BOBE remains on the Hedgeye Best Ideas list as a long.
We continue to believe there is significant upside in BOBE, but it is likely that this upside will not be realized until we see several changes at the senior level. Despite an uninspiring quarter, we find solace in the fact that we are one step closer to this becoming a reality. The 1QF15 earnings call was simply painful to listen to. Management's vision for the future of this company is outdated and will not materially improve the company or generate the level of returns shareholders deserve.
The comments from CEO Steven Davis speak to how disconnected he is from reality -- "Bob Evans Restaurants and Bob Evans Farms Food are making meaningful progress as both businesses leverage the significant capital investment each has made over the last several years." To put this in perspective, BOBE's EPS has declined from $2.39 to $1.68 over the past year and 1QF15 EPS just declined 83%.
Mr. Davis goes on to say that both of BOBE's operating segments remain challenged by macroeconomic factors such as the continuation of a competitive promotional environment and weak consumer confidence. Two days ago, the Conference Board said that consumer confidence in the U.S. climbed to its highest level in nearly seven years in August. To be fair, however, we do suspect that BOBE's core customer (lower-middle to middle income guests in the Midwest) remains financially challenged.
Bob Evans restaurants same-store sales declined 2% in 1Q15, underperforming the Knapp-Track Family Category which declined 1.6% during this time. Mr. Davis went into great detail to explain that a closer look into their core markets suggests they are outperforming their most comparable competitors. Nitpicking statistics is a tired practice that we don't typically value. The truth is, you're either transforming the business to grow customer counts or you're not!
Management provided the following points to suggest the future is brighter for Bob Evans Restaurants:
- The key to achieving the expected results relies upon the successful rollout of the Broasted Chicken platform
- Day-part expansion
- Expanded holiday operating hours
- Normalized weather
While these are all big question marks, one thing is clear: management hasn't identified a differentiated strategy to drastically improve its positioning in a fast-changing restaurant landscape. Day-part expansion will be particularly challenging. The lunch business is weaker with lower guest satisfaction scores and the dinner business is also weak -- operations are more challenged, the staff is subpar, carry-out orders are at their highest and it’s the most competitive day-part.
Management has consistently proven that they have a difficult time managing a complex business; they can't even come up with an effective marketing strategy! Improving the marketing of take-out is not the silver bullet here. They still expect to achieve 2015 sales goals which they slashed significantly last quarter, but 2HF15 guidance looks aggressive to us.
As silly as it seems, management believes that the Broasted Chicken platform will be its saving grace. Although the Broasted Chicken platform represented 11% of sales mix in the Cincinnati market it's important to remember that a significant portion of this is likely driven by initial trial. Repeat business will be critical and we're not certain they'll get it.
It's difficult to get excited about this company until the new board members complete their "initiation" to every aspect of the business. After a short honeymoon period, we'd expect to see more changes to the operating structure of the company. There's much to be done.
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