December 13, 2016

Should Bob Evans sell its packaged foods division?

This week Bob Evans Farms, Inc released its 3rd quarter earnings to a tepid audience. Same-store sales were down 1.8% in the second quarter, which ended on October 28th. On the call, CEO Saed Mohseni pointed out that many of its locations are based in Midwestern areas of the country hardest hit by economic challenges. The good news, he said, is that stores outside Pennsylvania, Ohio, and Michigan fared much better; 65% of the total number of units nationwide saw growth in same-store sales. In other words, the struggling locations weighed down the scale.

But the elephant in the room was whether Bob Evans' packaged food business, BEF Foods, should fully spinoff from Bob Evans Restaurants and get sold. It's widely considered the healthier asset and investors looking for dividends are keen for answers. The situation has even devolved to the point where activist investor Thomas Sandell whose firm, Sandell Asset Management, has 4 seats on the Bob Evans board, flat-out asked a flustered Mohseni about it right on the earnings call for everyone to hear. 

We used SIGNUM for Restaurants to drill down into the meaty debate. And the takeaway is that Bob Evans' brand equity is high but customer service (especially wait times) is trending the wrong way. So then should the company use its restaurant brand equity to beef up its packaged goods business, where customer service is less of an issue?

More specifically, there is clearly demand for food served by Bob Evans, and that demand is growing. Take a look at this chart. 

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Taking the last two years and putting them over the preceding two years, we see that buyers are talking about Bob Evans food with much more intensity. Consumers are bullish on the menu items and the prices, which are driving demand and cravings. Even the coffee is growing in popularity.

Now let's take a look at how the physical storefronts are faring.

Complaints about in-store wait times and poor service are clearly up over that same 4-year period. 

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The loyalty metrics should also be of concern to Bob Evans. Upstart competitors like Panera, Five Guys, and PF Changs are enjoying significant upticks in loyalty metrics from buyers while Bob Evan's line is rather flat. 

Screen Shot 2016-12-09 at 10.20.57 AM.png

In the final analysis it's evident from the first chart that "Bob Evans" maintains valuable – even growing – brand equity. Challenges arrive in the 2nd and 3rd charts in terms of in-store performance and sagging marketshare relative to the competition. 

Again, one potential takeaway is that Bob Evans Restaurants could lend "BEF Foods" more of its brand strength. The Bob Evans brand is conspicuously absent from the latter's website, even though there's a contact address front and center @bobevans and the photographs are remarkably similar (though not identical) to the food pics on the Bob Evans Restaurant menu. In the hope of boosting BEF Foods' value why not further tap into the perennially strong brand? It could ease the transition and boost the value of BEF Foods for a sale. 

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