Bob Evans Farms (BOBE) is trading lower (-3%) after reporting 4Q17 (Apr) earnings this morning. There have been some big changes at BOBE recently, so a little background would help. Bob Evans Farms is a producer of refrigerated potato, pasta and vegetable-based side dishes, pork sausage, and a variety of refrigerated and frozen convenience food items under the Bob Evans and Owens brand names.
On April 28, 2017, the company completed the sale of Bob Evans Restaurants to Golden Gate Capital. And the company recently acquired Pineland Farms Potato Company. The sale of Bob Evans Restaurants and the acquisition of Pineland Farms Potato marks the beginning of a new era at Bob Evans Farms in which the company will focus exclusively on its Foods business. BEF Foods is the national market share leader in refrigerated dinner side dishes, and is also the market share leader in sausage products in its core Midwest markets.
The new Bob Evans, along with the manufacturing capacity of Pineland Farms (which has a 900-acre potato farm), is positioned to be a higher profit and higher growth company that is expected to provide better returns to shareholders. BOBE expects to leverage its acquisition of Pineland Farms to generate side-dish sales growth, particularly in expansion markets and new retail channels such as club and convenience stores. BOBE also expects to grow in the food service channel as it partners with restaurant chains.
Following the completion of these transactions, BOBE repaid debt with the sale proceeds and established a $300 mln credit facility maturing April 2022. BOBE says its near-term leverage range of 1.0-2.0x provides considerable flexibility. The company also announced a special dividend of $7.50 per share payable June 16, to stockholders of record on May 30.
Turning to the Q4 (Apr) results, non-GAAP EPS rose 27% YoY to $0.61. Revenue from continuing operations fell 2.4% YoY to $99.9 mln. Pounds sold for AprQ increased 7.0% while average net selling price per pound declined 2.3%. 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.
Excluding the impact of an extra week in 4Q16, net sales actually increased 4.9% YoY, driven by the continuation of double digit growth in its high margin refrigerated side-dish business. With the sale of BER complete, BOBE can now strategically expand its food service sales effort, leveraging Pineland Farms' strength in this large channel of distribution. In terms of guidance for FY18, BOBE expects revenue of $464-476 mln and GAAP EPS of $2.06-2.24. Full year EBITDA guidance is expected to be $102-108 mln.
In sum, the stock is trading lower on this earnings result and guidance. Weakness in the overall market may also be having an impact. Despite the weakness today, BOBE seems to have set itself up well going forward. Selling off the restaurant segment makes sense. In fact, the stock jumped when the deal was first announced in January 2017.
The Food segment had been growing much faster and had higher margins than the Restaurant segment. In fact, the Restaurant segment was seeing stagnant sales in recent years, so the split makes sense. BOBE can now focus on growing its Foods segment by expanding into new retail channels. Pineland Farms has a strong position in the food service channel (which is very large) so BOBE will now be able to more effectively cross-sell its other products into the food service channel, which has not been a strength of BOBE in the past. BOBE will also expand into new retail channels such as club and convenience stores. On a final note, the split could make BOBE a more attractive acquisition target.