Is Zoe's Kitchen a Good Investment Opportunity?

Zoe's Kitchen (NYSE: ZOES  ) began trading on Friday, posting IPO gains of 65% on a day when the markets continued to free-fall. Following such large gains, investors might consider it overvalued. However, in comparing it to peers like Noodles & Company (NASDAQ: NDLS  ) , Potbelly (NASDAQ: PBPB  ) , and Chipotle (NYSE: CMG  ) , should investors consider buying?

How does Zoe's stack up?
Zoe's Ktichen is the latest fast-casual restaurant to turn public, and so far, investors are responding well to its Mediterranean-inspired theme. Initially, the company scheduled a $70 million IPO at a midpoint of $12, but then priced at $15, for a market capitalization of $275 million. However, after a 67% gain and a $25 share price, Zoe's market capitalization now sits at $460 million. Hence, is $460 million too expensive for Zoe's Kitchen?

To answer that question, let's look at the fundamentals, and some key metrics relative to its peers.

Company

Market Cap

12-Month Revenue

2013 Revenue Growth

Number of Stores

Sales per Store

Profit Margin

Zoe's Kitchen

$460 million

$116 million

46%

111

$1.04 million

(3.1%)

Noodles 

$1.05 billion

$350 million

16%

380

$921k

1.9%

Potbelly 

$502 million

$300 million

9%

300

$1 million

0.42%

Chipotle 

$16.59 billion

$3.21 billion

17.7%

1,550

$2.07 million

10.19%

Clearly, Chipotle is the king of fast-casual, having the most stores and best revenue per store, which translates into the highest margins. As a result, it trades at a premium of 51 times earnings and 5.1 times sales.

However, for all of the smaller fast-casual chains, including Zoe's, becoming Chipotle is the ultimate goal. Therefore, in some ways, Zoe's, Potbelly, and Noodles have more investment value, as they have greater room for growth.

With that said, you might notice that Zoe's and Potbelly trade at a very comparable market cap despite the latter being twice as large. The reason is because Potbelly, with just $300 million in revenue, is already showing signs of slowed growth. Specifically, its revenue grew just 1.8% in the fourth quarter, and with competition from a wide array of sandwich shops, its chances of becoming the next Chipotle are slim to none.

Noodles kind of fits into this category as well. Sure, it grew 16% last year, but it also has the lowest revenue per store of the bunch, and it competes in the noodle and pasta segment with the likes of Olive Garden and Fazolis. With that said, Noodles is different, as its dishes are inspired from different regions of the globe.

Zoe's is unique, as the market for Mediterranean food is relatively small in terms of restaurant chains. For example, Noodles has some Mediterranean dishes, but not a full menu or a great deal of diversity from this region. This gives Zoe's a niche market, and with 46% growth, it's no wonder that investors are bullish looking ahead.

Investing for the future
Zoe's is the quintessential "investing for the future" stock, as 111 stores in 15 states is a very small presence. Therefore, it's worth noting that its 27 new stores last year represented a 32% increase, which means that much of Zoe's revenue growth came from store expansion.

Therefore, when Zoe's says in its S-1 that it plans to double its stores in the next four years, investors have a reason to get excited. The company expressed even more ambitious goals of having 1,600 stores total. If we apply the same $1.04 million-per-store multiple as its current fundamentals imply, Zoe's could peak with more than $1.6 billion in annual revenue, thus making its stock very cheap right now.

Final thoughts
Even if Zoe's never has 1,600 stores, its goal to double its store count in the next four years is possible, if not likely. This would double its revenue, maybe even more, as the company's same-store sales have grown in 16 consecutive quarters. It is likely to continue driving more revenue per existing store during this expansion.

Worst-case scenario: Zoe's becomes the next Noodles, which would be a 100% premium over the next four years, a return that any investor would be happy to earn. Therefore, it's no shock that Zoe's stock exploded on its IPO, as this is a fast-casual chain that really does have significant long-term upside.

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