Will Zoe’s Kitchen Continue to Rally Like Chipotle Mexican Grill or Fizzle Like Noodles & Company?

Zoe's Kitchen has great potential. Investors are hoping it's the next Chipotle and that it doesn't disappoint like Noodles & Company.

Apr 15, 2014 at 6:00PM

Shares of Zoe's Kitchen (NYSE:ZOES) soared more than 64% on its first day of trading. This has many investors excited that the chain could be the next hot name in the restaurant space. The restaurant sector has seen several big winners, like Chipotle Mexican Grill (NYSE:CMG), but also plenty of losers.Investors should be cautious after Noodles & Company (NASDAQ:NDLS) disappointed the Street and shares fell following earnings.

For us Fools, what's next for Zoe's Kitchen?

The multiple benefits of a Mediterranean diet and lifestyle
One great thing about Zoe's Kitchen is that it has a very unique concept. The chain is trying to do for Mediterranean food what Chipotle Mexican Grill did for Mexican food. Given the popularity and overall health benefits of a Mediterranean diet, I see the chain's great potential, especially since its focus is on fast casual as opposed to a sit-down-and-order approach.

It's tough to argue with eating a Mediterranean diet. The health benefits of the Mediterranean diet are numerous: lowering cholesterol, improving weight loss, improving rheumatoid arthritis, reducing the risk of developing diabetes/Alzheimer's disease/cancer, and helping to ward off heart attacks, strokes, and premature death.

At Zoe's Kitchen, besides offering Mediterranean food, the company focuses on encouraging customers to live the Mediterranean lifestyle.Zoe's Kitchen wants its customers to get more out of each day and to complement meals with 20 to 25 minutes of moderate exercise daily. A Mediterranean lifestyle involves a fulfilled, happy life that is shared with family, good friends, and great food that is wholesome and fresh.

The menu is enticing
The menu is focused on homemade Mediterranean recipes. Ingredients are delivered to each restaurant fresh daily. Nothing is fried, and there are no microwaves. The motto at Zoe's Kitchen is: "If it wasn't food 100 years ago, it's not food today."

Most of the cooking is done on the grill and involves plenty of fresh fruit and vegetables, fresh herbs, olive oil, and lean proteins. The menu includes hummus, Greek salad, sandwiches, pita sandwiches, kabobs, desserts, pita chips, multiple side dishes, and gluten-free options.

Its growth has been impressive and looks set to continue
Zoe's Kitchen grew from 21 locations in 2008 to 111 restaurants across 15 states as of Feb. 24. Of those restaurants, only six locations are franchised; the rest are company-owned. Comparable-restaurant sales grew 6.9% last year. Its company-owned restaurants have generated 16 consecutive quarters of positive comparable-restaurant sales growth.

Average unit sales increased from $1.1 million in 2009 to almost $1.5 million in 2013. During this period, overall sales grew from $20.8 million to $116.4 million, while adjusted earnings before interest, taxes, depreciation, and amortization went from $900,000 to $10.9 million.

This year Zoe's Kitchen plans to open 28 to 30 new restaurants. The company hopes to one day have more than 1,600 restaurants in the U.S.

How are Chipotle and Noodles & Company doing?
Shares of Noodles & Company are trading near their lows after the company missed earnings estimates in the latest quarter. Investors had driven shares of Noodles & Company higher on expectations that the company would post numbers like Chipotle. Unfortunately, that did not happen and earnings came in $0.01 below expectations. Systemwide comparable sales were only higher by 3.9%. While most restaurant chains would be happy with those numbers, investors need a little more with shares trading at 147 times this year's earnings and 54 times next year's earnings.

Meanwhile, Chipotle continues to defy skeptics. In its most recent quarter, comparable-restaurant sales grew 9.3%. Revenue increased more than 20%, and net income jumped by almost 30%. The company also opened 56 new restaurants in the quarter. Management expects to open 180 to 195 new restaurants this year. Comparable-restaurant sales for 2014 are expected to be in the low- to mid-single digit range, which would be flat versus last year when comparable-restaurant sales grew 5.6%.

Foolish assessment
Zoe's Kitchen investors will get a better idea of how the company will fare after its first quarterly earnings report as a public company. Investors will be looking for Chipotle-like numbers and not the numbers reported by Noodles & Company. I do like the concept of Zoe's Kitchen and think the Mediterranean-inspired chain has great potential. I'll be waiting for its first earnings report before jumping in because I expect shares to be volatile until investors get a clearer picture of how the company is doing.

 

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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