UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number: 0-1667

 

 

Bob Evans Farms, Inc.

(Exact name of registrant as specified in its charter)

 

 

(614) 491-2225

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

 

 

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

                                                                  (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of October 29, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $849,716,939 based on the closing sale price as reported on the NASDAQ Stock Market.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

PART I

 

 

In this Annual Report on Form 10-K, 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.

 

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K and other written or oral statements that we make from time-to-time may contain forward-looking statements that set forth anticipated results based on management’s plans and assumptions. Statements in this Annual Report on Form 10-K, including those contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10-K, that are not historical facts are forward-looking statements. These statements are often indicated by words such as “expects,” “anticipates,” “believes,” “estimates,” “intends” and “plans.” Forward-looking statements involve various important assumptions, risks and uncertainties. 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.” We note these factors for investors as contemplated by the Private Securities Litigation Reform Act of 1995. It is impossible to predict or identify all of the risk factors that we face. Consequently, you should not consider any such list to be a complete set of all potential assumptions, risks or uncertainties. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement for circumstances or events that occur after the date on which the statement is made to reflect unanticipated events. Any further disclosures we make in our filings with the Securities and Exchange Commission should also be consulted.

 

The following description of our business should be read in conjunction with the information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report on Form 10-K and our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

The following terms used herein are registered trademarks or service marks of Bob Evans: BE Mail^®, Bob Evans^®, Bob Evans Restaurants^®, Bob Evans Special Touch^®, Best Brand Builders^sm, Mimi’s^®, Mimi’s Café^®, Owens^®, Bob Evans Oven Bake^®, and Taste of the Farm^®, Farm Fresh Goodness^®, Come Enjoy a Taste of France^®, Just Enough^®, and SWH Custom Foods^®.

 

Background

 

We are a full-service restaurant company that operates two distinct restaurant concepts — Bob Evans Restaurants and Mimi’s Cafés. We also own and operate BEF Foods, Inc. (“BEF Foods”), a leading producer and distributor of pork sausage and complementary homestyle convenience food items. Our business began in 1948 when our founder, Bob Evans, began making sausage on his southeastern Ohio farm to serve at his 12-stool diner. Our business grew from there, and we became a publicly traded company in 1963. Our current company was incorporated in Delaware in 1985 as the successor to the original company, which was incorporated in Ohio in 1957. We expanded our business by acquiring Owens Foods, Inc. (then known as Owens Country Sausage, Inc.) in 1987 and SWH Corporation, which does business as Mimi’s Café, in July 2004.

 

We have a 52 or 53-week fiscal year that ends on the last Friday in April. When we refer to fiscal 2011, fiscal 2010 and fiscal 2009, we are referring to our fiscal years that ended on April 29, 2011, April 30, 2010, and April 24, 2009, respectively. All years presented were comprised of 52 weeks, except fiscal 2010, which had 53 weeks.

The following table contains information regarding revenues, operating profit and identifiable assets of our restaurant business and food products business for each of our last three fiscal years. Please note that certain prior year amounts have been reclassified to conform to the fiscal 2011 classification.

 

 

Our Strategy

 

We believe our restaurant and food products businesses are regional brands with national potential. Our vision and mission statements embody our expectations for our company’s future. Our vision is to be the “Best in Class” in all of our food businesses. We strive to accomplish this vision by pursuing our mission — building brand loyalty by delighting customers with high-quality, delicious products “at your place or ours,” while balancing the needs of our employees, guests and investors.

 

We believe we can achieve our vision and mission by following a set of principles we refer to as our BEST (Bob Evans Special Touch) Brand Builders:

 

1. Win Together as Team — Our entire team must work together in a spirit of collaboration. We must communicate openly and share ideas and BEST practices with one another. We are committed to recognizing outstanding performance with pay incentives.

 

2. Consistently Drive Sales Growth — We will bring our brand positioning to life in everything we do. Our goal is to drive sales by consistently offering innovative, high-quality food that our customers will crave. We will strive to get more guests in our restaurants and buying our grocery products through effective marketing. We will offer exceptional customer service and suggest our great menu items at every table.

 

3. Improve Margins With an Eye on Customer Satisfaction — We must keep our customers satisfied with high-quality products and service while improving our long-term profitability. This involves using effective systems and processes to deliver margin improvements, such as our restaurant labor management systems and lean manufacturing initiatives in our food products segment. We must control our “controllables,” such as food costs, yields and waste.

 

4. Be the BEST at Operations Execution — We are committed to producing the highest-quality products and following the highest food safety standards. We must deliver outstanding customer service every day and fix the problems that make our customers unhappy. We must also ensure employee satisfaction while driving operational efficiency and productivity.

5. Increase Returns on Invested Capital — We must generate a good return on the money we spend. Each business in the Bob Evans Farms family must earn the right to receive funding by generating a favorable return on the money our company invests in it. All of our employees must think and act like owners of our business.

 

Our Restaurant Concepts

 

As of April 29, 2011, we owned and operated 563 Bob Evans Restaurants and 145 Mimi’s Cafés, with no franchising. Through our two restaurant concepts, we offer our customers a unique dining experience by serving a variety of high-quality, reasonably priced breakfast, lunch and dinner items in family-friendly settings.

 

Bob Evans Restaurants

 

Our vision for Bob Evans Restaurants is to be nationally recognized as a premier restaurant company in all markets in which we compete. Our mission is to be our customers’ favorite restaurant by giving them our BEST (Bob Evans Special Touch)...one customer at a time. Bob Evans Restaurants are founded on quality, homestyle food and friendly service. Bob Evans Restaurants feature “farm fresh goodness that brings families together,” including a wide variety of comfort foods inspired by our homestead heritage, such as Bob Evans sausage gravy and chicken pot pie. We want our customers to always feel right at home with us, so we “treat strangers like friends and friends like family.”

 

Breakfast entrées are served all day and feature traditional favorites such as sausage, bacon, eggs and hotcakes, as well as specialty offerings like crepes and Biscuit Bowls. We also offer a wide variety of lunch and dinner entrées, including a full line-up of Big Farm Salads and signature dinner items, such as country fried steak and slow-roasted turkey. During fiscal 2011, we added a number of new items to our menu from our innovation pipeline, including several varieties of our Big Farm Burgers. We also offer a “Fit from the Farm” menu to provide guests who are following a 2,000 calorie daily diet with the option of eating three balanced meals a day at Bob Evans Restaurants.

 

Bob Evans Restaurants feature an inviting atmosphere inspired by our Ohio farm heritage. The atmosphere evokes images of a classic, timeless country home. Most traditional Bob Evans Restaurants range in size from approximately 3,600 to 6,500 square feet while our larger Bob Evans Restaurants & General Stores are approximately 9,800 square feet, with an approximate average of 150 seats. In fiscal 2011, it cost approximately $2.3 million to build a new stand-alone Bob Evans Restaurant, including the land. We are in the process of implementing a remodeling program for our all of our existing restaurants that is based upon our latest prototype, as discussed in more detail in “Restaurant Locations and Expansion” below.

 

We believe our Bob Evans Restaurants draw people who want a wholesome meal at a fair price in an alcohol-free, family-friendly atmosphere. Our average annual store sales were $1.7 million per Bob Evans Restaurant in fiscal 2011. Average per-guest checks for fiscal 2011 for breakfast, lunch and dinner were $8.21, $8.46 and $8.71, respectively, for an average of $8.45 for all day parts. Depending on each location’s business patterns, Bob Evans Restaurants are generally open from 6 a.m. or 7 a.m. until 9 p.m. or 10 p.m. Sunday through Thursday, with extended closing hours on Friday and Saturday at some locations. During fiscal 2011, breakfast, lunch and dinner accounted for 33 percent, 37 percent and 30 percent, respectively, of total Bob Evans Restaurant revenue. Weekend sales accounted for approximately 40 percent of a typical week’s revenue during fiscal 2011.

 

We aim to “Consistently Drive Sales Growth” by continuing to implement strategies to build Bob Evans Restaurants’ carryout sales. We have increased marketing of our carryout offerings, including our family meals, catering menu and take-home holiday family feasts. We also introduced on-line ordering for Bob Evans Restaurants during fiscal 2011, which we believe fostered growth in our carryout business. During fiscal 2011, Bob Evans Restaurants’ off-premise business (i.e., carryout and catering) accounted for approximately 9.6 percent of the concept’s total revenues. We will continue to focus efforts on increasing our carryout and catering business in fiscal 2012.

 

We offer retail gifts, food items and other novelties for sale on a limited basis in the retail areas located inside most of our traditional Bob Evans Restaurants and on a much larger scale in our seven Bob Evans Restaurants & General Stores. We continue to improve our selection of retail products by offering more food and other branded items consistent with our brand positioning and homestead heritage.

Mimi’s Cafés

 

Mimi’s is a “neighborhood bistro inspired by France” where our guests can “Come Enjoy a Taste of France.” Mimi’s colorful French-cottage themed buildings offer guests a place to enjoy the charm, flavors and simple joys of a cozy neighborhood bistro where the conversation and wine flow easily, at their pace. Mimi’s combines elements of an upscale casual experience with broad everyday appeal. The cuisine has a touch of “gourmet Francais,” featuring breakfasts, lunches and dinners inspired by the fresh, seasonal dishes and effortless style of the French Countryside. The menu includes a variety of cuisine categories, including:

 

 

We believe that Mimi’s high-quality food, broad menu, exceptional service, unique atmosphere and affordable average check make the concept attractive to a broad demographic range. We believe the concept is particularly appealing to women, and we are focusing Mimi’s menu, atmosphere and marketing to attract more female guests.

 

All Mimi’s restaurants offer a selection of high-quality beer and wine. Over the past few years, we have upgraded many of the beer/wine licenses to full liquor licenses to satisfy guest demand for distilled spirits, and in turn, increase alcohol sales and boost profit margins. During fiscal 2011, we upgraded nine Mimi’s to full liquor licenses, bringing the total number of Mimi’s with full liquor licenses to 126 at the end of fiscal 2011. We plan to continue our efforts to increase alcohol sales at Mimi’s during fiscal 2012 through enhanced beverage offerings and promotional programs such as “wine flights.”

 

Mimi’s restaurants are visually appealing and resemble a French country home with dormer windows, gabled roofs, stone walls and bright awnings. The interior of each restaurant, inspired by French bistros, incorporates gold walls, burgundy accents, red leather and brass railings to create ambiance. Each restaurant contains distinct dining environments that provide our guests with a variety of dining atmospheres, including the:

 

 

Most Mimi’s restaurants range in size from 6,000 to 7,000 square feet. The current prototype is an approximately 6,500 to 6,800 square-foot building with an approximate average of 240 seats. In fiscal 2010, it cost approximately $2.8 million to build a new Mimi’s, excluding the land. We did not build any new Mimi’s in fiscal 2011.

 

Mimi’s average annual unit sales in fiscal 2011 were approximately $2.7 million. Average per-guest checks for fiscal 2011 for breakfast, lunch and dinner were $10.08, $10.75 and $12.87, respectively, for an average of $11.27 for all day parts. Sales of alcoholic beverages accounted for approximately 4 percent of Mimi’s sales in fiscal 2011. Mimi’s is open from 7 a.m. to 11 p.m., with breakfast being served all day. During fiscal 2011, breakfast, lunch and dinner accounted for approximately 22 percent, 41 percent and 37 percent, respectively, of Mimi’s total revenue. Weekend sales accounted for approximately 38 percent of a typical week’s revenue during fiscal 2011.

 

We aim to “Consistently Drive Sales Growth” by continuing to implement strategies to build Mimi’s carryout sales. We have increased marketing of our carryout offerings, including our take-home holiday family feasts. During fiscal 2011, Mimi’s implemented an improved on-line ordering system to drive carryout sales. Mimi’s carryout and catering business accounted for approximately 4 percent of the concept’s total fiscal 2011 revenues.

We own and operate SWH Custom Foods, an approximately 25,000 square-foot prep kitchen in Fullerton, California, that prepares signature muffin mixes, dressings, sauces and soups for Mimi’s, Bob Evans Restaurants and some third-party restaurants. By producing approximately 40 to 45 different items, SWH Custom Foods allows Mimi’s to maintain a consistent flavor profile and efficiently produce an extensive menu of freshly prepared, high-quality items.

 

Restaurant Management

 

We believe that high-quality restaurant management is critical to the success of our restaurant concepts. We must “Be the BEST at Operations Execution” to keep our customers satisfied. Our restaurant management structure varies by concept and restaurant size.

 

Our restaurant segment management structure is organized to drive top-line growth and bottom-line profitability. Each restaurant concept has a president and chief concept officer. The chief concept officers focus their efforts on the overall growth and development of the concepts, with particular focus on increasing sales, new restaurant development and concept evolution.

 

We also have a president and chief restaurant operations officer, who is responsible for building a sales, service and people-first culture that delivers “BEST in class” results. The president and chief restaurant operations officer leads the Bob Evans Restaurant and Mimi’s operations teams, and oversees restaurant development and construction in close cooperation with the chief concept officers. The president and chief restaurant operations officer also leads our Operations Services group, which develops “one BEST way” solutions by standardizing operations processes across both restaurant concepts and ensuring that all new procedures and tools are “restaurant ready.”

 

At Bob Evans Restaurants, “we treat strangers like friends and friends like family.” Each Bob Evans Restaurant employs approximately 50 to 90 hourly employees, and is led by a general manager, and two to three assistant managers, depending on the size, location and sales volume of the restaurant. Bob Evans Restaurant general managers report to an area coach who oversees approximately eight restaurants. The area coaches report to a vice president — head coach or a region coach. Each vice president — head coach is responsible for approximately 14 area coaches, whereas each region coach is responsible for approximately seven area coaches. Bob Evans Restaurants are visited regularly by all levels of management to ensure they are functioning well and adhering to the concept’s standards.

 

Mimi’s complements fine food with service that emphasizes our high standards, core values and attention to detail. Each Mimi’s employs an average of 70 hourly employees, and is led by general manager and typically one to two assistant managers, depending on the size, location and sales volume of the restaurant. One assistant manager at each restaurant has been designated as a “sales manager” who is dedicated to “Consistently Driving Sales Growth” by driving sales of beverages, appetizers and desserts, as well as promoting sales programs such as carryout, catering, take-home holiday feasts and gift cards. Each Mimi’s also has a kitchen manager who is responsible for leading kitchen operations, including managing food preparation and ensuring menu items meet Mimi’s operational and quality standards. Mimi’s general managers report to an area coach who oversees approximately five to nine restaurants or an area coach designate who oversees approximately four restaurants. The area coaches and area coach designates report to a region coach who is responsible for an average of 48 restaurants. The region coaches in turn report to Mimi’s vice president of operations.

 

During fiscal 2011, we “Improved Margins with an Eye on Customer Satisfaction” by continuing to aggressively manage labor and food costs. We eliminated approximately 1.8 million labor hours from the restaurant segment during fiscal 2011 while improving our guest loyalty index scores at both concepts. Bob Evans Restaurants and Mimi’s eliminated approximately 956,000 and 875,000 labor hours, respectively, by improving labor forecasting and scheduling. Additionally, we completed the deployment of an actual versus theoretical food cost program at both concepts to help manage food costs.

Restaurant Locations and Expansion

 

As of April 29, 2011, Bob Evans Restaurants (including Bob Evans Restaurants and General Stores) were located in 18 states, primarily in the Midwest, mid-Atlantic and Southeast, and Mimi’s Cafés were located in 24 states, primarily in California and other western states. The following table sets forth the number, concept and location of our restaurants as of the end of fiscal 2011:

 

Restaurants in Operation at April 29, 2011

 

 

We strive to continuously “Increase Returns on Invested Capital.” Each business segment must earn the right to receive additional capital. We believe that we have to expand our restaurants with a focus on the quality, not just the quantity, of openings. Future restaurant growth depends on a variety of factors, including:

 

 

We use a site selection process for each restaurant concept that includes a detailed evaluation of factors such as population density, household income in the area, competition, the site’s visibility and traffic patterns, accessibility and proximity to retail centers, and the demographics of potential guests.

 

We have slowed the expansion of Bob Evans Restaurants over the past several years, but we are starting to open some new restaurants while remodeling our existing locations. In fiscal 2011, we opened two new Bob Evans Restaurants, compared to none in fiscal 2010 and one in fiscal 2009. During fiscal 2012, we plan to build six new Bob Evans Restaurants. These new restaurants will be located in high-traffic retail areas or near major interstate highways located in or near existing markets to deepen the concept’s penetration in successful trade areas and to expand into contiguous trade areas.

 

Historically, we have located Mimi’s in convenient, high-traffic areas in new and existing regional markets that we believe will support the concept. The casual dining segment has been hit particularly hard by the economic recession, and we have significantly reduced our development plans for Mimi’s. During fiscal 2011, we did not open any new Mimi’s, compared to two in fiscal 2010 and 12 in fiscal 2009. The reduction in development is largely due to the ongoing economic recession and Mimi’s prolonged negative same-store sales performance. Currently, we do not believe that our average new store volumes generate a level of return on our development costs that justifies significant expansion of Mimi’s. We do not intend to substantially increase the construction of new Mimi’s until the economy improves and we are able to improve “restaurant level economics” by increasing our sales, lowering our labor, purchasing and construction costs, and increasing our margins and profitability. As a result, we do not plan to open any new Mimi’s in fiscal 2012.

 

We continually assess all of our existing restaurants under a program to determine whether any restaurants should be (1) rebuilt, (2) relocated, (3) remodeled or (4) retired. During fiscal 2011, we retired eight underperforming Bob Evans Restaurants and one Mimi’s. We believe these closures strengthened our restaurant portfolio by improving overall returns and freeing up resources for other uses, including the “Farm-Fresh Refresh” remodel program for Bob Evans Restaurants described below.

 

We believe that we must invest capital in our existing restaurants to ensure that they are safe, well-maintained and appealing to our guests in order to increase customer satisfaction and same-store sales. We select restaurants and determine the level of investment based upon the return on the investment we expect to generate through increases in sales and profitability. We have established “hurdles” for the expected rate of return on invested capital which must be met before a restaurant is remodeled or rebuilt. A “rebuild” occurs when we replace an existing restaurant by constructing a new restaurant at the same site or a nearby site. Remodels range from minor décor updates in existing restaurants to more substantial changes to décor, fixtures, equipment, layout and external appearance.

 

We believe we must innovate and change the way people think about Bob Evans Restaurants by ensuring that the concept is relevant to our family-first growth target. During fiscal 2011, we rebuilt two existing Bob Evans Restaurants and remodeled 33 restaurants, including 28 in the Dayton, Ohio market. These restaurants are part of Bob Evans Restaurants’ new “Farm-Fresh Refresh” program, which provides the restaurants with a contemporary look and feel to enhance the guest experience. The new and remodeled restaurants feature a fresher, brighter color scheme, a new “Taste of the Farm” bakery, a dedicated carryout area, gift card displays, a redesigned retail area, and a mural depicting the heritage of the Bob Evans brand. During fiscal 2012, we plan to expand the Farm-Fresh Refresh remodel program to 56 restaurants, including 44 restaurants in the Detroit, Michigan and Toledo, Ohio markets.

 

During fiscal 2011, we remodeled three Mimi’s in Arizona. The remodeled restaurants are aimed to revitalize and reposition the concept. The remodeled Mimi’s feature: an enhanced bar area; a new color palette; updated décor inspired by French bistros; a dedicated carryout area; and a bakery featuring Mimi’s signature muffins and other freshly-baked pastries. We are still evaluating the performance of the remodeled Mimi’s in Arizona, and have not announced plans to remodel any Mimi’s in fiscal 2012.

Supply Chain and Distribution

 

Controlling our supply costs is a key strategy for “Improving Margins with an Eye on Customer Satisfaction.” Our ability to offer high-quality, reasonably priced menu items at our restaurants depends upon acquiring food products and related items from reliable sources at competitive prices. Our supply chain team sources, negotiates and purchases food and non-food items from more than 700 suppliers. Our suppliers must adhere to strict product specifications and quality control standards.

 

Our restaurant operating margins are subject to changes in the price and availability of food commodities. Prices for many of the food and other commodities we buy for our restaurants increased significantly during fiscal 2011, and we expect more increases during fiscal 2012. Our operating margins are also affected by changes in the price of utilities, such as natural gas upon which many of our restaurants depend for their energy supply.

 

To help control costs and obtain competitive prices, our supply chain team negotiates directly with our suppliers and occasionally uses purchase commitment contracts to stabilize the potentially volatile pricing associated with certain commodity items. Additionally, we purchase products in bulk for our food products operations and negotiate volume discounts with suppliers. We continue to consolidate our purchasing activities for the entire company. This allows us to leverage the combined purchasing power of both restaurant concepts and BEF Foods (our retail food products business). As part of this effort, we use competitive bidding and reverse on-line auctions for certain products and services.

 

BEF Foods manufactures sausage products for both of our restaurant concepts, which are distributed to our restaurants by third parties. Third parties distribute food and inventory items to our restaurants twice a week, on average. Our distributors purchase products from the suppliers we specify, at the prices we negotiate, and distribute them to our restaurants on a cost-plus basis. Produce, breads and dairy items are sometimes delivered to restaurants more frequently and/or obtained from local suppliers to ensure freshness.

 

SWH Custom Foods (Mimi’s in-house prep kitchen) prepares muffin mixes, dressings, sauces and soups for all Mimi’s, and a limited number of items for Bob Evans Restaurants. These items and other products are distributed to our restaurants by third parties approximately twice per week.

 

During fiscal 2010, we undertook an extensive review of our restaurant distribution system in an effort to: optimize our distribution efficiency for both restaurant concepts; manage our restaurant distribution risk; combine the location of products for both restaurant concepts in the same distribution centers; and identify distribution partners capable of providing opportunities for additional efficiencies. We solicited and reviewed bids from a number of distributors to service our entire restaurant system. As a result of this process, we selected Gordon Food Service, Inc. (“GFS”) and Meadowbrook Meat Company, Inc. (“MBM”) as our restaurant distributors and implemented their services in fiscal 2011. Distribution services to our restaurants are now divided geographically, with GFS servicing our restaurants in the Eastern half, and MBM servicing our restaurants in the Western half, of the United States. As a result of our distribution system changes, we believe we have improved distribution efficiency, attained consistent pricing for both restaurant concepts, and lowered costs as we leverage the combined volume of both restaurant concepts. Although only two distributors furnish the majority of inventory items to our restaurants, we believe other distributors can readily provide this inventory. We have not experienced any material or continued shortage of the products distributed by any third parties. Please see Item 1A — Risk Factors — Our restaurant business is dependent on timely delivery of fresh ingredients by our suppliers and distributors” for more information.

 

Sources and Availability of Raw Materials

 

Menu mix in the restaurant business is varied enough that raw materials historically have been readily available. However, some food products may be in short supply during certain seasons and raw material prices often fluctuate according to availability. During fiscal 2011, we experienced shortages of some produce items such as tomatoes due to extreme weather conditions in critical growing areas. We believe that all essential food products will continue to be generally available from our existing suppliers or, upon short notice, can be obtained from other qualified suppliers. Due to the rapid turnover of perishable food items, our restaurants maintain inventories with a modest aggregate dollar value in relation to revenues.

Advertising and Marketing

 

We spent approximately $33 million on restaurant advertising and marketing during fiscal 2011, including approximately $28 million for Bob Evans Restaurants and $5 million for Mimi’s. Most of our advertising budget was spent on television, radio, print and outdoor advertising for Bob Evans Restaurants. We focus our advertisements on new Bob Evans Restaurant menu items and the concept’s position as offering “farm fresh goodness that brings families together.” Our fiscal 2011 advertising campaigns featured new menu offerings, such as our Big Farm Burgers and our “10 under $20.00” family meals. We also remained focused on our digital marketing efforts by utilizing BE Mail, Facebook and Twitter, as well as the Bob Evans Web site. We also distribute coupons and support in-store merchandising, menus, kids’ marketing programs, and local store marketing. For example, we support the openings of new and rebuilt stores with a special “Rise and Shine” grand opening celebration attended by members of our Bob Evans Restaurant leadership team.

 

Traditionally, Mimi’s relied on word-of-mouth and local store marketing rather than traditional advertising media. We have expanded Mimi’s marketing efforts to include more in-store merchandising, and targeted mailings. Digital media is an important aspect of Mimi’s marketing efforts, including use of Facebook, Twitter, the Mimi’s Café Web site, and the Mimi’s Café E-Club, which has grown to more than 830,000 members as of the end of fiscal 2011.

 

Research and Development

 

Research and development expenses for our restaurant operations have not been material. As part of our effort to “Consistently Drive Sales Growth,” we continuously test food items to identify new and improved menu offerings to appeal to our existing customers, satisfy changing eating trends and attract new customers. We maintain 18-month product development pipelines for both of our restaurant concepts. These pipelines are focused on creating and introducing innovative items, as well as enhancements to existing offerings.

 

In order to keep our menus fresh and appealing to our guests’ taste preferences, our product development is concentrated on creating appealing menu offerings that are consistent with the positioning of each brand, as well as quality enhancements to some of our best-selling items. Product development for Bob Evans Restaurants focuses on homestyle offerings with a unique Bob Evans twist, whereas Mimi’s develops products made with freshly prepared items consistent with its French bistro-inspired positioning.

 

Competition

 

The restaurant industry is highly competitive. There are many different segments within the restaurant industry, distinguishable based on the type of food, food quality, service, location, associated price-to-value relationship and overall dining experience. We have positioned our Bob Evans Restaurants in the family dining segment and our Mimi’s in the casual dining segment. We must “Be the BEST at Operations Execution” to effectively compete for customers’ “share of stomach.”

 

The restaurant business is affected by changes in the public’s eating habits and preferences, population trends, traffic patterns, weather conditions and gasoline and other energy costs, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond our control. Key competitive factors in the industry include the quality and value of menu offerings, quality and speed of service, attractiveness of facilities, advertising, name-brand awareness and image, and restaurant locations. Although we believe our restaurant concepts compete favorably with respect to each of these factors, many of our competitors are well-established national, regional or local chains, and some have substantially greater financial, marketing and other resources than we have. Additionally, we compete with many restaurant operators and other retail establishments for site locations and restaurant employees. We also face growing competition from quick-service and fast-casual restaurants that are improving the quality and expanding the variety of their offerings, especially at breakfast.

 

BEF Foods — Retail Food Product Operations

 

Our vision for BEF Foods is to be a BEST in class food business with a portfolio of convenient meal solutions that meet consumer needs driven by innovation and strong retail partnerships. We offer a wide variety of quality,

homestyle food products to retail and foodservice customers. We sell our retail food products under the Bob Evans and Owens brand names. We believe our food products provide “farm fresh goodness” and convenient meal solutions that uphold our high-quality standards. Our food products include approximately 100 varieties of branded fresh, smoked and fully cooked pork sausage and hickory-smoked bacon products. We also offer over 50 complementary, convenience food items in the refrigerated and frozen areas of grocery stores such as mashed potatoes, macaroni and cheese, microwaveable sandwiches and slow-roasted main dish entrées.

 

During fiscal 2011, we introduced approximately 25 new retail food products, including many varieties of Bob Evans Oven Bake side dishes, sausage patties for grilling, and dinner gravies. Our refrigerated mashed potatoes and macaroni and cheese side dishes continue to grow as a percentage of our food products volume. We will continue to “Consistently Drive Sales Growth” through new product development and enhancing existing items to address changing consumer demands.

 

Production

 

We produce food products in our six manufacturing facilities. We produce fresh sausage products at our plants located in Hillsdale, Michigan, Richardson, Texas and Xenia, Ohio. Our Sulphur Springs, Texas, Bidwell, Ohio, and Springfield, Ohio, plants produce ready-to-eat products, such as sandwiches, soups and gravies. We also operate a distribution center in Springfield, Ohio.

 

We have made efforts to “Increase Returns on Invested Capital” by implementing a plant rationalization program to ensure we are operating efficiently and are positioned for future growth. The program is geared to identify operational gaps and opportunities to improve production efficiencies. As a part of this program, we closed our fresh sausage plant in Galva, Illinois and the fresh sausage production portion of our Bidwell, Ohio plant in fiscal 2011. These closures were necessary to eliminate excess sausage manufacturing capacity resulting from diminishing supply in the live sow market, rising sow prices and decreasing sales volume in the sausage category.

 

We strive to “Be the BEST at Operations Execution” by always focusing on food safety. We follow a Hazard Analysis and Critical Control Points (“HACCP”) program at each of our manufacturing plants. HACCP is a comprehensive system developed in conjunction with government agencies to prevent food safety problems by addressing physical, chemical and biological hazards. We use HACCP to identify potential safety hazards so that key actions can be taken to reduce or eliminate risks during production. We also have a team dedicated to food safety and quality assurance. During fiscal 2010, all of our manufacturing plants and our Springfield, Ohio distribution center earned certification through the British Retail Consortium Global Standard for Food Safety.

 

We use third parties to manufacture or “co-pack” all of the Bob Evans and Owens products that are not produced in our own facilities. These co-packed items include our mashed potatoes, macaroni and cheese, and some meat items. At the end of fiscal 2011, we used approximately 25 third parties to manufacture food products for us.

 

Sales

 

The U.S. food industry has experienced significant consolidation over the last 20 years as competitors have shed non-core businesses and made strategic acquisitions to complement category positions, maximize economies of scale in raw material sourcing and production, and expand retail distribution. The importance of sustaining strong relationships with retailers has become a critical success factor for food companies because it drives category management and continuous replenishment programs. Food companies with category leadership positions and strong retail relationships have increasingly benefited from these initiatives as a way to maintain shelf space and maximize distribution efficiencies.

 

Although our Bob Evans brand mashed potatoes are only available on a limited basis in some parts of the country, we believe it is the leading brand of refrigerated mashed potatoes in the United States. Our goal is to “Consistently Drive Sales Growth” by leveraging our strong share position to secure additional retail store business and gain more market penetration. We also believe strong brand awareness is critical in maintaining and securing valuable retail shelf space and will provide a strong platform for introducing product line extensions and new products.

Our sales force, which consists of our national account teams and third party food brokers, sells our food products to a number of leading national and regional retail chains. A relatively small number of customers accounts for a large percentage of our sales. For fiscal 2011, our largest 10 accounts represented approximately 76 percent of our total food products sales, with Wal-Mart Stores, Inc. (and its affiliates) and The Kroger Co. each accounting for over 10 percent of our food products segment sales. As part of our effort to “Win Together as a Team,” we maintain national account teams to address the needs of our key retailers on a long-term basis.

 

We continue to devote time and effort on sales of our products to foodservice customers (i.e., third party restaurants, schools and other commercial buyers). In fiscal 2011, sales to foodservice customers accounted for approximately 8 percent of our food products business. Items for our foodservice customers are made to their specifications and include sausage, sausage gravy and breakfast sandwiches. Although foodservice represents only a small portion of our food products sales, it provides us with incremental volume in our production plants, as well as an opportunity for future growth.

 

We sell a variety of products to food brokers who in turn supply the U.S. military, including convenience food items and sausage. Products sold to the military represented less than one percent of our food products volume in fiscal 2011.

 

We sell our grilling sausage, side dish and frozen breakfast items in the Ontario, Canada area, and some of our Owens brand products are sold in parts of Mexico. Less than one percent of our fiscal 2011 revenue is attributable to sales of our food products in Canada or Mexico.

 

Distribution

 

We currently supply our customers by shipping products directly to their warehouses for further distribution by the customers to their retail stores. In the past, we supplied customers through our direct-store delivery system, in which members of our route-sales team periodically called on retail stores to purchase products off a delivery truck. During fiscal 2010, we completed the conversion of our direct-store-delivery system to a warehouse system. Although the conversion to a warehouse system initially resulted in some severance costs and higher slotting fees, it has resulted in a lower cost structure and increased points of distribution. We also distribute our products through food wholesalers and distributors who primarily service smaller, independent grocers.

 

At the end of fiscal 2011, Bob Evans and Owens brand products were available for purchase in grocery stores in all 50 states, the District of Columbia, and the Ontario, Canada area. Our Owens brand products were available for purchase primarily in Oklahoma and Texas. Several of our Owens brand products were also available in parts of Mexico through H.E. Butt Grocery Company (dba HEB Grocery Stores).

 

We continue to work with retailers in states where there is an opportunity to distribute our products. We will explore expansion prospects with retailers to profitably increase points of distribution. During fiscal 2011, we added nearly 700 new item authorizations (i.e., orders from customers for products they have not ordered from us before).

 

Sources and Availability of Raw Materials

 

The most important raw material used in our food products business is live sows, which we depend upon to produce our pork sausage products. We procure live sows at prevailing market prices from terminals, local auctions, country markets and corporate and family farms in many states and Canada. The live sow market is highly cyclical in terms of the number of sows available and the current market price. A significant contraction in the live sow market began during fiscal 2010, and we believe that the sow herd is at its lowest level since the early 1900’s. The live sow market is also dependent upon supply and demand for pork products, as well as corn and soybean meal prices (the major food supply for sows), weather and farmers’ access to capital. In fiscal 2012, we believe BEF Foods will continue to be challenged by sow costs that are significantly higher than historical averages, as well as limited supplies of sows. To date, we have not experienced any significant or prolonged difficulty in procuring live sows. We have not traditionally contracted in advance for the purchase of live sows, although we have done so in limited quantities from time-to-time. We have, however, entered into some contracts with regard to the purchase of live sows in which we have agreed to accept a specific number of truck loads per week with pricing based on the current market price plus yield premiums.

Other important raw materials used in our food products operations are seasonings and packaging materials. Historically, these materials have been readily available, although some items may be in short supply during certain seasons and prices fluctuate according to availability. Generally, we purchase these items under supply contracts, and we occasionally engage in forward buying when we believe it to be advantageous. We believe that these items will continue to be available from our existing suppliers or, upon short notice, can be obtained from other qualified suppliers.

 

Most of our food products are highly perishable and require proper refrigeration. Product shelf life ranges from 18 to 60 days for refrigerated products. Due to the highly perishable nature and shelf life of these items, our production plants normally process only enough product to fill existing orders. As a result, we maintain minimal inventory levels. With our transition to a warehouse delivery system, many of our breakfast and dinner sausage items are frozen and shipped to warehouses. Shipping frozen product allows our retailers added flexibility to slack out product to meet consumer demand and allows us to build inventory for heavy consumption periods.

 

Advertising and Marketing

 

During fiscal 2011, we spent approximately $8.6 million advertising our food products, excluding coupon and trade promotion marketing costs. Our food products marketing programs consist of advertising, consumer promotions and trade promotions. Our advertising activities include television, radio, newspaper and magazine advertisements aimed at increasing brand awareness and building consumer loyalty. Consumer promotions include the distribution of recipes featuring our products and targeted coupons designed to attract new customers and increase the frequency of purchases. Our trade promotions are aimed at providing retail display support and securing additional shelf space. During fiscal 2011, we continued to “Win Together as a Team” and “Consistently Drive Sales Growth” through joint marketing programs to support both Bob Evans Restaurants and BEF Foods.

 

Competition

 

The food products business is highly competitive and is affected by changes in the public’s eating habits and preferences, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond our control. Key competitive factors in the industry are the quality, flavor and value of the food products offered, advertising and name brand awareness. We believe that we compete favorably with respect to each of these factors. Our competitors include well-established national, regional and local producers and wholesalers of similar products, some of whom have substantially greater financial, marketing and other resources than we have. We also face growing competition from private label sausage products and side dishes. With respect to our sausage products, our major competitors include the sausage products of Johnsonville Sausage LLC and the Sara Lee Corporation (i.e., Jimmy Dean brand). We believe that sales of our sausage and mashed potato products constitute a significant portion of sales of comparable products in the majority of our core markets.

 

Seasonality and Quarterly Results

 

Our restaurant and food products businesses are subject to seasonal fluctuations. Historically, our highest levels of revenue and net income at Bob Evans Restaurants occurred in the first and second quarters of our fiscal year. Many Bob Evans Restaurants are located near major interstate highways and generally experience increased revenue during the summer travel season. Conversely, Mimi’s business traditionally tends to be slightly lower in the summer months. Holidays, severe weather conditions (such as snow storms, hurricanes, thunderstorms), natural disasters (such as flooding, tornadoes, and earthquakes) and similar conditions may impact restaurant sales volumes in some of the markets in which we operate.

 

Our food products business is seasonal to the extent that third and fourth quarter sales are typically higher due to increased sales of sausage during the colder months from November through April. We promote our bratwurst and Italian sausage products for outdoor grilling in an attempt to grow volume during the summer months.

 

Our consolidated quarterly results are significantly impacted by the cost and availability of raw materials, especially live sows. Our consolidated quarterly results are also impacted by the timing of new restaurant openings and remodels and their associated costs. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.

Trademarks and Service Marks

 

We have registered trademarks and service marks, including the marks “Bob Evans^®” and “Mimi’s Cafe^®” for our restaurant business, “Bob Evans^®” and “Owens^®” for BEF Foods, and “SWH Custom Foods^®” for our prep kitchen services, as well as the Bob Evans and Mimi’s Café logos. We maintain a registration program for our marks with the United States Patent and Trademark Office and in certain foreign countries. In order to better protect our brands, we have also registered our ownership of the Internet domain names “www.bobevans.com,” “www.mimiscafe.com.” “beffoods.com,” and “bobevansfoods.com.” We believe that our trademarks, service marks, proprietary recipes and other proprietary rights have significant value and are important to our brand-building efforts and the marketing of our restaurant concepts and BEF Foods. We have vigorously protected our proprietary rights in the past and expect to continue to do so. We cannot predict, however, whether steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our concepts. It may be difficult for us to prevent others from copying elements of our restaurant concepts and food products, and any litigation to enforce our rights would likely be costly.

 

Government Regulation

 

We are subject to numerous federal, state and local laws affecting our businesses. Our restaurants are subject to licensing and regulation by a number of governmental authorities, which may include health, sanitation, environmental, zoning and public safety agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development and openings of new restaurants or could disrupt the operations of existing restaurants. However, we believe that we are in compliance in all material respects with all applicable governmental regulations and, to date, we have not experienced abnormal difficulties or delays in obtaining the licenses or approvals required to open or operate any of our restaurants.

 

Various federal and state labor laws govern our operations and our relationships with our employees, including such matters as minimum wage, meal and rest breaks, overtime, fringe benefits, safety, working conditions and citizenship requirements. Significant government-imposed increases in minimum wages, paid or unpaid leaves of absence, paid “sick days” or other paid time off, mandated health benefits for all employees or increased tax reporting, assessment or payment requirements related to our employees who receive gratuities could be detrimental to the profitability of our restaurants and food products operations. Minimum wage increases in many states in which we operated during fiscal 2011 affected the profitability of our restaurants and led to increased menu prices. Various proposals that would require employers to provide paid time off for all of their employees are considered from time-to-time in Congress and various states.

 

The costs of insurance and medical care have risen significantly over the past few years and are expected to continue to increase. Existing or potential legislation changes, such as proposals to require employers to provide health insurance to all employees, could negatively impact our operating results. The imposition of any requirement that we provide paid time off or health insurance to all employees could have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general. Our suppliers may also be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to us.

 

We have a significant number of hourly restaurant employees that receive tip income. We have elected to voluntarily participate in a Tip Reporting Alternative Commitment (“TRAC”) agreement with the Internal Revenue Service. By complying with the educational and other requirements of the TRAC agreement, we reduce the likelihood of potential employer-only FICA assessments for unreported or underreported tips.

 

There have been a number of federal, state and local proposals and regulations to require restaurants to provide nutritional information on menus and/or require that restaurants label menus with the country of origin of meal ingredients. For example, Mimi’s located in California are subject to a state-wide menu labeling law that became effective on July 1, 2009, and our Bob Evans Restaurant located in Montgomery County, Maryland is subject to a menu-labeling law that became effective on July 1, 2010. The national health care reform legislation enacted on March 23, 2010, contains provisions that require restaurants with 20 or more locations to post calorie information on menus and additional nutritional information in writing at the restaurant. The FDA released Proposed

Regulations implementing this legislation on April 6, 2011. At present, the FDA expects to release Final Regulations prior to December 31, 2011. The Final Regulations will specify when the FDA will commence enforcement of the Final Regulations. Although the new federal legislation preempts the legislation already enacted in California, Montgomery County, Maryland, and other state and local jurisdictions (e.g., Maine, Massachusetts, New Jersey, Oregon, New York City and Philadelphia), some of these jurisdictions are requiring compliance with their regulations until the FDA begins enforcing the federal regulations. We are concerned that these menu-labeling laws could have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general. However, we support the implementation of uniform standards across the United States by the FDA, rather than a state-by-state and locality-by-locality approach.

 

Potential changes in labor laws, including the possible passage of all or parts of the proposed Employee Free Choice Act (“EFCA”), could result in portions of our workforce being subjected to greater organized labor influence. The EFCA, also referred to as the “card check” bill, could impact the nature of labor relations in the United States, specifically, how union elections and contract negotiations are conducted. The EFCA aims to make it easier for unions to form, and employers of unionized employees may face mandatory, binding arbitration of labor scheduling, costs and standards, which could increase the costs of doing business. Although we do not currently have any union employees, EFCA or similar labor legislation could have an adverse effect on our business and financial results by imposing requirements that could potentially increase our costs, reduce our flexibility and impact our ability to service our guests.

 

Our restaurants and manufacturing plants must comply with the applicable requirements of the Americans with Disabilities Act of 1990 (“ADA”) and related state statutes. The ADA prohibits discrimination on the basis of disability with respect to public accommodations and employment. Under the ADA and related state laws, when constructing new restaurants and facilities or undertaking significant remodeling of existing restaurants and facilities, we must make them more readily accessible to people with disabilities. We also must make reasonable accommodations for the employment of people with disabilities. The ADA was amended recently to significantly expand the categories of individuals who are deemed to have disabilities.

 

Alcoholic beverage control regulations require each Mimi’s to apply to a state authority and, in certain locations, county and municipal authorities for licenses and permits to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be subject to penalties, temporary suspension or revocation for cause at any time. Alcoholic beverage control regulations impact many aspects of the daily operations of Mimi’s, including the minimum ages of patrons and employees, employee alcoholic beverage training, hours of operation, advertising, wholesale purchasing, inventory control and the handling, storage and dispensing of alcoholic beverages.

 

Mimi’s located in certain states may be subject to “dram-shop” statutes, which generally provide a person injured by an intoxicated person with the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We train Mimi’s employees how to serve alcohol and we carry liquor liability coverage as part of our existing comprehensive general liability insurance. We have never been named as a defendant in a lawsuit involving “dram-shop” statutes.

 

As a manufacturer and distributor of food products, we are subject to a number of food safety regulations, including regulations promulgated by the U.S. Department of Agriculture (“USDA”) and the FDA. These agencies enact and enforce regulations relating to the manufacturing, labeling, packaging, distribution and safety of food in the United States. Among other matters, these agencies: enforce statutory prohibitions against misbranded and adulterated foods; establish safety standards for food processing; establish standards for ingredients and manufacturing procedures for certain foods; establish standards for identifying certain foods; determine the safety of food additives; establish labeling standards and nutrition labeling requirements for food products; and enforce regulations to prevent the introduction, transmission or spread of communicable diseases. In addition, various states regulate our operations by: enforcing federal and state standards for selected food products; grading food products; licensing and inspecting plants and warehouses; regulating trade practices related to the sale of food products; and imposing their own labeling requirements on food products. Some of the food commodities we use in our operations are also subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to Congressional and administrative review.

Through our sausage manufacturing operations, our food products business is subject to the requirements of the Packers & Stockyards Act (the “P&S Act”). The general purpose of the P&S Act is to: (1) assure fair competition and fair trade practices; (2) safeguard farmers and ranchers; (3) protect consumers; and (4) protect members of the livestock, meat and poultry industries from unfair, deceptive, unjustly discriminatory and monopolistic practices. The P&S Act is administered by the Grain Inspection, Packers & Stockyards Administration (“GIPSA”), which is part of the USDA. Among other requirements, the P&S Act requires meat packers, such as BEF Foods, to be bonded, provides trust protection for producers in the event they are not paid for livestock by a meat packer, and requires that livestock producers be paid promptly by meat packers for the sale of livestock. Violations of the P&S Act may be resolved through a notice of violation, a stipulation agreement with GIPSA, administrative actions and court actions.

 

We are subject to federal and state environmental regulations, including various laws concerning the handling, storage and disposal of hazardous materials, such as cleaning solvents. These regulations have not had a material adverse effect on our operations to date. We do not anticipate that compliance with federal, state and local provisions regulating the discharge of materials into the environment, or which otherwise relate to the protection of the environment, will have a material adverse effect upon our capital expenditures, revenues or competitive position.

 

U.S. federal, state and local laws and regulations are increasingly being enacted to address concerns about the effects that carbon dioxide emissions and other identified greenhouse gases (“GHG”) may have on the environment and climate worldwide. These effects are widely referred to as “Climate Change.” In the U.S., Climate Change legislation is currently pending in Congress and, if enacted, would limit GHG emissions from covered entities through a “cap and trade” system to reduce the quantity of national GHG emissions in accordance with established goals and time lines. One or more of our food manufacturing facilities could be covered by such new legislation. There also has been recent regulatory activity relative to the regulation of GHG emissions by the U.S. Environmental Protection Agency under the Clean Air Act, including the proposed mandatory reporting of greenhouse gases rule. Additionally, several states already have taken steps to require the reduction of GHGs by certain companies and public utilities, primarily through the planned development of GHG inventories and/or regional GHG cap and trade programs. GHG emissions occur at several points across our operations, including production, transportation and processing. Our compliance with any future legislation or regulation of GHGs, if it occurs, may result in increased compliance and operating costs. It is not, however, possible at this time to predict the structure or outcome of any future legislative or regulatory efforts to address such emissions or the eventual cost to us of compliance. Based on information currently available to us, we believe that compliance with these regulations will not have a material adverse effect on us.

 

Employees

 

As of April 29, 2011, we employed 44,819 persons (full and part-time), including 43,638 persons in our restaurant business and 1,181 persons in our food products business. None of our employees are currently covered by collective bargaining agreements, and we have never experienced an organized work stoppage, strike or labor dispute. We believe our working conditions and compensation packages are generally comparable with those offered by our competitors. We consider overall relations with our employees to be favorable.

 

Available Information

 

Our Internet Web site address is www.bobevans.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our Web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on or connected to our Web site is not incorporated into this Annual Report on Form 10-K.

 

Upon the written request of a stockholder, we will provide without charge a copy of this Annual Report on Form 10-K, including the financial statements and financial statement schedules included herein. In addition, upon the written request of a stockholder, we will provide a copy of any exhibit to this Annual

Report on Form 10-K upon the payment of a reasonable fee. Written requests should be delivered to Bob Evans Farms, Inc., Attention: Investor Relations, 3776 South High Street, Columbus, Ohio 43207.

 

 

The risk factors presented below may have a material adverse affect our future operating results, financial position and cash flows. The categories listed below are for information purposes only and do not signify that any risk should or should not be included in one or more of the other categories, or that any category or risk is more significant than any other risk. In addition to the risk factors presented below, changes in general economic conditions, consumer tastes and discretionary spending patterns, demographic trends and consumer confidence in the economy, which affect consumer behavior and spending for restaurant dining occasions and retail purchases in general, may have a material adverse effect on us. Our actual results could vary significantly from any results expressed or implied by any forward-looking statements contained in this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission depending upon a variety of factors, including, but not limited to, the following risks and uncertainties:

 

 

Our success depends on consumer acceptance of our menu offerings, food products, prices, atmosphere and service procedures.

 

Our success in creating demand for our restaurant menu offerings and food products is dependent on our ability to continue to accurately predict consumer dining and taste preferences and adapt our menu and food products to trends in food consumption. If customer eating habits change significantly and we are unable to respond with appropriately priced menu offerings and food products, it could have a material adverse effect on demand for our menu offerings and food products, which would result in lost customers and a material adverse effect on our business and results of operations. Our success is also dependent upon our ability to provide outstanding customer service and to keep the atmosphere of our two restaurant concepts differentiated from our competitors, and relevant and appealing to our customers. If we change a restaurant concept or customer service technique, we may lose customers who do not prefer the changed concept or customer service technique, and we may not be able to attract a sufficient new customer base to produce the revenue needed to make the concept or technique profitable.

 

Our long-term growth strategy depends on opening new restaurants. Our ability to expand our restaurant base is influenced by factors beyond our control, which may further slow restaurant expansion and impair our growth strategy.

 

We are pursuing a moderate and disciplined long-term growth strategy which, to be successful, will depend in large part on our ability to open new restaurants and operate those restaurants on a profitable basis. Currently, we do not believe that our average new restaurant volumes generate a level of return on our development costs that justifies significant expansion of Mimi’s, and we are just returning to new restaurant growth for Bob Evans Restaurants. We do not intend to substantially increase the construction of new restaurants until the economy improves and we are confident that we have adequately improved restaurant level economics by increasing our sales, lowering our labor, purchasing and construction costs and increasing our margins and profitability. We cannot guarantee that we will be able to achieve our expansion goals or operating results similar to those of our existing restaurants. One of our biggest challenges in meeting our long-term growth objectives will be to locate and secure an adequate supply of suitable new restaurant sites. We have experienced delays in opening some of our restaurants and may experience delays in the future. Delays or failures in opening new restaurants could have a material adverse effect on our planned long-term growth strategy.

 

The success of any restaurant expansion will depend upon numerous factors, many of which are beyond our control, including the following:

 

 

 

In addition, we contemplate entering new markets in which we have no operating experience. These new markets may have different demographic characteristics, competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause the new restaurants to be less successful in these new markets than in our existing markets.

 

Our long-term growth strategy may strain our management, financial and other resources. For instance, our existing systems and procedures, restaurant management systems, financial controls, information systems, management resources and human resources may be inadequate to support our planned expansion of new restaurants. Also, we may not be able to respond on a timely basis to all of the changing demands that the planned expansion will impose on our infrastructure and other resources.

 

Our restaurant business is dependent upon satisfactory customer service, and we may have difficulty hiring and retaining a sufficient number of qualified employees to deliver appropriate service.

 

Our success depends in part upon our ability to attract, train, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers who can meet the high standards necessary to deliver the levels of food quality and service on which our restaurant concepts are based. The short supply of qualified individuals in some areas could strain our restaurant operations, delay new restaurant openings or require us to increase wages to attract desired individuals, which could have a material adverse effect on our financial position or results of operations. Also, high rates of employee turnover could have a negative impact on food quality and customer service, which would result in an adverse effect on our restaurant business and results of operations.

 

Our success depends on our ability to compete effectively in the restaurant and food products industries.

 

The restaurant industry is highly competitive and is affected by changes in the public’s eating habits and preferences, population trends, traffic patterns and weather conditions, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond our control. Key competitive factors in the restaurant industry include the quality and value of the menu items offered, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant locations. Many of our competitors are well-established national, regional or local chains, and some have substantially greater financial, marketing and other resources than we have, which may give them competitive advantages. We compete with many restaurant operators and other retail establishments for site locations and restaurant employees. We also compete with grocery store chains that offer cooked and prepared products for the consumer. We expect competition to intensify as our competitors expand operations in our markets and quick-service restaurant chains expand their breakfast offerings. This increased competition could have a material adverse effect on our financial position or results of operations.

 

The food products business is also highly competitive and is affected by changes in the public’s eating habits and preferences, as well as by local and national economic conditions affecting consumer spending habits. Key competitive factors in the industry include the quality, flavor and value of the food products offered, advertising and name brand awareness. Our competitors include well-established national, regional and local producers and wholesalers of similar products, many of whom have substantially greater name recognition and financial,

marketing and other resources than we have, which may give them competitive advantages. We are facing increased competition from private label sausage products and side dishes. We expect competition to intensify in our food products segment as other food companies introduce refrigerated side dishes to compete with our successful mashed potatoes and macaroni and cheese products. This increased competition could have a material adverse effect on our financial position or results of operations.

 

Our failure to achieve and maintain positive same-store sales for an extended period of time would likely have a material adverse effect upon our financial condition, results of operation and cash flows.

 

Same-store sales are a key measure of the financial health of our company, as well as our individual restaurants. Same-store sales growth may be affected by a number of factors, including:

 

 

In fiscal 2011, same-store sales at Mimi’s decreased 4.5 percent and Bob Evans Restaurants’ same-store sales decreased 1.0 percent. Our failure to achieve and maintain positive same-store sales for extended periods of time for either of our restaurant concepts would have a material adverse effect upon our business, results of operations and financial condition.

 

The growth of our food products sales and profits is dependent upon our ability to expand into existing and new markets.

 

The successful growth of BEF Foods’ business depends on our ability to add new retail customers, as well as expand the number of products sold through existing retail customers by expanding the number of our items they offer for sale. The expansion of BEF Foods’ business depends on our ability to obtain and retain large-account customers, such as grocery store chains and warehouse customers. Our failure to obtain and retain new large-account customers or maintain our relationships with existing large-account customers could have a material adverse effect on BEF Foods’ business and results of operations.

 

Our food products business is dependent upon a limited number of suppliers for the production of a significant number of items and relies upon a relatively small number of customers for a large percentage of its sales.

 

Our food products business is dependent upon a limited number of suppliers, and we have not identified secondary suppliers for food products manufactured in our plants. Our prolonged inability to provide products to fill orders in a timely manner would have an adverse effect on both our restaurant and food products businesses and our results of operations. Our food products business also relies upon a relatively small number of customers for a large percentage of its sales. For fiscal 2011, our largest 10 accounts represented approximately 76 percent of our total food products sales, with Wal-Mart Stores, Inc. (and its affiliates) and The Kroger Co. each accounting for over 10 percent of our food products segment sales. Our inability to maintain strong relationships with our key customers could result in a loss of business, which would have a material adverse effect on our food products business and our results of operations.

The financial performance and results of operations of BEF Foods could be adversely affected by availability of and price we pay for sows.

 

The most important raw material used to produce our pork sausage products in our food products business. We procure live sows at prevailing market prices from terminals, local auctions, country markets and corporate and family farms in many states and Canada. The live sow market is highly cyclical in terms of the number of sows available and the current market price. A significant contraction in the live sow market began during fiscal 2010, and we believe that the sow herd is at its lowest level since the early 1900’s. The live sow market is also dependent upon supply and demand for pork products, as well as corn and soybean meal prices (the major food supply for sows), weather and farmers’ access to capital. The live sow market has been extremely volatile over the past several years. Our sow costs increased 36 percent in fiscal 2011 compared to fiscal 2010.

 

We believe our food products segment will continue to be challenged by sow costs that are significantly higher than historical averages, as well as limited supplies of sows. We estimate our fiscal 2012 sow costs will be in the range of $60 to $65 per hundredweight, compared to $57 in fiscal 2011. Higher sow costs adversely affect BEF Foods’ profitability, and we cannot guaranty that we will be able to pass along any portion to our consumers in a timely manner or at all.

 

Because many of our restaurants are concentrated in certain geographic areas, there could be a material adverse effect on our operations by regional economic conditions and events.

 

The concentration of many of our existing and planned restaurants in particular regions of the United States could affect our operating results in a number of ways. For example, our results of operations may be adversely affected by economic conditions in that region, the local labor market and regional competition. Also, adverse publicity relating to our restaurants in a region in which they are concentrated could have a more pronounced adverse effect on our overall revenue than might be the case if our restaurants were more broadly dispersed.

 

A majority of our Bob Evans Restaurants are located in Ohio and other parts of the Midwest, which makes us particularly sensitive to economic conditions, natural disasters, severe weather and other events in this region. We believe same-store sales at our Bob Evans Restaurants are particularly sensitive to economic conditions in the Midwest, which has been hit particularly hard by the downturn in the United States’ economy, the troubled auto industry, increased unemployment and lower home values. Nearly 250 Bob Evans Restaurants are located in Michigan and Ohio where the impact of job losses in the automotive industry (manufacturers and suppliers) could have a material adverse effect on our sales. Also, because a significant percentage of our Mimi’s are located in California, we are also particularly sensitive to events and developments in that state, such as earthquakes or other natural disasters and energy shortages. We are particularly concerned about Mimi’s sales and profit trends in California, Florida, Arizona and Nevada. These states accounted for approximately 65 percent of Mimi’s sales in fiscal 2011 and have been hit particularly hard by the downturn in the United States’ economy, sub-prime mortgage issues, increased unemployment and lower home values.

 

Adverse weather conditions could harm our sales and profits.

 

Weather conditions can adversely impact sales at our restaurants. Adverse weather conditions, such as snow and ice in the Midwest, that keep customers from dining out or going to grocery stores, result in lost opportunities for our restaurants and food products division. Adverse weather conditions may also cause shortages or interruptions in the supply of fresh meat and produce to our restaurants and hamper the distribution of our food products to grocery stores.

 

Our ability to align our corporate culture to adapt to evolving business changes and requirements could have a material adverse effect on us in the future.

 

Our results may be adversely affected if we are unable to execute on the key elements of our strategic plan to improve our delivery execution, resource utilization, and decision making processes. As with any organization with over 40,000 employees, effecting significant changes in operational regimes and corporate culture is a challenge. If we are unable to change and instill within our entire organization the appropriate operational regimes of our new corporate culture, we may not be able to gain the anticipated improvements and increase our profitability. The

implementation of our strategic plan will require, among other things, expending capital, developing and adopting new technologies, recruiting talented employees and changing our corporate culture. If we are unable to successfully execute any or all of the initiatives of our strategic plan, our revenues, operating results and profitability may be adversely affected.

 

 

Our business could suffer if we are the subject of negative publicity or litigation regarding allegations of food-related contaminations or illnesses.

 

As a multi-unit restaurant business and food products business, we can be adversely affected by complaints or litigation from consumers alleging illness, injury or other food quality, adverse health effects (including obesity) or operational concerns. Our reputation and business can also be adversely affected by negative publicity resulting from such complaints or litigation. Food-related contaminations and illnesses may be caused by a variety of food borne pathogens, such as e-coli or salmonella, from a variety of illnesses transmitted by restaurant workers, such as hepatitis, and from contamination of food by foreign substances. Contamination and food borne illness incidents could also be caused by food suppliers and distributors. As a result, we cannot control all of the potential sources of contamination or illness that can be contained in or transmitted from food. If any person becomes injured or ill, or alleges becoming injured or ill, as a result of eating our food, we may be liable for damages, be subject to governmental regulatory action and/or receive adverse publicity, regardless of whether the allegations are valid or whether we are liable, any of which could have long-lasting, negative effects on our reputation, financial position and results of operations.

 

Catastrophic events may disrupt our business and could adversely affect our revenues and results of operations.

 

We are a highly automated business and rely on our production facilities and our network infrastructure and our Web site for our development, marketing, operational, support, hosted services and sales (including on-line ordering) activities. A disruption, infiltration or failure of these systems or third party hosted services in the event of a major natural disaster, fire, power loss, telecommunications failure, cyber attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data. In the past, severe weather conditions and natural disasters have caused power outages and other circumstances which have adversely affected the operations of our corporate office in Columbus, Ohio, individual food manufacturing plants, and restaurants.

 

BEF Foods operates six manufacturing plants. If we were forced to close or delay production at one or more of these plants due to a natural disaster or significant labor issue, we may be unable to increase production at our other plants in a timely manner, which could have a material adverse effect on our results of operations. Also, Mimi’s relies on a single site prep kitchen for preparation of substantially all of the concept’s signature muffin mixes, dressings, sauces and soups. Any temporary or permanent disruption in the operation of this facility would affect the ability of Mimi’s to serve the full range of menu offerings or require us to obtain these items from alternative sources, which could have a material adverse effect on our results of operations.

 

We are in the process of developing more robust disaster recovery plans and certain backup systems to reduce the potentially adverse effect of such events. A catastrophic event that results in the destruction or disruption of our data center or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.

 

If we lose the services of any of our key management personnel, our business could suffer.

 

Our future success significantly depends on the continued services and performance of our key management personnel. Our future performance will depend on our ability to motivate and retain these and other key officers and key team members, particularly regional and area managers and restaurant general managers. Competition for high-quality employees is intense. The loss of the services of members of our senior management or key team members or the inability to attract additional qualified personnel as needed could harm our business.

Our restaurant business is dependent on timely delivery of fresh ingredients by our suppliers and distributors.

 

Our restaurant operations are dependent on timely deliveries of fresh ingredients, including fresh produce, dairy products and meat. The cost, availability and quality of the ingredients we use to prepare our food are subject to a variety of factors, many of which are beyond our control. Fluctuations in weather, supply and demand, the economy and political conditions could adversely affect the cost, availability and quality of our ingredients. If the variety or quality of the food we offer declines due to the lack or lower quality of our ingredients or due to interruptions in the flow of fresh ingredients, customer traffic may decline and negatively affect our sales. We have contracted with third-party distributors for the delivery of food and other products to our restaurants. If these contracts were suddenly and unexpectedly terminated, supply costs could increase and disruptions in distribution could occur during the transition to other third-party distributors.

 

The price and availability of food, ingredients and utilities used by our restaurants could adversely affect our revenues and results of operations.

 

Our business is subject to the general risks of inflation. Our results of operations depend significantly on our ability to anticipate and react to changes in the price and availability of food, ingredients, utilities, and other related costs over which we may have little control. Fluctuations in economic conditions, weather and demand, as well as natural disasters can adversely affect the availability, quality and cost of the ingredients and products that we buy. We require fresh produce, dairy products and meat, and therefore are subject to the risk that shortages or interruptions in supply of these food products could develop. Our operating margins are subject to changes in the price and availability of food commodities. For example, the profitability of our food products segment is sensitive to sow costs. The effect of, introduction of, or changes to tariffs or exchange rates on imported retail products or food products could increase our costs and possibly affect the supply of those products. Our operating margins are also affected by fluctuations in the price of utilities such as natural gas, whether as a result of inflation or otherwise, on which our restaurants depend for much of their energy supply. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations. In addition, because we provide a moderately priced product, we may not seek or be able to pass along price increases to our guests sufficient to offset cost increases.

 

Our inability to successfully and sufficiently raise menu and food products prices to offset increased costs could result in a decline in margins.

 

We utilize price increases for menu offerings and food products to help offset cost increases, including increased costs for wholesale food, raw materials, distribution, minimum wages, employee benefits, construction, fuel, utility, and other costs. During fiscal 2010, we implemented menu price increases at Bob Evans Restaurants and Mimi’s Cafés to help offset operating and supply cost increases. Further federal legislation to increase the minimum wage as well as the tip credit wage we pay to certain staff members receiving guest gratuities is probable, and there may be similar increases implemented in other jurisdictions in which we operate or seek to operate. We may not be able to anticipate and react to changing costs by adjusting our purchasing practices and prices to sufficiently account for increased costs, especially further minimum wage increases at the federal and/or state level. Also, because we offer moderately priced food, we may not be able to, or we may choose not to, pass along price increases to our customers, which could have a material adverse effect on our business and results of operations.

 

III.  COMPLIANCE

 

The restaurant and food products industries are heavily regulated, and compliance with applicable laws and regulations may be more costly than we expect.

 

The restaurant industry and the food products industry are subject to various federal, state and local laws and regulations. Compliance with these legal requirements may be more costly than we expect. The failure to obtain and/or retain licenses, permits or other regulatory approvals could delay or prevent the opening of a restaurant and/or the continued operation of a particular restaurant or food products manufacturing facility. Our failure to comply with applicable laws and regulations could also result in fines or legal actions that could adversely affect our

business, results of operations and financial position. Significant legal and regulatory issues affecting our business include:

 

 

Legislation and regulations requiring the display and provision of nutritional information for our menu offerings in our restaurants could increase our operating costs, affect consumer preferences, increase the likelihood of litigation, and negatively impact our results of operations.

 

We are concerned about regulations requiring restaurants to provide calorie and other nutritional information on menus and/or in our restaurants. Mimi’s located in California are subject to a state-wide menu labeling law that became effective on July 1, 2009, and our Bob Evans Restaurant located in Montgomery County, Maryland is subject to a menu-labeling law that became effective on July 1, 2010. The national health care reform legislation enacted on March 23, 2010, contains provisions that require restaurants with 20 or more locations to post calorie information on menus and additional nutritional information in writing at the restaurant. The FDA released Proposed Regulations implementing this legislation on April 6, 2011. At present, the FDA expects to release Final Regulations prior to December 31, 2011. The Final Regulations will specify when the FDA will commence enforcement of the Final Regulations. Although the new federal legislation preempts the legislation already enacted in California, Montgomery County, Maryland, and other state and local jurisdictions (e.g., Maine, Massachusetts, New Jersey, Oregon, New York City and Philadelphia), some of these jurisdictions are requiring compliance with their regulations until the FDA begins enforcing the federal regulations.

 

Menu labeling regulations could have an adverse effect on our results of operations and financial condition due to the potential impact on our sales and profitability if the disclosures change guest preferences and menu mix, as well as increased operating costs incurred to comply with these regulations. Moreover, we could become subject to litigation arising from our nutritional disclosures, such as claims that our nutritional disclosures are inaccurate or that our menu offerings are harmful to human health.

 

Health concerns and government regulations relating to the consumption of trans-fats, pork, beef, chicken and other food products could affect consumer preferences and could negatively impact our results of operations.

 

Consumer food preferences could be affected by health concerns about the consumption of various types of food, such as trans-fats, pork, beef and chicken. Negative publicity concerning trans-fats related to fried foods and other items, “mad cow” and “foot-and-mouth” disease relating to the consumption of beef and other meat products, “H1N1” or “swine flu” related to pork products, “avian flu” related to poultry products and the publication of government, academic or industry findings about health concerns relating to menu items served by any of our restaurants could also affect consumer food preferences. These types of health concerns and negative publicity

concerning our food products may adversely affect the demand for our food and negatively impact our business and results of operations. Additionally, some government authorities are increasing regulations regarding trans-fats and sodium. We have largely eliminated artificial trans-fat from our restaurant menu offerings, and these regulations may require us to limit sodium amounts in our menu offerings and/or food products in the future. These regulations may require us to switch to higher cost ingredients and may hinder our ability to operate in certain markets.

 

Our business could suffer if we are the subject of increased litigation regarding personal injuries suffered on our premises, discrimination, harassment or other labor matters.

 

Employee and customer claims against us based on, among other things, personal injury, discrimination, harassment, wage and hour disputes or wrongful termination may divert our financial and management resources from operating our businesses. Restaurant companies have been the target of class actions and other lawsuits alleging, among other things, violation of federal and state law. Like many employers, Mimi’s has been faced with allegations of purported class-wide wage and hour violations in California, and we have taken charges related to the settlement of these cases. An unfavorable verdict or a significant settlement in a future class-action lawsuit could have a material adverse effect on our financial position, cash flows and results of operations.

 

Compliance with new and changing regulations related to corporate governance and public disclosure will result in additional expenses and pose challenges for our management team.

 

New as well as changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and the rules and regulations promulgated and to be promulgated under the Dodd-Frank Act, as well as under the Sarbanes-Oxley Act of 2002, and the rules and regulations of the Securities and Exchange Commission and The NASDAQ Stock Market, have created uncertainty for public companies and increased our costs and time that our Board of Directors and management must devote to complying with these rules and regulations. Our Board of Directors and management team will need to devote significant time and financial resources to comply with both existing and evolving standards for corporate governance for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities.

 

 

The global economic downturn adversely impacted our business and financial results in fiscal 2011, and a prolonged poor economy could have a material adverse effect on us in the future.

 

The restaurant and food products industry is dependent upon consumer discretionary spending. The global economic downturn has reduced consumer confidence to historic lows impacting the public’s ability and desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly reduced home values, investment losses in the financial markets, personal bankruptcies and reduced access to credit, resulting in lower levels of guest traffic in our restaurants and sales of our food products. When gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage and other borrowing costs increase with rising interest rates, our guests and customers may have less disposable income and reduce the frequency with which they dine out or purchase our products. This is particularly the case with casual dining concepts like Mimi’s because consumers may choose more inexpensive restaurants (such as quick-service restaurants or fast casual dining) when eating outside the home. If this difficult economic situation continues for a prolonged period of time or deepens in magnitude, our business and results of operation could be materially adversely effected. This will result in spreading fixed costs across a lower level of sales, and will, in turn cause downward pressure on our profitability. This could result in restaurant or plant closures and asset impairment charges.

 

A privacy breach could adversely affect our business.

 

The protection of customer, employee and company data is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new administrative processes. In addition, customers have

a high expectation that we will adequately protect their personal information. If we fail to comply with these laws and regulations or experience a significant breach of customer, employee or company data, our reputation could be damaged and we could experience lost sales, fines or lawsuits.

 

Inappropriate use of social media vehicles present new risks.

 

The inappropriate use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications from the improper collection of personal information. Negative posts or comments about us on any social networking web site could seriously damage our reputation. In addition, the disclosure of non-public company sensitive information through external media channels could lead to information loss as there might not be structured processes in place to secure and achieve this information. Identifying new points of entry as social media continues to expand presents new challenges.

 

Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to a variety of other factors, resulting in a decline in our stock price.

 

Our quarterly operating results may fluctuate significantly because of several factors, including:

 

 

Our restaurant and food products businesses are also subject to seasonal fluctuations. As a result, our quarterly and annual operating results, same-store sales and comparable food products sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any fiscal year. If our quarterly operating results fall below the expectations of securities analysts and investors due to the factors discussed above, this could result in a decline in our stock price.

 

Many factors, including those over which we have no control, affect the trading price of our stock.

 

Factors such as reports on the economy or the price of commodities, as well as negative or positive announcements by competitors, regardless of whether the report relates directly to our business, could have an impact of the trading price of our common stock. The market price of our common stock may also be affected by stock market conditions, including price and trading fluctuations on the NASDAQ Stock Market, the New York Stock Exchange or other exchanges. In addition to investor expectations about our prospects, trading activity in our common stock can reflect the portfolio strategies and investment allocation changes of institutional holders, as well as non-operating initiatives such as share repurchase programs. Any failure to meet market expectations for our financial performance, particularly with respect to comparable restaurant sales, revenues, operating margins and earnings per share, would likely cause our stock price to decline.

Disruptions in the financial markets may adversely impact the availability and cost of credit and consumer spending patterns.

 

Our ability to make scheduled payments or to refinance our debt and to obtain financing for general corporate purposes will depend on our operating and financial performance which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. Global credit markets and the financial services industry have been experiencing a period of unprecedented turmoil in recent months, characterized by the bankruptcy, failure or sale of various financial institutions and an unprecedented level of intervention from the United States and other governments. These events may adversely impact the availability of credit already arranged, and the availability and cost of credit in the future. There can be no assurances that we will be able to arrange credit on terms we believe are acceptable or that permit us to finance our business with historical margins. These events have also adversely affected the U.S. and world economy, and any new or continuing disruptions in the financial markets may also adversely affect the U.S. and world economy, which could negatively impact consumer spending patterns. There can be no assurances that various U.S. and world government responses to the disruptions in the financial markets in the near future will restore consumer confidence, stabilize the markets, or increase liquidity or the availability of credit. There can be no assurances as to how or when this unprecedented period of turmoil will be resolved.

 

Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely affect us.

 

Our credit facilities and the agreements governing our senior notes contain various covenants that limit, among other things, our ability to: incur liens on our assets; merge or consolidate with other entities; transfer or sell a substantial part of our assets; substantially change the nature of our business; engage in sale and leaseback transactions; and enter into transactions with affiliates.

 

The agreements governing our senior notes contain additional restrictive covenants, including financial maintenance requirements relating to our: consolidated net worth; ratio of consolidated indebtedness to consolidated capitalization; ratio of consolidated income available for fixed charges to fixed charges; and levels of priority indebtedness.

 

The covenants contained in our debt instruments could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger, acquisition or other corporate opportunities, to fund our business operations or to successfully implement our current and future operating strategies.

 

A breach of a covenant in our debt instruments could cause acceleration of a significant portion of our outstanding indebtedness.

 

A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other debt instruments. In addition, the agreements governing our senior notes require us to maintain certain financial ratios. Our ability to comply with these covenants may be affected by events beyond our control (such as uncertainties related to the current economy), and we cannot be sure that we will be able to comply with these covenants at all times in the future. Upon the occurrence of an event of default under any of our debt instruments, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we cannot be sure that our assets would be sufficient to repay in full our outstanding indebtedness.

 

Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.

 

We believe that our trademarks, service marks and other proprietary rights are important to our success and our competitive position. Our primary trademarks, “Bob Evans^®,” “Mimis Cafe^®” and “Owens^®,” are key components of our operating and marketing strategies. As a result, we devote appropriate resources to the protection of our trademarks and other proprietary rights. The protective actions that we take, however, may not be sufficient to

prevent unauthorized usage or imitation by others, which could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal costs.

 

In addition, third parties might claim that our trademarks or menu offerings infringe upon their proprietary rights. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.

 

Our current insurance loss estimates may not be adequate and, if claims exceed such estimates, it could have a material adverse effect on our profitability.

 

We are self-insured for a significant portion of our current exposures related to our workers’ compensation, general liabilities and employee health insurance programs. Although we base our loss estimates on actuarial data, as well as on our historical trends, we may not be able to accurately predict the number or value of the claims that occur. In particular, health insurance costs have increased significantly over the last 10 years. In the event that our actual liability exceeds our estimate for any given period, or if we are unable to control rapidly increasing health care costs, there could be a material adverse effect on our level of profitability.

 

Our Certificate of Incorporation and Bylaws, as well as Delaware law may have anti-takeover effects.

 

Provisions of our Certificate of Incorporation and Bylaws may have the effect of discouraging, delaying or preventing a merger, tender offer or proxy contest, which could have an adverse effect on the market price of our common stock. In addition, certain provisions of Delaware law applicable to us could also delay or make more difficult a merger, tender offer or proxy contest involving our company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any “interested shareholder” (as defined in the statute) for a period of three years unless certain conditions are met. In addition, our senior management is entitled to certain payments and rights upon a change in control of our Company.

 

If Mimi’s Café’s actual performance does not meet the forecasts contained in our five-year strategic plan, we may need to take a noncash impairment charge related to the intangible assets associated with the Mimi’s Café concept.

 

At April 29, 2011, we had intangible assets totaling $40.7 million on our balance sheet related to our acquisition of Mimi’s Café. Specifically, this amount includes $34.0 million for the unamortized Mimi’s Café trade name and $6.7 million for the Mimi’s Café restaurant concept, which is amortized over a 15-year life. We are required to perform annual impairment tests of our intangible assets (or more frequently if events or changes in circumstances indicate the asset might be impaired). Impairment testing of the Mimi’s Café trade name requires that we determine its fair value. If the fair value of the asset is less than its $34.0 million carrying value, an impairment charge would be recognized in an amount equal to the difference. The impairment test for the $6.7 million restaurant concept asset involves a three-step process, whereby we first consider whether indicators of impairment are present. If indicators are present, the second step is to compare the sum of the undiscounted future cash flows attributable to the asset to its carrying value. In the event that the undiscounted cash flows are less than the carrying value, the third step is to determine the fair value of the restaurant concept. If the fair value is less than its carrying value, an impairment charge would be recognized for the difference. We use the relief-from-royalty method, which is an income approach to valuation, to determine the fair values of the trade name and restaurant concept intangible assets. Using the relief-from-royalty method, the fair values are impacted by projected sales, including plans for new restaurant development and same-store sales trends.

 

In the fourth quarter of fiscal 2011, we completed our annual impairment tests of intangible assets. The assumptions we used for projected sales were based on our current five-year development and financial forecasts for Mimi’s Café. Using these assumptions, the fair values of the Mimi’s Café trade name and restaurant concept exceeded their carrying values, and as a result, no impairment charges were recorded. Although we believe our current plans and forecasts to be achievable, there is the potential that our actual future results could differ from these forecasts, especially given Mimi’s Café’s prolonged negative same-store sales trend. While the company

identified certain underperforming restaurants that required an impairment charge during fiscal 2011, overall year-to-date results for Mimi’s Café continue to meet performance expectations. Accordingly, no impairment indicators were identified related to the Mimi’s trade name or restaurant concept as of the fourth quarter of fiscal 2011. If Mimi’s Café’s performance falls below expectations in future periods, impairment charges related to Mimi’s Café trade name and restaurant concept could arise.

 

 

None.

 

 

The following provides a brief summary of the location and general character of our principal plants and other physical properties as of April 29, 2011.

 

We own our principal executive offices located at 3776 S. High St., Columbus, Ohio. We also own a 937-acre farm located in Rio Grande, Ohio and a 30-acre farm located in Richardson, Texas. The two farm locations support our brand heritage and image through educational and tourist activities.

 

Bob Evans Restaurants

 

At the end of fiscal 2011, we owned the real estate for 486 of our Bob Evans Restaurants and leased the real estate for the remaining 77. The table located in Item 1 of this Annual Report on Form 10-K shows the location of all of our Bob Evans Restaurants in operation as of the end of fiscal 2011. The initial terms for the majority of our Bob Evans Restaurant leases’ are 20 years and include options to extend the terms. Additionally, we own or lease 25 closed restaurants that we intend to sell or lease in the future.

 

We own approximately 17 acres of improved property commonly known as the Southland Mall, located adjacent to our Bob Evans Farms corporate headquarters in Columbus, Ohio. Part of our corporate headquarters is located in this facility and we lease space in the remainder of the facility.

 

Mimi’s Cafés

 

Mimi’s corporate offices are located in Irvine, California, under a lease that expires in 2014. The SWH Custom Foods prep kitchen is located in Fullerton, California, under a lease that expires in July 2012, with one three-year renewal option and one five-year renewal option. Mimi’s also leases a décor and furnishings warehouse located in Corona, California, under a lease that expires in July 2012.

 

At the end of fiscal 2011, we leased the real estate for all but seven of our Mimi’s locations. The table located in Item 1 of this Annual Report on Form 10-K shows the location of all Mimi’s in operation as of the end of fiscal 2011. The initial terms for the majority of Mimi’s leases are 20 years and include options to extend the terms for up to 15 additional years.

 

Food Products

 

Our food products business has six manufacturing plants located in Hillsdale, Michigan, Bidwell, Springfield and Xenia, Ohio, and Sulphur Springs and Richardson, Texas. We also operate a distribution center in Springfield, Ohio. We own all of these properties.

 

During fiscal 2011, we closed a food product manufacturing plant located in Galva, Illinois. We still own this facility.

 

We believe that our manufacturing facilities currently have adequate capacity to serve their intended purpose. We believe our facilities have adequate capacity over the next five years and will position our food products business for growth during that period.

 

We own a regional food products sales office in Westland, Michigan. We lease various other locations throughout our food products marketing territory which serve as regional and divisional sales offices.

 

 

Like many restaurant companies and retail employers, SWH Corporation, a wholly owned indirect subsidiary of Bob Evans, which does business as Mimi’s Café, has been faced with allegations of purported class-wide wage and hour violations in California. The following is a brief description of the current California class action matters pending against SWH Corporation.

 

On October 13, 2009, a class action complaint entitled Edder Diaz and Rosolyn Gray, et al. vs. SWH Corporation d/b/a Mimi’s Café was filed in Alameda County California Superior Court. In a March 2010 amended complaint, Mr. Diaz and Ms. Gray purport to represent a class of servers, bartenders, front-of-house trainers, to-go servers, shift managers, or shift manager expeditors who are allegedly similarly situated. In a second amended complaint filed in October 2010, Mr. Diaz and Ms. Gray allege that current and former nonexempt employees working in these positions in California from July 26, 2006, to August 31, 2010 (1) were not reimbursed for certain expenses incurred in connection with the discharge of their duties, (2) were denied rest breaks and meal periods as required for nonexempt employees under California wage and hour laws, (3) were not paid minimum wage and overtime for time spent working off-the-clock during, or in connection with, a meal period, and (4) were required to pay for cash shortages. The second amended complaint seeks unspecified damages, penalties, interest and attorneys’ fees and costs.

 

Although we believe Mimi’s Café has complied with the California wage and hour laws at issue in the Diaz lawsuit, we elected to resolve the lawsuit voluntarily. In October 2010, we entered into a Memorandum of Understanding with the Diaz class representatives and their legal counsel to settle the lawsuit for $340,000, inclusive of payments to class members, enhancements to the class representatives, costs of administration, and plaintiffs’ attorney fees and costs related to the lawsuit. The Alameda County California Superior Court granted preliminary approval of the settlement on December 8, 2010. We recently completed the administration of class notices, and the Alameda County Superior Court granted final approval of the settlement on May 31, 2011. The Court’s final approval order rejected a portion of the class representative enhancements, saving Mimi’s Café $4,500 of the settlement amount. Settlement payments are scheduled to be distributed in or around July 2011, and a final accounting hearing is scheduled with the Court on November 14, 2011.

 

We are from time-to-time involved in ordinary and routine litigation, typically involving claims from customers, employees and others related to operational issues common to the restaurant and food manufacturing industries. In addition to the class action lawsuits described above, we are involved with a number of pending legal proceedings incidental to our business. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our financial position, cash flows or results of operations.

 

 

Not applicable.

 

 

The following table sets forth the executive officers of Bob Evans Farms, Inc. and certain information regarding each executive officer as of June 24, 2011. The executive officers are appointed by and serve at the pleasure of the Board of Directors of Bob Evans Farms, Inc.

 

 

PART II

 

 

Market Information, Holders of Common Equity and Dividends

 

The information required by Item 201(a) through (c) of Regulation S-K is incorporated herein by reference to Note 8 — Quarterly Financial Data (Unaudited), to our consolidated financial statements which are included in Item 8 of this Annual Report on Form 10-K.

 

Performance Graph

 

Comparison of Five-Year Cumulative Total Return

 

The following line graph compares the yearly percentage change in our cumulative total stockholder return on our common stock over our preceding five fiscal years against the cumulative total return of the Standard & Poor’s 500 Stock Index (“S&P 500”) and the weighted average of our peer group. Our peer group is comprised of restaurant companies listed on The NASDAQ Stock Market (weighted 80 percent) and a group of meat producers listed on either The NASDAQ Stock Market or the New York Stock Exchange (weighted 20 percent). We measure cumulative stockholder return by dividing (a) the sum of (i) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (ii) the difference between the price of our common stock at the end and the beginning of the measurement period by (b) the price of our common stock at the beginning of the measurement period.

 

 

CUMULATIVE VALUE OF $100 INVESTMENT

 

 

Issuer Repurchases of Equity Securities

 

On May 26, 2010, the Board of Directors authorized a share repurchase program of up to $25.0 million in shares of our outstanding common stock from time-to-time on the open market or through privately negotiated transactions, depending on market conditions for fiscal 2011. During fiscal 2011, we repurchased 682,835 shares of our common stock at a total price of $19.0 million.

The following table provides information on Bob Evans’ purchases of its common stock during the three fiscal months ended April 29, 2011:

 

 

On June 14, 2011, the Board of Directors authorized a share repurchase program of up to $25.0 million in shares of our outstanding common stock from time-to-time on the open market or through privately negotiated transactions, depending on market conditions for fiscal 2012.

 

 

Consolidated Financial Review
Bob Evans Farms, Inc. and Subsidiaries

 

 

 

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 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 29, 2011, we owned and operated 708 full-service restaurants, including 563 Bob Evans Restaurants in 18 states and 145 Mimi’s Cafés in 24 states. Bob Evans Restaurants are primarily located in the Midwest, mid-Atlantic and Southeast regions of the United States. Mimi’s Cafés are primarily located in California and other western states. Revenue in the restaurant segment is recognized at the point of sale.

 

We also produce and distribute pork sausage and a variety of complementary homestyle convenience food items under the Bob Evans and Owens brand names. These food products are delivered to warehouses that distribute to grocery stores throughout the United States. Revenue in the food products segment is recognized when products are shipped to our customers’ warehouses. References herein to 2012, 2011, 2010 and 2009 refer to fiscal years. All years presented are 52-week years, except for 2010, which contained 53 weeks.

 

General Overview

 

The following table reflects data for fiscal 2011, compared to the preceding two fiscal years. The consolidated information is derived from the accompanying Consolidated Statements of Income. The table also includes data for our two industry segments — restaurant operations and food products. The ratios presented reflect the underlying dollar values expressed as a percentage of the applicable net sales amount.

 

 

 

 

The results for fiscal 2011, fiscal 2010 and fiscal 2009 include the impact of the following:

 

 

 

Restaurant Segment Overview

 

The ongoing industry-wide factors most relevant to our restaurant segment include: the economy, sales trends, labor and fringe benefit expenses, commodity prices, energy prices, competition, consumer acceptance, restaurant openings and closings, governmental initiatives, food safety and weather. The factor that had the greatest positive impact on our restaurant segment performance in fiscal 2011 was the improvement of operating wages. The factors that had the greatest negative impact compared to fiscal 2010 were commodity cost pressures, asset impairments and the absence of a 53^rd week of operations.

 

In fiscal 2011, same-store sales decreased 1.0 percent at Bob Evans Restaurants and decreased 4.5 percent at Mimi’s compared to fiscal 2010. We believe same-store sales at our Bob Evans Restaurants are particularly sensitive to economic conditions in the Midwest, which has been hit especially hard by the downturn in the United States’ economy, the troubled auto industry, increased unemployment and lower home values. Nearly 250 Bob Evans Restaurants are located in Michigan and Ohio where the impact of job losses in the automotive industry (manufacturers and suppliers) continue to have an adverse effect on our net sales. We believe the negative same-store sales trend at Mimi’s reflects the challenging economic environment in the casual dining sector, as well as pressures on consumer spending in certain key areas, particularly in California, Arizona, Florida and Nevada, which account for approximately 65 percent of Mimi’s same-store sales. Although same-store sales remained negative, we are encouraged by the sequential quarterly improvement in same-store sales at Bob Evans Restaurants and Mimi’s throughout fiscal 2011, and we are focused on continuing that sales momentum. During the fourth quarter of fiscal 2011, Bob Evans Restaurants saw same-store sales trends turn positive for the first time in the last ten fiscal quarters.

 

Reported restaurant segment operating income was $65.8 million in fiscal 2011 compared to $85.1 million in fiscal 2010, a decrease of $19.3 million. The restaurant segment operating income decrease is primarily the result of

the absence of a 53^rd week of operations, which contributed incremental operating income of $5.7 million in fiscal 2010. The decrease in fiscal 2011 operating income is also the result of a pretax fixed asset impairment charge of $15.0 million in fiscal 2011 for eight underperforming Mimi’s restaurants, three underperforming Bob Evans Restaurants and various other properties.

 

Food Products Segment Overview

 

The ongoing industry-wide factors most relevant to the food products segment include: sow availability and cost, other commodity costs, transportation and energy costs, governmental regulations, food safety, the economy, weather and consumer acceptance. In fiscal 2011, the food products segment’s profitability was positively impacted by an increase in net sales, a decrease in promotional discounts, and cost reductions resulting from our lean manufacturing initiatives, including the closure of two fresh sausage operations in the second quarter of 2011.

 

The food products segment’s net sales increased 1.3 percent in fiscal 2011 compared to fiscal 2010 despite the absence of a 53^rd week, which contributed incremental net sales of $5.5 million in fiscal 2010. Pounds sold of comparable products decreased 8 percent in fiscal 2011 compared to fiscal 2010. We define comparable products as principally sausage and refrigerated side dishes, including mashed potatoes. The financial impact of the volume decrease in comparable pounds sold was more than offset by a significant decrease in promotional discounts as we relied less on promotional spending to move volume. These discounts are recorded as a reduction of net sales in the Consolidated Statements of Income.

 

Sow costs represent a significant component of food products segment cost of sales, and the volatile nature of sow costs greatly impacts the profitability of the segment. Compared to fiscal 2010, average sow costs increased 35.5 percent in fiscal 2011. Despite the significant increase in average sow costs, the cost of sales in the food products segment decreased from 55.4 percent of net sales in fiscal 2010 to 54.7 percent of net sales in fiscal 2011. This was primarily due to both the significant decrease in promotional expenses and a price increase on retail products, which was implemented at the end of the first quarter of fiscal 2011 as a result of the rising commodity cost environment.

 

The food products segment experienced an increase in operating income of $1.5 million, or 7.0 percent, in fiscal 2011 compared to fiscal 2010, and its operating income margin increased to 7.1 percent of net sales in fiscal 2011 compared to 6.7 percent of net sales in fiscal 2010 despite the absence of a 53^rd week, which contributed $1.2 million in operating income in fiscal 2010. This was primarily due to the increase in net sales from fiscal 2010 and the improvement in controlling both the cost of sales and operating wages, as a percent of net sales, in fiscal 2011 by 0.7 percent and 2.0 percent, respectively. The cost controls were primarily a result of our lean manufacturing initiatives in the second quarter of 2011.

 

In fiscal 2010, the food products segment’s operating income increased $5.7 million, or 36.6 percent, compared to fiscal 2009 due to the lower overall cost structure associated with our conversion from the direct-store delivery (“DSD”) distribution model to a warehouse system that occurred mostly in the fourth quarter of fiscal 2009. The food products segment’s fiscal 2010 results were also positively impacted by the 53^rd week of operations, which contributed an incremental $5.5 million and $1.2 million in net sales and operating income, respectively. The food products segment’s operating income margin increased from 5.0 percent of net sales in fiscal 2009 to 6.7 percent of net sales in fiscal 2010.

 

Net Sales

 

Consolidated net sales decreased $49.9 million, or 2.9 percent, in fiscal 2011 compared to fiscal 2010. The fiscal 2011 decrease was the net result of a $54.2 million decrease in restaurant segment net sales, partly offset by a $4.3 million increase in food products segment net sales.

 

Restaurant segment net sales accounted for 80.9 percent of total net sales in fiscal 2011, 81.7 percent of total net sales in fiscal 2010, and 82.2 percent of total net sales in fiscal 2009. The $54.2 million decline in restaurant segment net sales in fiscal 2011 represents a 3.8 percent decrease over fiscal 2010 net sales, which were 1.9 percent lower than fiscal 2009 net sales.

The fiscal 2011 decrease in restaurant segment net sales was the result of both the absence of a 53^rd operating week that contributed $25.8 million of incremental net sales in fiscal 2010 and same-store sales declines. Same-store sales at Bob Evans Restaurants decreased 1.0 percent, 3.5 percent and 0.3 percent in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The same-store sales comparisons for Bob Evans Restaurants included average menu price increases of 1.7 percent in fiscal 2011, 1.9 percent in fiscal 2010 and 3.1 percent in fiscal 2009. Mimi’s same-store sales decreased 4.5 percent in fiscal 2011 and 7.2 percent in both fiscal 2010 and fiscal 2009, including average menu price increases of 2.9 percent, 2.2 percent and 2.4 percent in fiscal 2011, fiscal 2010 and fiscal 2009 respectively. Same-store sales computations, which include refreshes, for a given year are based on net sales of stores that are open for at least two years prior to the start of that year. Net sales of stores 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 stores are excluded for all periods in the same-store sales computation.

 

Carryout represented 9.2 percent of Bob Evans Restaurant net sales in fiscal 2011 compared to 8.2 percent and 7.9 percent in fiscal 2010 and fiscal 2009, respectively. Retail merchandise comprised 1.0 percent of Bob Evans Restaurant net sales in 2011 compared to 1.7 percent and 2.0 percent in fiscal 2010 and fiscal 2009, respectively, as a result of our change in strategy from retail to off-premise sales emphasis. Mimi’s benefited from liquor, beer and wine net sales, which represented 4.0 percent of net sales in fiscal 2011, compared to 3.9 percent and 3.8 percent in fiscal 2010 and fiscal 2009, respectively. Historically, Mimi’s alcohol offerings were limited to beer and wine. We will continue to include a broader selection of alcoholic beverages in all new and remodeled Mimi’s, subject to our ability to obtain the necessary permits and licenses. At the end of fiscal 2011, 90 of Mimi’s stores offered the broader selection of alcoholic beverages and 55 Mimi’s stores offered only beer and wine. Net sales at Mimi’s also benefited from increases in carryout, which represented 4.4 percent, 4.1 percent, and 4.0 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively.

 

The decrease in restaurant segment net sales in fiscal 2011 was also due, in part, to a decline in the number of operating locations: 708 restaurants were in operation at the end of fiscal 2011 compared to 715 in 2010. During fiscal 2011, Bob Evans Restaurants opened 2 new restaurants and closed 8 underperforming restaurants. Mimi’s closed 1 underperforming restaurant during fiscal 2011 and did not open any new restaurants.

 

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

 

Bob Evans Restaurants:

 

Mimi’s:

 

 

We continue to update the appearance of our Bob Evans Restaurants, of which 2 were rebuilt and 33 were remodeled in fiscal 2011. We also remodeled 3 Mimi’s in fiscal 2011. We believe that the enhanced appearance of the restaurants adds to our customers’ experience, which will help same-store sales and continue to strengthen our restaurant concepts. During fiscal 2012, we plan to build 6 new, rebuild 3 and expand our “Taste of the Farm” remodel program to 56 Bob Evans Restaurants. See the “BEST Brand Builders” section for a discussion of our “Taste of the Farm” remodel program. We do not plan to open or rebuild any Mimi’s restaurants in fiscal 2012. We will continue to work our remodel approach at Mimi’s that will conclusively drive sales growth. We are still evaluating the performance of the three Mimi’s we remodeled during fiscal 2011 to determine if the investment meets our return-on-investment expectations.

 

Given the same-store sales declines at Bob Evans Restaurants and the challenging economic environment, a strong product development pipeline, focused marketing message and customer value initiatives take on heightened importance. We are committed to the ongoing development of new homestyle products with a Bob Evans twist to help build same-store sales, such as Big Farm Burgers, tomato basil soup, loaded home fries and hash browns, and Farm-Grill Chicken. We created a Fit from the Farm menu in fiscal 2010. Additionally, we currently offer 25 meals for $5.99 or less at Bob Evans Restaurants. We also added three new incremental layers of net sales at Bob Evans Restaurants. The first is our catering menu, which we launched in the third quarter of fiscal 2010, the second is our family meals, which feed a family of four, and the third is a bakery, which is currently only offered in our remodeled restaurants. See the “BEST Brand Builders” section for further discussion of our sales initiatives.

 

Mimi’s experienced negative same-store sales in fiscal 2011 for the fourth consecutive year. We believe these results continue to reflect our execution issues, the challenging environment in the casual dining sector, as well as pressures on consumer spending in certain key markets, such as California, Arizona, Florida and Nevada, which currently account for approximately 65 percent of Mimi’s same-store sales. We continue to focus our marketing efforts to drive net sales at Mimi’s. Our marketing initiatives to drive net sales include brand/menu item awareness and special offers through our e-club, which has grown its membership from 50,000 members to over 830,000 members in two years, and free standing inserts (“FSIs”). Online ordering is also now available at all Bob Evans Restaurants and Mimi’s locations, and we have also expanded into catering at Mimi’s with our to-go party packs. We are continuing to tighten up our operational activities leveraging our operational strength from Bob Evans Restaurants. In addition, we continue to evaluate initiatives to help reenergize same-store sales at Mimi’s. See the “BEST Brand Builders” section for further discussion of these initiatives.

 

Food products segment net sales accounted for 19.1 percent, 18.3 percent and 17.8 percent of consolidated net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. Food products segment net sales increased $4.3 million, or 1.3 percent, in fiscal 2011 compared to fiscal 2010 despite the absence of a 53^rd week of operations, which contributed incremental net sales of $5.5 million in fiscal 2010. Although we experienced an 8 percent decrease in the volume of comparable products sold (calculated using the same products in both periods and excluding newer products), the impact of this decrease was more than offset by a $30.7 million decrease in promotional discounts.

The overall increase in food products segment net sales was driven by the significant decrease in promotional discounts, partially offset by an 8 percent decrease in comparable pounds sold. We plan to continue our strategy of growing through successful product introductions and additional points of distribution. We continue to make progress in penetrating supercenter retail stores, which provides another high-volume net sales channel for our food products. At the end of fiscal 2011, Bob Evans and Owens brand products were available for purchase in grocery stores in 50 states, the District of Columbia, the Toronto, Canada area and parts of Mexico. See the “BEST Brand Builders” section for further discussion of new products and distribution.

 

Food products segment net sales increased $4.3 million, or 1.4 percent, in fiscal 2010 versus fiscal 2009. The fiscal 2010 net sales increase was reflective of a 7.0 percent increase in the volume of comparable products sold, as well as the impact of a 53^rd week of operations, which contributed $5.5 million of incremental net sales.

 

Cost of Sales

 

Consolidated cost of sales (cost of materials) was 30.4 percent, 29.9 percent and 30.7 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively.

 

In the restaurant segment, cost of sales (predominantly food cost) was 24.7 percent, 24.2 percent and 25.1 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The increase in restaurant segment cost of sales in fiscal 2011 was attributable to higher commodity costs, partially offset by the implementation of an actual-versus-theoretical food cost program at Bob Evans Restaurants during the fourth quarter of last year and at Mimi’s during the second quarter of this year. See the “BEST Brand Builders” section for further discussion of our productivity initiatives.

 

The improvement in restaurant segment cost of sales in fiscal 2010 compared to fiscal 2009 was attributable to lower commodity costs, mix shifts to higher-margin products and lower costs resulting from effective supply chain management.

 

Food products segment cost of sales was 54.7 percent, 55.4 percent and 56.4 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The fiscal 2011 versus fiscal 2010 comparison is favorable in spite of the significant increase in sow costs, which averaged $57.17, $42.18 and $44.93 per hundredweight in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The fiscal 2011 sow cost average represented a 35.5 percent increase compared to fiscal 2010, and the fiscal 2010 average represented a 6.1 percent decrease compared to fiscal 2009. The fiscal 2011 increase in sow costs was more than offset by both the significant decrease in promotional expenses and price increases on retail products. We expect that sow costs will average approximately $60 to $65 per hundredweight in fiscal 2012, which will place significant pressure on our operating margins.

 

The decrease in food products segment cost of sales in fiscal 2010 versus fiscal 2009 was primarily due to the decrease in sow costs, which was partly offset by deleverage from increased promotional discounts and a mix-shift from fewer manufactured items to more co-packed items, which are products we purchase from third parties for sale under our brand names (e.g. mashed potatoes, frozen entrees, etc.). Co-packed items have a higher cost of sales than our manufactured sausage products, because of the costs payable to the co-packers to manufacture the products.

 

Operating Wage and Fringe Benefit Expenses

 

Consolidated operating wage and fringe benefit expenses (“operating wages”) were 33.3 percent, 34.7 percent and 34.3 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively.

 

In the restaurant segment, operating wages were 38.8 percent of net sales in fiscal 2011, compared to 39.8 percent and 39.3 percent in fiscal 2010 and fiscal 2009, respectively. The fiscal 2011 decrease in the operating wages ratio was due to a reduction in labor hours and lower health insurance costs, partially offset by weather-related inefficiencies during the third quarter and negative leverage due to same-store sales declines at both Bob Evans Restaurants and Mimi’s. See the “BEST Brand Builders” section for further discussion of labor management.

The fiscal 2010 increase in the operating wages ratio was due to deleverage from lower same-store sales at Bob Evans Restaurants and at Mimi’s, higher health insurance claims and minimum wage increases partially offset by lower restaurant manager bonuses and labor hours.

 

In the food products segment, operating wages were 10.2 percent, 12.2 percent and 11.4 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The fiscal 2011 decrease in the operating wages ratio was primarily due to headcount reductions resulting from our lean manufacturing productivity initiatives, including the closure of the Galva, Illinois, sausage manufacturing facility and our fresh sausage operations in Bidwell, Ohio. The fiscal 2010 increase was primarily due to additional expenses associated with increased production at our Sulphur Springs, Texas, manufacturing facility and overtime labor hours in an effort to meet shipment demand for key accounts, particularly during the third quarter.

 

Other Operating Expenses

 

Approximately 94 percent of other operating expenses (“operating expenses”) occurred in the restaurant segment in fiscal 2011, the most significant components of which were utilities, advertising, restaurant supplies, repair and maintenance, rent, nonincome based taxes and credit card processing fees. Consolidated operating expenses declined to $270.7 million in fiscal 2011 from $276.5 million in fiscal 2010, which declined from $280.4 in fiscal 2009. Consolidated operating expenses were 16.1 percent of net sales in fiscal 2011 and 16.0 percent of net sales in both fiscal 2010 and fiscal 2009. Restaurant segment operating expenses were 18.8 percent of net sales in fiscal 2011 and 18.4 percent of net sales in both fiscal 2010 and fiscal 2009. The fiscal 2011 increase in the other operating expenses ratio was primarily the result of increased advertising, higher utility costs, negative leverage from the sales decline and higher debit/credit card processing fees, partly offset by a reduction in restaurant supplies. The restaurant segment other operating expenses for fiscal 2010 compared to fiscal 2009 were stable as the deleverage impact from lower same-store sales was offset by lower utilities and preopening expenses.

 

Food products segment other operating expenses as a percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009 were 5.1 percent, 5.3 percent and 4.9 percent, respectively. The decrease in the operating expense ratio in fiscal 2011 compared to fiscal 2010 was primarily the result of efficiencies gained from our lean manufacturing productivity initiatives and lower repair and maintenance expenses, which also benefited from the closure of the Galva, Illinois, sausage manufacturing facility and our fresh sausage operations in Bidwell, Ohio. The increase in the operating expense ratio in fiscal 2010 compared to fiscal 2009 was due to additional expenses associated with the expansion of our Sulphur Springs, Texas, manufacturing facility, as well as deleverage from increased promotional discounts.

 

Selling, General and Administrative Expenses

 

The most significant components of S,G&A expenses are wages and fringe benefits, advertising expense, food products transportation costs, gains/losses on asset sales and fixed asset impairment charges. Consolidated S,G&A expenses represented 9.9 percent, 8.3 percent and 8.8 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The primary driver of the S,G&A increase for fiscal 2011 versus fiscal 2010 was an increase in severance costs and fixed asset impairment charges.

 

In the restaurant segment, S,G&A expenses were 7.5 percent, 6.3 percent and 6.5 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. S,G&A expenses were negatively impacted in fiscal 2011 by charges related to fixed asset impairments of $15.0 million for eight underperforming Mimi’s restaurants, three Bob Evans Restaurants operating locations and nine other properties. In fiscal 2010, S,G&A expenses were affected by fixed asset impairment charges of $6.2 million and the benefit of life insurance proceeds of $2.5 million.

 

In the food products segment, S,G&A expenses were 19.7 percent, 17.4 percent and 19.7 percent of net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. S,G&A expenses were negatively impacted in fiscal 2011 by consulting expenses of $3.4 million, and $2.8 million in restructuring charges, both associated with lean manufacturing productivity initiatives. Fiscal 2010 S,G&A expenses were reduced by converting the food products segment from a DSD system to a more efficient warehouse distribution system and $1.4 million in pretax gain on the sale of 49 percent of our corporate aircraft.

Depreciation and Amortization

 

Depreciation and amortization (“D&A”) was 5.0 percent, 4.9 percent and 4.7 percent of consolidated net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. Restaurant segment D&A was 5.4 percent, 5.3 percent and 5.1 percent of restaurant net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The fiscal 2011 increase as a percentage of restaurant net sales is primarily due to the fiscal 2011 capital expenditures and negative leverage from declining same-store sales. The fiscal 2010 increase as a percentage of restaurant net sales is primarily due to the fiscal 2010 capital expenditures and declining restaurant net sales. Food products segment D&A was 3.2 percent, 3.0 percent and 2.6 percent of food products net sales in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The fiscal 2011 increase as a percentage of food product net sales is due to fiscal 2011 capital expenditures and relatively stable food products net sales. The fiscal 2010 increase as a percentage of food products net sales is due to the fiscal 2010 capital expenditures, primarily for a 50,000-square foot expansion at our plant in Sulphur Springs, Texas, and relatively stable food products net sales.

 

Goodwill and Other Intangibles Impairment

 

We are required to assess the carrying value of our goodwill and other intangible assets annually or whenever circumstances indicate that a decline in value may have occurred. Based on our consolidated stock valuation relative to our book value, a scaled-back Mimi’s development plan and continued same-store sales at Mimi’s, we determined that indicators of potential impairment were present during the third quarter of fiscal 2009. As a result, we performed interim impairment tests of goodwill and intangible assets with indefinite lives.

 

The result of our impairment test in fiscal 2009 of the unamortized Mimi’s business trade name asset indicated that the asset had a fair value of $34.0 million, compared to its carrying value of $45.8 million. This resulted in a pretax impairment charge related to the business trade name of $11.8 million in the restaurant segment in the third quarter of fiscal 2009. The fair value of the business trade name was estimated using the relief-from-royalty method, an income approach to valuation.

 

We also performed an interim test in fiscal 2009 to determine if the carrying amount of goodwill was impaired. The results indicated that the carrying value of Mimi’s goodwill of $56.2 million was fully impaired. Therefore, we recorded a pretax goodwill impairment charge in the restaurant segment in the third quarter of fiscal 2009 for the entire $56.2 million. The fair value of the Mimi’s reporting unit was estimated based on a discounted cash flow model using our business plans and projections for Mimi’s as the basis for expected future cash flows. We believe the assumptions used for the impairment test are consistent with those that a market participant would use.

 

We also reviewed the Mimi’s restaurant concept asset for impairment in the third quarter of fiscal 2009. This asset is being amortized over a 15-year life. The estimated fair value of the restaurant concept, calculated using a relief-from-royalty method, exceeded its carrying value and therefore, no impairment charge was recorded related to this asset.

 

There were no goodwill and other intangibles impairment charges in both fiscal 2011 and fiscal 2010.

 

Interest

 

Net interest expense was as follows:

 

The decrease in net interest expense in fiscal 2011 was primarily the result of lower average borrowings in fiscal 2011 as compared to fiscal 2010. We reduced our total debt by $40.9 million during fiscal 2011. At April 29, 2011, our outstanding debt included $149.3 million of fixed-rate unsecured senior notes and the balance on our variable-rate revolving lines of credit was $0. A change in market interest rates will not impact interest expense associated with our fixed-rate debt.

 

The decrease in net interest expense in fiscal 2010 was also the result of lower average borrowings during the year compared to fiscal 2009.

 

Provision for Income Taxes

 

The effective federal and state income tax rates were 32.0 percent, 27.0 percent and 29.4 percent (excluding the nondeductible goodwill impairment charge, discussed earlier) in fiscal 2011, fiscal 2010 and fiscal 2009, respectively. The 5.0 percent increase for fiscal 2011 is primarily due to the favorable impact of settlements with certain state taxing authorities that were received during fiscal 2010. The 2.4 percent decrease for fiscal 2010 is attributable to both an increase in the cash surrender value of company owned life insurance policies and life insurance proceeds received during fiscal 2010.

 

Liquidity and Capital Resources

 

Cash generated from both the restaurant and food products segments was used as the main source of funds for working capital, capital expenditures, debt repayments, dividends and share repurchases in fiscal 2011. Cash and equivalents totaled $57.7 million at April 29, 2011.

 

In the second quarter of fiscal 2009, we completed a private placement of $70 million in senior unsecured fixed-rated notes. These notes were issued in two series. The $40 million Series A senior notes bear interest at 6.39 percent and mature on July 28, 2014, with a mandatory prepayment of $20 million due on July 28, 2012. The $30 million Series B senior notes bear interest at 6.39 percent and mature on July 28, 2013. The net proceeds from the notes we issued in fiscal 2009 were used to repay outstanding debt under existing bank credit facilities and to repay a portion of our outstanding senior notes issued in fiscal 2004.

 

Bank lines of credit were increased to $180.0 million in December 2007 as a temporary measure to provide additional credit until the $70.0 million private placement of notes was completed. With the completion of the private placement in the second quarter of fiscal 2009, the bank lines of credit were reduced in the third quarter of fiscal 2009 to $165.0 million and again in 2010 to $120.0 million. At April 29, 2011, we had no outstanding balances on these bank lines of credit. At April 30, 2010, and April 24, 2009, $14.0 million and $67.0 million, respectively, were outstanding on these lines of credit. At April 29, 2011, our bank lines of credit available totaled $120.0 million, of which $12.3 million was reserved for certain standby letters-of-credit. The remaining $107.7 million of our bank lines of credit was available for liquidity needs, capital expansion and repurchases of our common stock.

 

In fiscal 2011, we repurchased 0.7 million shares of our outstanding common stock under our share repurchase program at a total cost of $19.0 million. In fiscal 2010 and fiscal 2009, we repurchased 0.7 million and 0.2 million shares of our outstanding common stock, respectively, under our share repurchase program at a total cost of $21.1 million and $5.4 million, respectively. Additionally, dividend payments totaled $23.7 million in fiscal 2011, $20.9 million in fiscal 2010 and $18.4 million in fiscal 2009.

 

Capital expenditures consist of purchases of land for future restaurant sites, new and rebuilt restaurants, production plant improvements, purchases of new and replacement furniture and equipment and ongoing remodeling programs. Capital expenditures were $43.9 million in fiscal 2011 compared to $51.3 million in fiscal 2010. The decrease in capital spending in fiscal 2011 versus fiscal 2010 was due to the decrease in Bob Evans and Mimi’s new openings because restaurant level economics did not meet our return-on-investment target at that point. In fiscal 2011, we opened 2 new Bob Evans Restaurants (as compared to 0 in fiscal 2010 and 1 in fiscal 2009). We also refrained from opening new Mimi’s locations in fiscal 2011 (as compared to 2 in fiscal 2010 and 12 in fiscal 2009).

We expect our capital expenditures for fiscal 2012 to approximate $70.0 to $80.0 million. In fiscal 2012, we plan to build 6 new Bob Evans Restaurants. We also plan to rebuild 3 and remodel 56 existing Bob Evans Restaurants. We do not plan to open, rebuild or remodel any Mimi’s.

 

Future payments of our contractual obligations and outstanding indebtedness as of April 29, 2011, are as follows:

 

 

 

 

We believe that funds needed for capital expenditures, working capital and share repurchases during fiscal 2012 will be generated from both operations and available bank lines of credit. We are evaluating additional financing alternatives. At the end of fiscal 2011, we also had $10.6 million in standby letters-of-credit for self-insurance plans.

 

At April 29, 2011, we had contractual commitments for restaurant construction, plant equipment additions and the purchases of land and inventory of approximately $43.3 million. D&A expenses in fiscal 2012 are expected to approximate $80.0 million to $90.0 million.

 

The amounts of other contingent commercial commitments by expiration period as of April 29, 2011, are as follows:

 

 

BEST Brand Builders

 

In fiscal 2011, we continue to focus on the BEST (Bob Evans Special Touch) Brand Builders. The Brand Builders represent an overall internal approach to managing the company. The five Brand Builders are:

 

 

Winning together as a team focuses on the development of our people. We recognize that tangible assets alone are not going to transform our business. In order to drive operational effectiveness, we need an organizational structure that supports our growth initiatives, rewards results, and has high-visibility leadership and coaching. We need the right talent in the right jobs and to prioritize people development at all levels of the organization.

 

In keeping with these goals, Paul F. DeSantis recently joined our executive team as chief financial officer. Mr. DeSantis brings nearly five years of Public Company Chief Financial Officer (“CFO”) experience to his new position. He came to us from A. Schulman, Inc. (NASDAQ: SHLM), where he served as CFO and treasurer. Prior to that, Mr. DeSantis was vice president and treasurer at Scott’s Miracle-Gro since 2003. He also spent four years at The Kellogg Company, the world’s largest producer of cereals and other convenience foods.

 

In April, we hired Mark Mears as president and chief concept officer of Mimi’s Café. Mr. Mears comes to us from The Cheesecake Factory, where he served as senior vice president and chief marketing officer since 2008. He was also senior vice president of marketing and sales at Universal Studios, executive vice president and chief marketing officer at Blimpie International, and served for six years in various marketing capacities at Pizza Hut. In addition, he has worked for some of the world’s premier ad agencies, including Leo Burnett, DDB Needham and Euro RSCG Retail.

 

Paul Bower also joined our organization during the fourth quarter of fiscal 2011 as our new senior vice president of real estate and development. Mr. Bower served for three years as senior vice president and chief development officer at COSI, where he directed the areas of real estate, construction and facilities, restaurant design and franchise sales. Prior to his time at COSI, Mr. Bower served in a number of roles at McDonald’s, including vice president of real estate for Donatos. Mr. Bower brings expertise in strategic planning, restaurant development, asset management and site selection. Mr. Bower’s knowledge of construction and design will be an essential aspect of our remodel and new restaurant development growth initiatives.

 

Finally, Chris Lambrix joined us in May 2011 as senior vice president of retail business development in our food products segment. Mr. Lambrix headed up the consumer and retail group for AT Kearney, a global strategic consulting firm. Before AT Kearny, Mr. Lambrix was vice president of pricing for the North America retail division at Sara Lee. His experience in sales, operations, manufacturing, procurement, cost reduction and lean initiatives will be paramount to the future growth of our food products segment.

 

Our second Brand Builder is to consistently drive sales growth. Our quarterly sequential same-store sales trend continued to improve throughout the year at both restaurant concepts. At Bob Evans Restaurants, in the fourth quarter of fiscal 2011 we achieved positive same-store sales for the first time in 10 quarters. This was due in large part to our continued efforts to drive off-premise sales through carryout and catering, as well as our spring seasonal offerings and promotions. Looking ahead to this summer, we will be promoting our successful Big Farm Burgers at Bob Evans Restaurants, featuring a half-pound of Black Angus beef, seasoned with our signature spice blend, then stacked with farm-fresh toppings on a wheat-dusted brioche bun. Available in seven different varieties, the Big Farm Burgers range in price from $6.99 to $9.99. We introduced this platform in November 2010, and the consumer response was excellent. We are optimistic that we will see a similar response to the promotion this summer.

 

Another summer promotion will be our new Farm-Grill Chicken, which features four varieties of new chicken sandwiches. We are also currently running a carryout promotion at Bob Evans Restaurants, which we believe has helped grow our off-premise sales during the promotional period.

 

At Mimi’s, we were happy to see the quarterly sequential same-store sales trend continue to improve throughout fiscal 2011. Some of our new seasonal breakfast features at Mimi’s include a granola and mixed-berry parfait, lemon poppy seed pancakes, cinnamon brioche French toast, and a crab cake three-egg omelet with hollandaise, red and green peppers, feta cheese and diced tomatoes. We will also continue Mimi’s seasonal fixed-price lunch menu, which consists of a two-course meal for $10.99, with either a soup or salad starter, paired with one of three entrée choices. And finally, Mimi’s seasonal fixed-price dinner menu consists of a three-course meal for $13.99, with a soup or salad starter and a “petite treat” dessert, with one of the three entrees.

 

In our food products segment, overall net sales increased slightly for both the year and the fourth quarter. The success of our recently completed conversion from a direct-store-delivery, or DSD model, to a warehouse distribution model has resulted in significant store-count growth over the past six years. In 2005, when we

were entirely DSD-focused, we delivered to fewer than 12,000 total stores. Today, our warehouse distribution model serves more than 24,000 stores. Along with the lower cost structure of this new business model, the warehouse distribution system has enabled us to grow sustainable sales, rather than offering temporary price reductions in limited geographies to drive top-line growth. Additionally, the food products segment added nearly 700 new item authorizations during fiscal 2011, including nearly 100 in the fourth quarter. These new authorizations helped offset the decrease in comparable pounds sold that were consistent with trends in the sausage industry.

 

Growth in the side dishes category, which generated mid-single digit percentage growth this year, also drove sales in the food products segment. Recently introduced products within the segment include three new oven-bake side dishes: scalloped potatoes, hash brown bake and macaroni and cheese.

 

The third Brand Builder is to improve margins with an eye on customer satisfaction. The cost-reduction efforts in both of our operating segments were evident during fiscal 2011, as we overcame approximately $30 million in commodity-cost and sow-cost increases to deliver a 40 basis-point improvement in full-year consolidated adjusted operating margins.

 

We estimate that restaurant-segment food cost inflation next year will be approximately 5.5 to 6.0 percent. As a result, we will focus on menu management with lower food costs in mind, and will focus future promotions on higher-margin items such as our seasonal features. Our plan is to keep pricing increases to a minimum, so we can maintain the value proposition that both our restaurant brands offer relative to their competitors. We believe our emphasis on everyday value, rather than discounting, provides us with a key competitive advantage.

 

In food products, we reduced year-over-year promotional spending 41.3 percent and 43.4 percent in the fourth quarter of fiscal 2011 and full year, respectively, in an effort to offset the highest sow costs we have encountered in recent memory. This enabled us to achieve higher segment operating margins than we have seen historically at these sow-cost levels.

 

In addition, our productivity study with AT Kearney helped us implement manufacturing improvements, as evidenced by the respective 540- and 240-basis point reductions in the cost of sales and operating wages lines of the food products segment’s fourth-quarter income statement. Two of these initiatives were the closings of our fresh sausage manufacturing operations in Galva, Illinois, and Bidwell, Ohio, in the second quarter, due to overcapacity in our fresh sausage processing plants.

 

Prior to shutting down the Galva and Bidwell fresh sausage operations, we utilized only about 50 percent of our total fresh sausage capacity. With the lean manufacturing improvements we made at our plants in Hillsdale, Michigan; Xenia, Ohio; and Richardson, Texas; we are now operating at between 60 and 65 percent, which leaves sufficient capacity to support our growth initiatives.

 

Also, our fresh sausage manufacturing capacity is no longer fixed, because we now have the ability to adjust our plants as necessary to quickly accommodate new business as we gain additional retail authorizations. We believe we have the appropriate amount of manufacturing capacity for the present state of our business, with enough room to accommodate our growth plans.

 

Our fourth Brand Builder is to be the BEST at operations execution. We are happy to report that many of our current consumer satisfaction scores for both restaurant brands are either at, or near, all-time highs. We believe this reflects the solid progress we are making with our process-improvement efforts. At Bob Evans Restaurants, our year-over-year Guest Loyalty Index (“GLI”) scores have now improved for nine consecutive quarters in hospitality, food quality and speed of service.

 

At Mimi’s, our GLI scores are also improving in many categories, including hospitality, food quality, and speed of service. However, we lag best-in-class operators, so we still have plenty of opportunity for improvement. That is where we will focus our attention in fiscal 2012. Our new menu, which contains about 20 percent fewer items than the previous one, should go a long way toward helping us reduce complexity, thereby improving our scores in many categories, including speed of service and food quality, while helping to reduce cost.

 

Our fifth and final Brand Builder is to increase returns on invested capital.

We have set our capital expenditures budget for next year at $70 to $80 million, which is almost double our fiscal 2011 level. This will include approximately $25 million for the new restaurants and remodels. We are also happy to be rebuilding the very first Bob Evans Restaurant in Rio Grande, Ohio, which will be part of a larger renovation of the Bob Evans homestead site. In addition, we anticipate expanding the implementation of our automated kitchen management system into 80 total restaurants, including 40 at Mimi’s and 40 at Bob Evans. We expect this system will help us reduce wait times and increase food preparation accuracy.

 

Our capital allocation strategy has enabled us to create considerable shareholder value over the past five fiscal years. From fiscal 2007 to fiscal 2011, we have delivered more than $350 million to our shareholders, including:

 

 

We are driving future growth with our strong balance sheet and operating cash flow. During this same period, we have invested more than $450 million in capital expenditures. We have also reduced our total debt position by half, from $298.5 million at the end of fiscal 2007 to $149.5 million at the end of fiscal 2011.

 

We are pleased with the growing momentum in our food products business. We achieved an impressive year-over-year increase in segment performance, despite historically high sow costs. We are actively exploring growth opportunities for the food products segment, given the high returns of this business and its strategic contribution to our overall profitability and brand equity.

 

We are excited about the results we have seen so far from our Dayton remodel program where we remodeled 28 Bob Evans Restaurants during the third and fourth quarters of fiscal 2011, as well as with the initial results in our newest restaurants, giving us confidence in our Bob Evans Restaurant expansion. We have lowered our remodel costs to approximately $250,000 to $300,000 per unit, and, as a result, we are expanding our “Taste of the Farm” remodel program to 56 additional restaurants, including 44 in the Detroit, Michigan, and Toledo, Ohio, markets. The new and remodeled restaurants feature a fresher, brighter color scheme, a new “Taste of the Farm” bakery, a dedicated carryout area, gift card displays, a redesigned retail area and a mural depicting the heritage of the Bob Evans brand.

 

We are also beginning to see improved unit economics with our new restaurants. We are excited about the early results from the two new Bob Evans Restaurants we recently opened in Jacksonville and Panama City, Florida, and we expect to build six new Bob Evans Restaurants next year as the first step toward returning to more meaningful development in future years. We are confident we have the right team in place to continue the success of our restaurant growth initiatives.

 

In summary, we remain focused on the five BEST Brand Builders and continue to implement them with a sense of urgency.

 

Business Outlook

 

We expect earnings per share of approximately $2.36 to $2.44 in fiscal 2012. We also estimate our average annual earnings growth rate will be in the range of approximately 7 to 10 percent over the next five years.

 

This outlook relies on a number of important assumptions, including the risk factors discussed in Item 1A. Risk Factors of this Form 10-K.

 

Particular assumptions for our full-year outlook include the following:

 

Consolidated company highlights

 

 

 

Restaurant segment highlights

 

 

We also expect approximately $2 million in higher year-over-year restaurant remodel expenses, due to the higher number of planned remodels relative to fiscal 2011. We expect to record the majority of this incremental impact in the second quarter, as opposed to the second half of the year in fiscal 2011.

 

Food products segment highlights

 

 

 

As noted in Note 1, “Summary of Significant Accounting Policies,” to our consolidated financial statements which are included in Item 8 of this Annual Report on Form 10-K, we do not use derivative financial instruments for speculative or hedging purposes. We maintain our cash and cash equivalents in financial instruments with maturities of three months or less when purchased.

 

At April 29, 2011, our outstanding debt included $149.3 million of fixed-rate unsecured senior notes and the balance on our variable-rate revolving lines of credit was $0. A change in market interest rates will not impact interest expense associated with our fixed-rate debt.

 

We purchase certain commodities such as beef, pork, poultry, seafood, produce and dairy. These commodities are generally purchased based upon market prices established with suppliers. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid and any commodity price aberrations are generally short-term in nature.

 

 

Bob Evans Farms, Inc.

 

Part I — Financial Information

 

Item 1. Financial Statements

 

Consolidated Balance Sheets

 

 

The accompanying notes are an integral part of the financial statements.

Consolidated Statements of Income
Years Ended April 29, 2011; April 30, 2010; April 24, 2009