This Stock Needs to Shed Its Baggage

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Bob Evans Farms' (NASDAQ: BOBE) food segment couldn't be launching its new frozen Breakfast Bake selections at a better time. Indeed, consumers are looking for a greater variety in their breakfast food items and, according to a recent study released by Mintel and cited in Food Business News, they're not afraid to pay more for those choices.

Indeed, some 57% of people who participated in the Mintel survey and who take the time for breakfast would pay higher ticket prices for better-quality, pre-packaged breakfast items. Just over 40% of survey participants are specifically asking for more organic offerings, while more than half are looking for greater frozen-food and refrigerated-item choices.

In Bob Evans' new breakfast item, consumers get a combination of microwave-ready hash browns with some egg or sausage variation, all of which retails for just under $4 for a four-pack. 

Ready for Take-Off

In its most recent quarter, Bob Evans' operating profit margins declined to 8.4% from 9.6% versus the year-ago-period, due in large part to rising SG&A costs that are expected to subside in fiscal 2013. The company is not keen on raising its menu prices as a means to improve its profit margins.

Currently, Bob Evans' food products represent less than 20% of consolidated earnings before interest and taxes, according to KeyBanc cited in Barron's. Nonetheless, the company is in the midst of a mild reorganization that could bolster performance in the higher-margin food products business, where in the fiscal 2Q profits more than doubled to $8.6 million versus $3.4 million in the year ago period.

In a recent Barron's article, KeyBanc suggests that if Bob Evans makes some strategic changes, which include shedding the company's Mimi's Cafe, the food products segment could account for 50% of EBIT by fiscal 2015.

Indeed, Mimi's Cafe has been a drag on Bob Evans and has been delivering negative same-store sales comps for years. Bob Evans Farms has still been able to deliver positive same-store sales growth in three of the past four quarters, however. The company has been in talks with third-parties about a possible sale. Mimi's Cafe locations are in need of remodeling and other upgrades to modernize the traditional restaurants, and finding someone to take on the task may not be easy.

Bob Evans admitted in its fiscal 2Q it is exploring a range of options for the Mimi's Cafe segment, including but not limited to a sale of the segment, and the company has already hired Lazard to help with the process.

Even with the baggage that Mimi's Cafe presents, Bob Evans lifted the high end of its long-term profit growth expectations from a range of 7%-10% to 8%-12% to reflect growth in the company's restaurants and food products divisions. The stock would have much more room to run without the burden of Mimi's Cafe.

If Bob Evans can remain focused on returning value to shareholders with its 2.7% dividend yield, manage cost savings where possible while it pursues its growth strategies, as well as grow its profit margins -- and can successfully unload the struggling Mimi's Cafe segment -- the stock is likely to see further upside in 2013.Shares of Bob Evans have climbed 13% since November 20th.

Getting Leaner

While Bob Evans Farms is expanding its food products business, Dean Foods (NYSE: DF) is moving in the opposite direction. The company is shedding its Morningstar Foods dairy business in a $1.45 billion sale to Canada's Saputo. The Canadian dairy company is interested in growing its U.S. footprint, and is taking on debt to finance the deal. In exchange, Saputo gets a household brand that generates some $1.6 billion in annual revenues, according to Bloomberg

Dean Foods, for its part, has been exploring a sale of its Morningstar segment for months. The latest sale comes months after the WhiteWave Foods (NYSE: WWAV) split from Dean Foods in an initial public offering earlier this year. Although Dean Foods still owns a majority stake in WhiteWave, the latter is at least partially integrating with Saputo, which paid $60 million for some WhiteWave assets. WhiteWave plans to apply the proceeds toward debt so that it's in a better position to expand, the company said.

It hasn't been nearly as easy for Bob Evans Farms to shed its Mimi's Cafe segment as it apparently was for Dean Foods to separate from two of its food divisions. If Bob Evans Farms cannot find a strategic or private equity buyer, it's going to have to invest time and money into further upgrades and remodels that will be a drag on performance for the foreseeable future.

GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Dean Foods Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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