Shares of Zoe's Kitchen (ZOES) hit an all-time low earlier this month, and its best shot at turning market sentiment around will come on Thursday when it posts fresh financials. It won't be easy. The fast-casual chain specializing in Mediterranean eats has seen its stock cut in half this year, plunging 52% so far in 2017.
Few things seem to be going right for the 161-unit chain that was initially a market darling when it went public at $15 three years ago. Zoe's Kitchen was once riding the coattails of investor excitement with fast-casual dining, a niche of restaurants offering the quality of casual dining but with the speed and convenience of fast food. Zoe's Kitchen was also making its own luck, riding an impressive streak of 28 quarters of positive comps. It's a whole new world these days. Fast-casual chains have been among the market's biggest losers over the past year, and Zoe's Kitchen's winning streak was snapped three months ago when it reported disappointing first-quarter results.
Image source: Zoe's Kitchen.
Swinging at the plate
Analysts see revenue climbing 13% to $75.1 million, but this doesn't mean that Wall Street feels comps will turn positive again. Zoe's Kitchen top line also grew at a 13% clip last time out, and that was with a 3.3% slide in comps. Expansion is what's driving revenue growth these days, and the stock's crummy chart over the past year is all the proof you need to know that double-digit revenue growth isn't enough.
The news gets uglier at the other end of the income statement where the market's bracing for a profit of $0.02 a share for the quarter. Zoe's Kitchen earned $0.06 a share a year earlier. Margins have come under pressure, and Zoe's Kitchen's operating profit plunged 40% during the first quarter. Investors hoping for a beat don't have history on their side. Zoe's Kitchen hasn't topped bottom-line targets in more than a year.
Simply living up to expectations hasn't been easy for Zoe's Kitchen. It has lowered its guidance or failed to live up to its outlook in each of the past four quarters, setting a challenging tone as we head into Thursday's report. Bulls better hope that Zoe's Kitchen can stick to its earlier guidance of $314 million to $322 million in revenue for all of 2017.
Stephen Anderson at Maxim lowered his price target on Monday, slashing his price goal on Zoe's Kitchen from $24 to $20. He lowered his earnings estimate for the year. He sees a return to positive comps during the latter half of the year. Anderson is also sticking to his buy rating. However, trimming away price and profit targets isn't very encouraging.
It's not comforting when an analyst issues a bearish note just days ahead of a report, suggesting negative conviction at a critical juncture. We saw this happen three months ago when David Tarantino at Baird downgraded the stock just a few days before the first-quarter update, and the stock would go on to plummet 22% that week.
Zoe's Kitchen has retreated during its earnings week for four straight quarters, dropping 22%, 12%, 6%, and 17%, respectively. There's a lot of momentum working against Zoe's Kitchen, but all it needs is a sign that it's starting to bottom out for the market to finally believe that a turnaround is possible.
