales and increased operating wages and other operating expenses. Prior to the acquisition of Kettle Creations, substantially all costs related to acquiring product from Kettle Creations were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition, as an owned facility, rather than as a co-packer, labor costs are included in operating wages; and utilities, freight, and hauling costs are included in other operating expenses.

Fiscal Year Ended April 26, 2013 ("fiscal 2013") as Compared to Fiscal Year Ended April 27, 2012 ("fiscal 2012")

Net Sales

Consolidated net sales decreased $45.5 million, or 2.8 percent, in fiscal 2013 compared to fiscal 2012. The fiscal 2013 decrease was the result of increases of $7.7 million and $34.1 million in the Bob Evans Restaurants and the BEF Foods segments net sales, respectively, offset by a decline of $87.3 million in the Mimi's Café segment. Mimi's Café results of operation are included in our consolidated results of operations through the sale date of February 15, 2013, as discussed in the Mimi's Café Segment Overview above.

Same-store sales computations for a given year are based on net sales of restaurants that are open for at least 18 months prior to the start of that year. Net sales of restaurants to be rebuilt are excluded for all periods in the same-store sales computation when construction commences on the replacement building. Net sales of closed restaurants are excluded from the same-store sales computation in the period in which the restaurants are closed; with the exception of closed restaurant days for restaurants undergoing the Farm Fresh Refresh which are included in the same-store sales base.

Bob Evans Restaurants reported net sales of $981.4 million in fiscal 2013, a 0.8 percent increase compared to $973.7 million in fiscal 2012. Same-store sales at Bob Evans Restaurants increased 1.0 percent in fiscal 2013, with average menu prices up 2.4 percent. The increase in net sales is a result of positive same-store sales in each fiscal quarter of 2013. During fiscal 2013, Bob Evans Restaurants opened two new restaurants, remodeled 195 existing locations and closed seven underperforming restaurants. In fiscal 2012, Bob Evans Restaurants eliminated a two-day early cutoff resulting in additional sales of $5.1 million, as described in Note 1.

The net sales increase in fiscal 2013 was due to positive same-store sales, despite the more than 1,300 lost sales days, which includes 684 incremental lost sales days, for the Farm Fresh Refresh remodeling initiative and elimination of our "Corner Cupboard" retail assortment. Bob Evans Restaurants that undergo a Farm Fresh Refresh remodel are closed an average of five to seven days, which equated to a loss in net sales of approximately $6.3 million in fiscal 2013 compared to $2.7 million in the corresponding period last year. We estimate the fiscal 2014 loss in net sales to be approximately $7.5 million as part of completing the remaining 233 Farm Fresh Refresh remodels.

We continue to see a sales increase provided by restaurants that undergo a Farm Fresh Refresh remodeling initiative over non-refreshed restaurants of approximately 3.7 percent, compared to non-refreshed restaurants, which recorded a same-store sales increase of 0.1 percent.

We remain on track for completing our Farm Fresh Refresh remodeling initiative by the end of fiscal 2014.


Our Farm Fresh Refresh initiative is designed to drive dine-in sales and expand high growth layers, such as bakery, catering and carryout sales. In fiscal 2013, bakery, catering and carryout sales increased 32 percent, 20 percent and 8 percent, respectively, compared to fiscal 2012. Our broad value platform that offers value and menu innovation across breakfast, lunch and dinner day parts also contributed to positive same-store sales at Bob Evans Restaurants. We offer $9.99 Three-Course Dinners, $6 Farmhouse Deals, $20 Family Meals-to-Go and our $5 Carryout-to-Go. In fiscal 2015, we plan to fully execute our new restaurant expansion program, which will provide another source for top-line growth.

The chart below summarizes the restaurant openings and closings during the last two fiscal years for Bob Evans Restaurants:

Bob Evans Restaurants:



                               Beginning      Opened      Closed       Ending
                Fiscal 2013
                1st quarter           565           2           2          565
                2nd quarter           565           -           -          565
                3rd quarter           565           -           -          565
                4th quarter           565           -           5          560
                Fiscal 2012
                1st quarter           563           -           -          563
                2nd quarter           563           2           1          564
                3rd quarter           564           -           -          564
                4th quarter           564           2           1          565

Mimi's Café reported net sales of $278.7 million in fiscal 2013, a decrease of 23.9 percent compared to $366.0 million in fiscal 2012 due to negative comps and the fact that Mimi's Café net sales results for fiscal 2013 are only included in our consolidated results of operations through the sale date of February 15, 2013.

The BEF Foods segment's net sales increased $34.1 million, or 10.8 percent, in fiscal 2013 versus fiscal 2012. The increase in net sales is primarily due to an increase in total pounds sold of 14.6 percent in fiscal 2013 compared to fiscal 2012. The increase in total pounds sold is largely due to the growth of our foodservice and refrigerated side dishes categories. Our acquisition of Kettle Creations early in the second quarter of fiscal 2013 contributed 2.9 percent of the total pounds sold increase. The growth of our foodservice and refrigerated side dishes categories has lessened the impact of flat sausage sales. An increase in gross sales was partially offset by an increase in promotional expenses of $7.3 million, or 15.6 percent in fiscal 2013. Promotional expenses and other selling allowances are reflected in the Consolidated Statements of Operations as a reduction of gross sales. The increase in promotional expenses was aimed at protecting market share in the category by assisting the retailer to reduce shelf prices as a response to significantly lower second quarter fiscal 2013 sow costs.

We believe there are opportunities to increase product volume through accelerating product innovation, the expansion of production facilities, expanding our selection of food products at each distribution point, insourcing Bob Evans Restaurants needs and acquisitions. The insourcing relationship not only benefits the BEF Foods segment through potential increases in total pounds sold, it also offers consistency to our guests, reduces product preparation and helps insulate Bob Evans Restaurants from arbitrary price increases from outside suppliers. Our expansion of Kettle Creations and our Sulphur Springs, Texas, production facilities are expected to be complete during fiscal 2014, where we expect to see continued efficiencies and growth in our refrigerated side dishes and precooked food products. We expect that the efficiencies gained will enable us to continue our focus on product innovation for future growth and margin improvements.

On May 29, 2012, we announced an additional phase to our plant optimization initiatives with the plan to close our ready-to-eat manufacturing plant in Bidwell, Ohio, and our soup and gravy manufacturing plant in Springfield, Ohio. We plan to cease operations at these two facilities in the third quarter of fiscal 2014, and we will consolidate the volume in Sulphur Springs, Texas, as part of that plant's expansion.


Cost of Sales

Consolidated cost of sales (cost of materials) was 30.3 percent of net sales and 30.8 percent of net sales in fiscal 2013 and fiscal 2012, respectively.

Bob Evans Restaurants' cost of sales was 24.1 percent of net sales in fiscal 2013 and 23.7 percent of net sales in fiscal 2012. The increase in the cost of sales ratio was due to commodity cost increases and unfavorable menu mix shifts, which were partially offset by ongoing efficiency initiatives, including the actual versus theoretical food cost program.

Mimi's Café cost of sales, predominantly food cost, was 26.2 percent of net sales and 26.8 percent of net sales in fiscal 2013 and fiscal 2012, respectively. The decrease in the cost of sales ratio was due to food cost initiatives, ongoing efficiency initiatives, including the actual versus theoretical food cost program and a new menu designed to drive product mix favorability, which were partially offset by commodity increases. In fiscal 2013, Mimi's Café cost of sales results are included in our consolidated cost of sales through the sale date of February 15, 2013.

BEF Foods segment cost of sales were 50.8 percent of net sales and 57.5 percent of net sales in fiscal 2013 and fiscal 2012, respectively. The decrease in the cost of sales ratio in fiscal 2013 was the result of a decline in sow costs and the effect of the Kettle Creations acquisition. Prior to the acquisition of Kettle Creations, substantially all costs related to acquiring product from Kettle Creations were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition, as an owned facility, rather than as a co-packer, labor costs are included in operating wages; and utilities, freight, and hauling costs are included in other operating expenses. Sow costs averaged $53.87 per hundredweight in fiscal 2013, a decline of 12.5 percent, compared to $61.58 in fiscal 2012. The year-over-year decline in sow costs resulted in a decrease of about $7.9 million in cost of sales for the BEF Foods segment compared to fiscal 2012. Our ongoing lean manufacturing initiatives, plant optimization activities, diversification of food products category growth and execution of future inorganic growth strategies are critical in offsetting the volatile nature of sow costs and competitive pressures.

Operating Wage and Fringe Benefit Expenses

Consolidated operating wage and fringe benefit expenses ("operating wages") were 31.8 percent of net sales and 32.3 percent of net sales in fiscal 2013 and fiscal 2012, respectively.

Bob Evans Restaurants' operating wages were 37.4 percent of net sales and 38.1 percent of net sales in fiscal 2013 and fiscal 2012, respectively. The fiscal 2013 improvement in the operating wages ratio resulted from sales leverage from improvement in same-store sales and labor efficiency initiatives, including more effective scheduling.

Mimi's Café operating wages were 38.7 percent of net sales and 37.2 percent of net sales in fiscal 2013 and fiscal 2012, respectively, due to deleveraging. In fiscal 2013, Mimi's Café operating wages are included in our consolidated operating wages through the sale date of February 15, 2013.

In the BEF Foods segment, operating wages were 10.7 percent of net sales and 8.8 percent of net sales in fiscal 2013 and fiscal 2012, respectively. The increase in the operating wage ratio in fiscal 2013 is due primarily to additional operating wages and fringe benefits associated with our acquisition of Kettle Creations early in the second quarter of fiscal 2013. Prior to the acquisition of Kettle Creations, substantially all costs related to acquiring product from Kettle Creations were included in inventories upon receipt of goods, then expensed to cost of sales upon shipment to customers, as BEF Foods was buying a finished product. Subsequent to the acquisition of Kettle Creations, as an owned facility rather than a supplier, labor costs were included in operating wages, resulting in an increase in operating wages. The increase in operating wages ratio in fiscal 2013 was partially offset by the sale of the Springfield, Ohio, warehouse facility in the second quarter of fiscal 2012. The fees associated with the third-party distribution agreement for continued use of the Springfield, Ohio, location as an outsourced facility in fiscal year 2013 rather than an owned facility through the first two quarters of fiscal 2012, are included in other operating expenses in the current year. In the first two quarters of fiscal 2012, when we owned the facility, there were operating wages associated with running the warehouse facility.

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