Bob Evans Farms F3Q08 (Qtr End 10/27/07) Earnings Call Transcript

Bob Evans Farms, Inc. (BOBE)

F3Q08 Earnings Call

November 13, 2007 10:00 am ET

Executives

David Poplar – Vice-President Investor Relations

Steven Davis – Chairman and Chief Executive Officer

Donald Radkoski – Chief Financial Officer

Analysts

Conrad Lyon – FTN Midwest

Stephen Anderson – MKM Partners

Amy Vinson – Avondale Partners

Brad Ludington – KeyBanc Capital

Michael Gallo – CL King

Presentation

Operator

I would like to welcome everyone to the Bob Evans Farms second quarter conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host Dave Poplar, Vice-President of Investor Relations. Sir, you may begin your conference.

David Poplar

Good morning and thank you for joining us today for the Bob Evans second quarter 2008 conference call. This is Dave Poplar and I’m here with Stephen Davis, Chairman of the Board and Chief Executive Officer, as well as Don Radkoski, our Chief Financial Officer.

We have some prepared remarks and then we’ll open up the call for questions. Let me first remind you that our comments today contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include projections regarding anticipated future results, including estimates for growth. A number of risks and uncertainties could cause actual results to differ materially from these forward-looking statements. Please refer to our recent earnings release and filings with the Securities and Exchange Commission for discussion of these risk factors.

We caution investors not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. We undertake no obligation to update our forward-looking statements to reflect future events or circumstances.

With that, I’ll now turn the call over to Steve.

Steven Davis

Thanks, Dave. Good morning, everyone, and thanks for joining us as we discuss our second quarter financial results. I’m going to start with a few highlights and then Don will provide us with the financial details on the quarter. After that I’ll have an update on the progress of our best brand builders and then we’ll be happy to take your questions.

Reported diluted earnings per share for the quarter were $0.45 compared to $0.37 a year ago. This represents a 21.6% increase.

Bob Evans Restaurants have now delivered positive same-store sales for five consecutive quarters. We’re happy with the improved operating results and the positive sales at Bob Evans Restaurants. While we have seen some softening of same-store sales against tough counts lately, we believe the turnaround is sustainable due to our expanded pipeline of new products, more effective marketing, and an increased focus on customer service in our restaurants. As evidence of this, we generated a solid increase in operating margins at Bob Evans Restaurants in the second quarter.

At Mimi’s Cafe same-store sales were down for the second consecutive quarter, which reflects to continued challenging environment in the casual dining sector as well as pressures on consumer spending due to weaknesses in the housing market in certain areas. Especially in California, Arizona, Florida, and Nevada; states that are home to almost 80% of Mimi’s restaurants. Most of Mimi’s new restaurants continue to produce AUDs above the system’s average, but we’re obviously not happy with the performance at Mimi’s over the last two quarters and we remain focused on fixing sales and profits, especially in our core restaurants.

Finally, we had another strong quarter in our food product segment with a 5.5% overall sales increase and a healthy 79% increase in operating income. The operating income improvement resulted from the sales increase, an unexpected reduction in hog prices, and a shift in timing of advertising expenses. All of which Don will explain in more detail now as he reviews the quarter’s financial highlights.

I’m going to now turn it over to Don Radkoski, our CFO.

Donald Radkoski

Okay. Thanks, Steve, and good morning, everyone. Overall, we are pleased with our performance in the quarter at the operating level. Consolidated net sales for the quarter were $426.3 million, up 3.3% from $412.7 million in last year’s second quarter. The increase primarily reflects improved same-store sales at Bob Evans Restaurants, new restaurant openings at Mimi’s Cafes, and strong sales in the food products segment.

Cost of sales was $128 million or 30% of net sales in the second quarter 2008 compared to $121 million or 29.3% of net sales in the second quarter of 2007. This increase is the result of higher costs for commodities in the restaurant segment that more than offset the decreased raw material costs in our food products segment.

Operating wages were $149.5 million or 35.1% of net sales in the second quarter of 2008 compared to $149 million or 36.1% of net sales in the second quarter of 2007. This improvement as a percentage of net sales is a result of effective labour management, as well as leverage from improved same-store sales at Bob Evans Restaurants and sales increases in food products, which helped offset the impact of state minimum wage increases.

Included in SG&A for the quarter were net pre-tax gains of $1 million on the sale of restaurant assets compared to $400,000 in gains recorded a year ago. Also included in SG&A was $700,000 in pre-tax expense for performance-based incentive compensation compared to $1.1 million in the comparable expenses a year ago. SG&A also included a $700,000 benefit from a year-over-year reduction in advertising expense in the food products business due to a shift in timing. As a result of these changes, reported operating income was $26 million compared with $22.3 million a year ago.

Net interest expense for the quarter was approximately $2.7 million compared to $2.4 million a year ago. Pre-tax income was $23.3 million compared to $20 million a year ago. And the tax rate was 33.6% compared to 32.5% a year ago.

In reporting net income for the second quarter was a $15.5 million compared to $13.5 million a year ago.

Diluted average shares outstanding were $34.4 million compared to $36.7 million in last year’s second quarter. During the second quarter we repurchased approximately 1 million shares for a total of 2 million shares repurchased for the year. This leaves us with an authorization to buy back about 1 million additional shares over the balance of fiscal 2008.

As Stephen mentioned, reported EPS was $0.45 compared to $0.37 one year ago. The $0.45 this year includes pre-tax gains on asset sales of $1 million or approximately $0.02 per share, while the $0.37 last year includes pre-tax gains on asset sales of $400,000 or about $0.01 per share.

Turning to the business segments. Net sales in the restaurant segment were $356.2 million, a 2.8% increase from a year ago. Same-store sales at Bob Evans were up 0.7% for the quarter with a 4.3% increase in August, a 0.4% increase in September, and a 1.9% decrease in October. Average menu prices at Bob Evans were up 2.3% in the second quarter.

At Mimi’s Cafe same-store sales were down 1.5%. By month, Mimi’s was down 1.9% in August, down 2% in September, and down 0.8% in October. Average menu prices at Mimi’s were up 3.8%.

The restaurant segment’s reported operating income was $19.8 million compared to $18.9 million in the second quarter last year; a 4.8% increase. The improvement was mainly due to effective cost management, mostly in labour hours, which more than offset the higher commodities and minimum wage increases.

Food costs were once again our biggest challenge during the quarter as restaurant food costs were 25.6% of sales, up 80 basis points from 24.8% in last year’s second quarter. As expected, we saw a general rise across the board in a wide variety of commodities.

Labour costs were 39.7% of sales, down from 40.8% a year ago. Those concepts made excellent progress in adjusting our labour scheduling to eliminate hours by using team service for the second consecutive quarter. This initiative helped offset the negative impact from the state minimum wage increases earlier this year.

Other operating costs in our restaurant segment were 18.5%, up slightly compared to 18.4% one year ago. SG&A expense was 5.8%, roughly flat compared to the second quarter of fiscal 2007. Depreciation and amortization expense also was approximately flat as a percentage of sales.

The food products segment had another great quarter with total net sales of $70.1 million, a 5.5% increase from a year ago. Comparable pounds sold were up 2% on top of an 11% increase achieved in last year’s second quarter.

The segment’s operating income of $6.1 million was up 79% from a year ago. However, the results benefitted from the $700,000 reduction in advertising expense I mentioned earlier, which is primarily timing related. We expect most of the reduction in this quarter to be offset by increases later in the fiscal year, primarily in the third quarter.

Hog costs in our sausage business averaged $40 per hundred weight for the quarter, down slightly from $41 average a year ago. Although hog costs have trended lower lately, we continue to expect sow prices to be somewhat higher in fiscal 2008 than they were a year ago.

As we noted in our press release, we are re-affirming our guidance for fiscal 2008 diluted reported earnings per share of $1.77 to $1.84. This includes the anticipated impacts of gains on real estate sales of approximately $4 million to $5 million.

We continue to project restaurant operating margins for the year slightly above the fiscal 2007 level due primarily to our productivity initiatives and improvement in our labour costs during the year. We also expect to see product margins slightly above last year’s with continued strong growth in pounds sold and hog costs averaging in the $40 to $45 range.

As we noted in the release, we have now bought back 2 million shares during the year and we still have authorization to buy back an additional 1 million shares in the fiscal year. Depending on market conditions, we may take advantage of this authorization.

We’re projecting net interest expense of approximately $10.5 million, up from $9 million in fiscal 2007. Our best estimate for the effective tax rate is approximately 33.3% for the year. However, a number of factors mostly related to state income taxes could affect this rate.

We continue to project average diluted shares outstanding in the range of 34.8 million to 35 million for the year.

Capital spending was $34 million for the quarter and $62 million for the year to date. We are continuing to target capital expenditures for the year of about $100 million or slightly greater because of the higher-than-expected number of Mimi’s opening. But still significantly below our high of about $140 million in fiscal 2004 and 2005.

We remain focused on expanding Mimi’s and our food products distribution, but expect to open only two Bob Evans Restaurants in fiscal 2008.

Turning to the balance sheet, cash at the end of the quarter was about $11 million. Total debt was about $245 million compared with stockholders equity of $665 million. And now I’ll turn it back over to Steve.

Steven Davis

Thanks, Don. For the past year and a half we have been focused on our overall internal approach to managing the company, which we have referred to as our best brand builders. We developed the brand builders to unlock the national growth potential of our premium regional brands. We continue to focus on driving these same five key objectives. We have made significant progress, but we still have untapped opportunities.

As a reminder, the five brand builders are: Win together as a team; consistently drive sales growth; Improve margins with an eye on customer satisfaction; Be the best at operations execution; and finally, Increase returns on invested capital. I’d like to quickly review our progress in each of these key areas.

Winning together as a team means getting everyone in the company strategically aligned and focused on the same common goals. As a public company, winning translates into earnings per share and we improved our results over the past year. We have implemented company-wide productivity initiatives, including procurement and purchasing consolidation under the leadership of Richard Hall. We’ve had success with corrugated, cheese, bacon, menus, and cartons, just to name a few items. By going to market as Bob Evans, Inc., we are achieving significant savings.

The second brand builder is to consistently drive sales growth. We are pleased that Bob Evans Restaurants has now achieved five consecutive quarters of positive same-store sales. While we had a soft October versus challenging comps, we are optimistic about the sales driving potential of our current promotion -- new deep-dish dinners – which is the latest in a consistent string of compelling new products made with a home-style Bob Evans twist.

At Mimi’s Cafe we experienced our second straight quarter of negative same-store sales in a challenging casual dining environment. We remain focused on leveraging our popular seasonal menus, which command the premium price point relative to the everyday menu. Recently we just launched our new service module, which calls for more effective suggestive selling. Mimi’s historically has done an excellent job of introducing exciting new menu items and we are now working on instituting a more formalized product development approach to create a new product pipeline calendar.

In food products, our sales momentum remains very strong, thanks in large part to our new product innovations. We’ve recently introduced four varieties of oatmeal bowls, mashed sweet potatoes, a new green bean casserole, new home-style stuffing, glazed apples, slow-roasted pork chops, a new maple and biscuit sausage sandwich, as well as our new pigs-in-a-blanket.

Another way we’re building sales in food products is by adding new points of distribution. So far in fiscal 2008 we have added 652 new points of distribution. We continue to gain market share in our key categories, as well.

The third brand builder is to improve margins with an eye on customer satisfaction. Our restaurant margins were up slightly in the quarter as we have managed labour hours in our restaurants without sacrificing our speed of service or customer satisfaction.

Our current pilot of a new point-of-sale system at Bob Evans is now in two restaurants and is going well. After the holiday season we’ll role it out to two more restaurants and then we’ll put together an implementation plan for a full rollout beginning in the winter of 2008. This will help us simplify our order entry, achieve more precise labour scheduling, and compare our food costs with theoretical food cost standards. Keys to continually improving our margins.

Our efforts to reduce costs at Mimi’s Cafe have taken on a greater sense of urgency with the recent softening of sales. Mimi’s made improved progress on managing labour costs during the second quarter, but we believe we have further opportunity to reduce unproductive labour hours and pre-opening costs, as well as better manage inventory and discretionary spending. We anticipate announcing new leadership at Mimi’s before the end of calendar year of 2007. Driving positive same-store sales and improving profitability will be the primary focus of the new president and the entire Mimi’s team.

In food products we put more systems and discipline in place around key variable expenses, such as improving hog yields, reducing plant costs, and returns and allowances. Our margins also received an unanticipated benefit from lower than expected hog costs in the second quarter.

Our fourth brand builder is to be the best at operations execution. At Bob Evans team service has been a key to managing labour hours without compromising service levels. We also continue to work on employee retention, which is one of the keys to customer satisfaction.

We also believe the new point-of-sale system will be a helpful tool to attract and retain employees as it is considerably easier to learn than the manual process we use today. We’re also implementing an applicant tracking system to help improve our hiring processes and improved retention as well.

Now from an operations standpoint at Mimi’s Cafe, we’re expanding our carry out and curb-side to-go capabilities and we also continue to evaluate our full-bar expansion. We now have converted or opened 35 of our restaurants with full-service bars and we’ve also completed one retrofit construction project with another one currently under way. We will evaluate the incremental fails from these two retrofits to determine whether further expansion makes sense.

Our fifth and final brand builder is to increase returns on invested capital. Mimi’s remains our current restaurant growth vehicle for the near term and we are continuing to target a unit expansion pace of approximately 15% annually with 17 new Mimi’s Cafes this year.

We are planning in building two new Bob Evans units in fiscal 2008, along with eight rebuilds. And as we’ve stated in the past, we are not going to open large numbers of new Bob Evans Restaurants again until projected returns improve.

Non-food products we have completed a 65,000 square foot expansion of our Springfield distribution center, which has doubled its capacity and is making us much more efficient at peak production times, such as the up-and-coming holiday season.

We are currently paying a quarter cash debit at $0.14 per share and, while our board believes the current dividend is appropriate when we view our yield and pay-out ratio versus our peers, we will continue to re-assess our dividend policy on a regular basis.

Finally, as Don noted, we have already repurchased about 2 million shares under our stock repurchase program for fiscal 2008. Our total authorization from the board for 2008 is for 3 million total shares, which means we still have the ability to buy back approximately 1 million additional shares over the rest of the year, depending upon market conditions. That is likely to be the primary use of our surplus cash flow.

With that summary we’d like to open up the call and now take any questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Conrad Lyon of FTN Midwest.

Conrad Lyon – FTN Midwest

Hey, good morning, everybody.

---Interjection

Good. Nice quarter there. My first question stems around labour. Can you speak to exactly what occurred to create the efficiencies?

Steven Davis

Yeah, Don, I’ll take that one.

Donald Radkoski

Okay.

Steven Davis

Two things. And this is actually something we’ve been working on for the better part of a year, so it’s not like this just happened over the past quarter. There are two key initiatives that we’ve been working on. One is a new labour management system that has done a much more effective job of helping us better understand when our business comes and how to align scheduling with that.

The second change is something that we’re calling team service. After looking at our consumer comments we found that there was some dissatisfaction occurring because we weren’t serving our customers fast enough. In the past we used to have just one person manning particular areas. Now what we’ve done is we’ve moved to something we’re calling team service where everybody on the floor is responsible for taking care of a customer, whether it’s in their section or not. And this is something that Mimi’s has been doing effectively for many years. So it worked well at Mimi’s, so we’ve adapted it over at Bob Evans, which is a great illustration of winning together as a team and identifying best practices in one part of the company and then moving them to another.

Conrad Lyon – FTN Midwest

Okay. So it basically sounds like fewer labour hours on the hourly side.

Steven Davis

Sorry?

Conrad Lyon – FTN Midwest

It sounds like you have fewer labour hours on the hourly side.

Steven Davis

Well, the answer is yes, but what we’re also doing is we’re making sure that we’re not just cutting labour hours for the sake of cutting labour hours. We’re lining up our business and our labour scheduling with when the business occurs and when the business isn’t there we’re doing a better job of managing those non-peak periods.

Conrad Lyon – FTN Midwest

Gotcha. Okay.

Donald Radkoski

The shoulder hours between, you know, the transition between kind of the peak periods you have and scheduling our associates in the mornings and certainly out. It’s important to maximize, I guess, the best use of those hours. So having full staff when the restaurants are full. I think that’s the goal in our scheduling.

Conrad Lyon – FTN Midwest

Gotcha. So working smarter. Yeah. Nice job. Okay. Big benefit, at what point or how much further out do you think you’re going to have similar benefits going forward?

Donald Radkoski

Well, we have to continue the labour and really the entire productivity initiative throughout this year. Really, as we look at it, it needs to keep going as we move into 2009 because clearly on the cost side of things commodity prices just continue to be, as we noted in the release, difficult and there’s not, it seems like, in the short term anyway, there’s not a reduction there coming. So we’ve got to stay and we’re planning on continuing to roll out these initiatives and be smart about labour and go from there. Do you have anything to add, Steve?

Steven Davis

You know, like Don said, this is something you have to stay after and we now have a team that’s focused 100% against staying where we have opportunity and, more importantly, putting systems and procedures in place to make sure that we deliver the customer satisfaction in addition to any potential productivity.

Conrad Lyon – FTN Midwest

Yeah, gotcha. Okay. Let me shift over to G&A, and this is more just a bookkeeping question. The gain, was that all on the restaurant side? That $1 million gain?

Donald Radkoski

Yes.

Conrad Lyon – FTN Midwest

Okay.

Donald Radkoski

Yes, that was all on the restaurant side.

Conrad Lyon – FTN Midwest

Yeah. All right. I hate asking these kind of nitpicky questions with sales, but all this fear about oil prices moving up and pump prices moving up here in December, here in November, any sense for how that sequential change in pump prices may have impacted sales or are you seeing much of any impact?

Steven Davis

Any time you have lower discretionary spending opportunities for that customer that’s going to put a strain on the consumer pocketbook. Having said that, where our team focuses is on the things that we can control. So when customers come in we’re really trying to make sure that we’re giving them a great experience and we continue to push new product innovation in advertising. And we got a great new product right now, deep-dish dinners, that is starting at $5.99 that seems to be getting some people’s attention. And with the upcoming peak season we think that if people have tighter pocket books they can come into Bob Evans and get a great dinner for $5.99.

Conrad Lyon – FTN Midwest

Yeah. I think that’s going to help you. Okay. Nice job. Thank you very much.

Operator

Thank you. Our next question is coming from Stephen Anderson of MKM Partners.

Stephen Anderson - MKM Partners

Good morning, gentleman, and a great quarter.

Steven Davis

Hi, Steve. Thanks.

Stephen Anderson - MKM Partners

I just wanted to continue on this theme of labour. How many states do you expect to have minimum wage increases in the states you operate in given that next quarter encompasses January and a lot of states will have state minimum wage increases?

Steven Davis

Well, many of the states we operate in will have some minimum wage increases really tied in with inflation. Those increases are expected to be much less significant than the ones that really happened last year, in Ohio in particular, in the Bob Evans system. However, California in the Mimi system will have a fairly significant increase this year on top of a fairly significant increase last year. I think that would be kind of the exception there, you know, with most other states having a fairly moderate inflationary increase.

Stephen Anderson - MKM Partners

And to continue on the labour theme, can you speak at all about progress on the KMS initiatives?

Steven Davis

What was that?

Stephen Anderson - MKM Partners

Can you speak at all on any KMS, kitchen management system initiatives?

Donald Radkoski

Oh, kitchen management system. You want to talk about the POS system test and I’ll talk about some other things?

Steven Davis

Yeah, we are in tests right now in two of our restaurants, in Bob Evans Restaurants, with a new point-of-sale system that will have a lot more reporting and certainly much more, an easier check for sure to, for the goods back to our cooks. Much, from our standpoint I think it will be a much improved system. That will be in test in the third quarter also and then we plan to begin rolling that system out during the fourth quarter and should see, should see some benefit from that next year.

Stephen Anderson - MKM Partners

Okay. Thank you.

Steven Davis

Was that it?

Stephen Anderson - MKM Partners

I think that was it, yes. Oh, just another direction all together. You don’t have any early guidance on what you’re seeing for 2009 openings. Particularly with regard to what you’re seeing in California and Florida, whether that has put you off in terms of opening new Mimi’s Cafes.

Steven Davis

Well, the majority of our openings are probably going to be east of the Mississippi. So we’ll start with that. But then also we’ve opened up some Mimi’s in southern California and central California that have actually beaten the system’s average. So I think it’s more a function of finding good locations and being smart enough about getting ahead of yourself in terms of your people capability. And that’s the key to success to opening restaurants. So even though we haven’t given the forward guidance, we’re still optimistic with Mimi’s openings because we continue to beat the system’s average. If that ever changes we’ll rethink it, but to date that seems to be the case.

Stephen Anderson - MKM Partners

Thank you.

Operator

Thank you. Our next question is coming from Amy Vinson of Avondale Partners.

Amy Vinson – Avondale Partners

Hi, guys. Just a couple of things. First, just kind of on the operations side. Can you give us a breakdown if you saw, on any changes you might have seen in the day part mixes or anything like that at Bob and Mimi’s?

Donald Radkoski

Yeah, I can answer that. Regarding the day part mixes, Bob Evans was essentially the same with breakfast at 32%, lunch at 36%, and dinner at 32%. Mimi’s was 20% breakfast, 40% lunch, 40% dinner. And that did shift a little bit form last quarter where lunch last quarter was 39% and dinner was 41%.

Amy Vinson – Avondale Partners

Yeah, I mean, beyond just the percentages, Don, are you saying, I mean, is there anything we see going on, I mean, are you seeing any changes in traffic patterns or anything positive or negative there? Are you picking up dinner?

Steven Davis

It’s the softness as well. It’s industry wide. There’s no secret. Dinner is a challenge for everybody and one of the things that we put an emphasis on last year with Bob Evans, and quite frankly it helped turn the business around, was really getting after our dinner business. Because at Bob Evans, because you’ve got almost an equal split between dinner and lunch, once you’ve got a dinner initiative that goes after the lunch business as well. So you impact almost 70% of your business and that’s been the key to the turnaround there.

Mimi’s for the last 18 months we’ve been seeing some challenges at the dinner hour and that seems to be where people are cutting back more with their discretionary spending. Fewer trips out with their family. So that’s not something that’s unique to Bob Evans or Mimi’s Cafe. That’s something that you’re seeing industry wide. Now, having said that, that’s where we really gotta be on top of our game and that’s where you’ll see a lot of our innovation taking place is going right against that dinner category. That doesn’t mean that we’re walking away from the other parts of our business, it just means that that’s going to be a premium emphasis for us.

And for example, in Mimi’s, you know, putting in a bar obviously doesn’t help your breakfast business, that helps your dinner and hopefully it doesn’t help your lunch. It helps your dinner business. You’ll see a lot of our initiatives focused against that specific segment.

Amy Vinson – Avondale Partners

Now, I applaud you guys for what you’re accomplishing and I guess going to that 18-month changes and the time that you’ve had there, Steve, do you, particularly with the new product pipeline, is there anything in particular that you’ve learned so far if you look back over the time that you’ve been there and the changes you’ve put in place with that stuff?

Steven Davis

Yeah, you know, it’s clearly been a team effort first and foremost. When people go out to eat a lot of times they want a lot of the things they get on a regular basis, but once in a while you gotta tempt people with something new and exciting and innovative. I think all of us have learned over our careers, once you get your positioning down you stay within that wheelhouse. Deep-dish dinner hits right at our core. And the $5.99 price, boy, I think is going to get some people’s attention.

Mimi’s, people come to Mimi’s for great innovative food and we continue to focus on our seasonal features. I think one of the things you’ll see us do going forward is I think we’re on a cycle of about rotating that season feature menu about seven times a year. And what we’re finding is that operationally that’s tough to execute. But we’re probably going to, well, we’re going to continue that program, but you’ll see the frequency drop maybe one cycle because what happens is we’ll put a new product out there, somebody will come back and try to get it and it’ll already be of the menu and then we disappoint our guest. So you’ll see us be a lot more prescriptive and a lot more systematic about our new product launches at the Mimi’s restaurant.

At Bob Evans it’s just a continuation of four or five times a year you’re going to see some new product innovation.

Amy Vinson – Avondale Partners

Okay. And the, going to Mimi’s really quickly. You mentioned in your comments that for the time being you saw Mimi’s as your gross vehicle, I think you said for the near term. Should we take that to mean that you’re agreeable at looking at other concepts or that returns are improving at Bob’s and you can envision growing that again?

Steven Davis

Well, let’s start with what we have in our portfolio for growth. We’re happy with the growth we’re seeing in food products. We think there’s a lot of head space there. We have the number one selling mashed potato brand, but we’re still only in less than 40% of the United States. Mimi’s Cafe, we continue to see the new restaurant openings above the system’s average, so we’re going to continue to invest in that. And then with Bob Evans Restaurants we’re going back and doing a little re-concepting and retooling to say, okay, if we are going to open Bob Evans Restaurants what do the unit economics have to look like, and we’re going to test our way before we expand it.

So that’s pretty much the line up. You’ll continue to see us grow food products as well as Mimi’s from a growth and distribution perspective. The focus at Bob Evans is same-store sales get the sales up so we can improve our unit economics so we can start opening more.

Amy Vinson – Avondale Partners

Okay. And then lastly, this one kind of, this and then I’ll leave you guys alone. Are you all seeing, as you’re looking out in your real estate development pipeline, are you seeing any benefits or improvements in the pricing that you’re seeing for I guess late ’08 or ’09 openings?

Donald Radkoski

We really have not seen a lot of benefit in, I guess, the softening markets. So you would think with more inventory at some point we would see that. As of lately we have not.

Steven Davis

In real estate a good site is a good site. So there’s no reason for anybody, if they’ve got a great site in front of a – especially with Mimi’s. If we’re going to lifestyle centers and usually if we don’t take the spot there’s usually some three or four people lined up right behind us. So we’re not seeing any favourability in that regards. What we are seeing is we’re seeing construction and contractors, (a) being more available, and then (b) I think you’ll see some of the pricing there start to, if nothing else, stabilize. Maybe even go down a little bit because it probably is a little bit of excess capacity of construction contractors out there given what’s happened in the housing market. And so I’d like to think over the next six months to nine months we’ll see a little softening there. But again, good real estate’s good real estate and we’ll probably wind up paying about what we’ve been paying the last couple of years for dirt or for leases.

Amy Vinson – Avondale Partners

Great. Thanks, guys.

Steven Davis

Thank you.

Operator

Thank you. Our next question is coming from Brad Ludington of KeyBanc Capital.

Brad Ludington – KeyBanc Capital

Morning, guys.

---Interjection

Hey. I just got a quick question on advertising for the third quarter for Bob Evans. Is it going to be kind of in line with, I think last year it was off-air in November and on-air in December and off for most of January?

Steven Davis

Yeah, what you’re going to find with our advertising, let me just give you a quick assessment of what happened last year. Last year in the first quarter we didn’t have a lot of new product news, so we went light on advertising. Then in the second quarter we put a full court press against our knife and fork sandwiches. This year we had innovation in every quarter, so for the full year we’ll spend about what we did last year, but for the third quarter specifically it’ll be on par with what we did last year. You might see a difference or slight difference in some of the timing based on when the windows start, but the total average amount that we spend on advertising will be about the same as last year.

Brad Ludington – KeyBanc Capital

Okay. And what about, for Bob Evans, the effective price increase? Should we expect that to maintain about the 1.8% it had in October?

Donald Radkoski

Well, the 1.8% was the October. We’re looking at probably for the full year, Brad, around 2.4%. So November’s going to be up to 2.9% and for the full year probably averaging about 2.4%.

Brad Ludington – KeyBanc Capital

Okay.

Steven Davis

One of the things we are trying to do, and that’s why you hear us talking about productivity, our strategy is going to be take the lowest possible price increase that we possibly can because given the customer dynamics out there with, you know, you all mentioned gas prices, we all know what’s happening with real estate, sub-prime, all those things. It’s a tough consumer environment out there so our strategy is going to be push hard on the productivity and then try to minimize the price increases because you can’t price your way to success in this business because ultimately you know it’ll happen.

Donald Radkoski

Mimi’s has been right around 3.7% is the price increase and that will drop down actually in the fourth quarter to slightly below 2%. So for the full year we should be around 3% average at Mimi’s. So that’s average price coming down.

Brad Ludington – KeyBanc Capital

Okay. And then last thing on gift cards. I can’t remember, are you guys going to be partnering with supermarkets or Sam’s or anything and selling those through other venues this year?

Steven Davis

Yeah, we’re just getting started with that. This will be the first year that we have second parties selling gift cards. But we’re also going to be pushing gift cards even more this year both in Bobby’s and in Mimi’s, Bob Evans and Mimi’s Cafe. So look for us to continue to leverage that as a strategic growth vehicle for both businesses.

Brad Ludington – KeyBanc Capital

All right. Well congratulations. Great quarter.

Steven Davis

Thank you.

Donald Radkoski

Thanks, Brad.

Brad Ludington – KeyBanc Capital

You bet.

Operator

Thank you. Once again, that is *1 to pose a question. Our next question is coming from Michael Gallo with CL King.

Michael Gallo – CL King

Hi, good morning.

---Interjection

A question I have is just around the breakfast eight par (sic) and it seems like there’s been a lot more emphasis from some of your quick service competitors not only rolling it out to additional units but also putting a lot of advertising support behind it. You clearly seem to be emphasizing dinner in a lot of your advertising. I was wondering, one, what you’re seeing? Are you seeing a lot of increased competitiveness from the quick service rivals? And also, how do you plan to maintain your market share in that segment as you seem to be focused more on dinner? Thank you.

Steven Davis

Our mantra at Bob Evans Restaurant is “breakfast is our heritage is dinner is our upside opportunity” So we’re not walking away from breakfast at all. Yes, there is increased competition out there. We recognize that, but we’ve got a lot of upside opportunity at Bob Evans, especially from the operational perspective on weekends to handle our capacity better than we do. I mean, if we can just turn tables faster we can grow our breakfast business on Saturdays and Sundays and that’s why a lot of these productivity initiatives are in place. It’s not just about cost savings, it’s about processing food faster, getting the tables served, and getting more people in and out of the restaurant. It’s never fun when you walk up to a restaurant and see people coming out the door. You’re less likely to come in. But if you see a reasonable wait and you see people moving you’re more likely to say I’ll stick it out and wait.

Additionally, you will see some new product innovation coming out at the breakfast time frame, so best way to think about our breakfast business is we’ve actually seen our sales continue to grow in breakfast. We’ve got a lot of capacity upside opportunity and we’ll continue to, couple times a year, introduce new products.

Michael Gallo – CL King

Okay, great. And then just second question. Clearly the industry has been challenging throughout. I was wondering whether you’re seeing any of your smaller independent competitors start to come under increased pressure between the minimum wage food and other costs that should actually start to give you an advantage.

Steven Davis

It’s kind of hard to speak to that. All I can say is we’re going to play our game, which is product innovation, smart scheduling and labour management, working hard on the procurement side. Commodities are going up, but there’s always opportunities to be smart about the way you source your products. And then also we’ve got two restaurant chains that if we go to the market as Bob Evans, Inc., we’ve got an opportunity from a buy-in perspective. So that’s pretty much going to be our game and we hope that we win the battle of the breakfast and dinner and lunch competitors, for that matter.

Michael Gallo – CL King

Okay. Great. Thanks a lot.

Steven Davis

Thank you.

Operator

Thank you. There appear to be no further questions at this time.

David Poplar

Okay. Thanks again, everyone, for joining us today. If you have additional questions please feel free to give us a call. If we don’t hear from you in the meantime, enjoy your holiday season and we’ll look forward to sharing our results for the third quarter with you in February. Have a great day.

Operator

Thank you. This does conclude today’s Bob Evans Farms second quarter conference call. You may disconnect your lines at this time and have a wonderful day.

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