Bob Evans: Stay on the Farm!

Just as city slickers wouldn't know how to run a ranch, cowboys should keep to their cattle. That's why Bob Evans Farms (Nasdaq: BOBE  ) , known for its breakfast sausage and homestyle restaurants, should ditch Mimi's Cafe and stick to what it knows. Otherwise, Bob Evans will struggle to keep growing in the future -- as will its stock price.

Bonjour, Mimi's Cafe
Bob Evans acquired Mimi's Cafe, a French-inspired set of bistros, in 2004 to access new markets with a trendier concept and help bump sales figures. Now, Mimi's Cafe makes up roughly one quarter of Bob Evans' total sales. The restaurant proudly invites you to "Come Enjoy a Taste of France." A taste of France? What does Bob Evans know about France? Those queries aside, there's one question that concerns shareholders the most: How does Bob Evans know how to operate a completely different restaurant?

Au revoir, growth
It doesn't, according to same-store sales, a key metric that measures sales growth at existing locations. While Bob Evans restaurants' same-store sales have fallen slightly, which is comparable to competitors like Cracker Barrel Old Country Store (Nasdaq: CBRL  ) and DineEquity's (NYSE: DIN  ) Applebee's, Mimi's Cafe has consistently posted losses of 4% or more each of the past three years:

Restaurant	2011	2010	2009
Bob Evans	(1.0%)	(3.5%)	(0.3%)
Mimi's Caf�	(4.5%)	(7.2%)	(7.2%)
Cracker Barrel	0.2%	0.8%	(1.7%)
Applebee's	2.3%	.3%	4.5%

Sources: Most recent 10-Ks for Bob Evans, Cracker Barrel, and DineEquity.

And according to Bob Evans' latest quarterly report, same-store sales dove another 4.8% at Mimi's Cafe.

Surprisingly, Bob Evans' total returns (including dividends) since buying Mimi's Cafe have kept up with competitors and beaten the market:

Company	Total Returns Since July 1, 2004
Bob Evans Farms	40.28%
Cracker Barrel Old Country Store	60.71%
DineEquity	38.63%
SPDR S&P 500	25.82%

Source: YCharts.com.

But with Mimi's continual decline, I don't think Bob Evans will keep up returns for long. Every customer that leaves Mimi's puts more pressure on already-thin restaurant margins, lowers the potential return for each Mimi's Cafe location, and will likely drag down the earnings per share.

Bob Evans' Waterloo
Management is obviously having trouble with Mimi's Cafe, but why? Beyond the differences in food, there are fundamental strategic problems that Bob Evans must either solve -- or pass on to a new owner:

Providing an upscale experience. A Bob Evans restaurant customer enjoys feeling at home while dining out -- at a reasonable price. A typical Mimi's Cafe bill is about 25% more than Bob Evans, and customers want an upscale experience to match the bill while dining out. Management must ensure customers receive this upscale experience, despite the fact that its bread-and-butter is still the down-home country feel of Bob Evans.

Leasing versus owning restaurant locations. Bob Evans owns a majority of its branded restaurants, while it leases almost every Mimi's Cafe space. Bob Evans has less experience negotiating favorable terms with property managers, and has to determine if it is worth renovating spaces that it doesn't own.

Serving alcohol. Bob Evans restaurants do not sell alcohol, but a majority of Mimi's Cafes have liquor licenses. While liquor sales are increasing at Mimi's, their slow climb from 3.8% of sales to 4% of sales still dramatically trails the industry average of 12%. There is also the added expense of special server training and liability coverage which Bob Evans must absorb at these locations. Bob Evans may have to encourage Mimi's locations to promote drinks, but given the former's unfamiliarity with selling alcohol, and recently weak performance at Mimi's locations, Bob Evans doesn't appear to be handling this very well.

These are only a few problems that I see in Bob Evans running a French bistro. If it can turn around the customers that are fleeing Mimi's Cafe, the stock, with its healthy dividend yield of 3%, might be worth a closer look -- especially with increased sales in its sausage and convenience foods. Keep an eye on the next quarterly report, and look for those same-store sales numbers. Until it does improve those numbers, I think Bob Evans' stock price will begin to lag behind the industry.

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