Why Zoe's Kitchen Could Outperform Its Fast-Casual Competitors

Fast-casual chain Zoe's Kitchen (NYSE: ZOES  ) has caught the eyes of investors who continue to search for the next Chipotle (NYSE: CMG  ) and this resulted in a 64.8% share price gain when the chain went public on Friday. There's still only one Chipotle, but Zoe's Kitchen has crafted an unique mix of Southern and Greek cuisine which has proven that it has an appeal of its own. While Chipotle and peer Panera (NASDAQ: PNRA  ) may have matured to some extent, Zoe's Kitchen offers investors the potential to benefit from very aggressive expansion.

Aggressive expansion
Zoe's Kitchen has been running in the red while it rapidly builds out its restaurant base. The S-1 shows that this restaurant has expanded from 21 locations in 2008 to 102 locations in 2013. High demand for its shares resulted in an IPO price of $15 each, so the chain collected about $87 million as proceeds from its offering of 5.83 million shares.This should give Zoe's Kitchen the fuel to keep its rapid growth going for the time being, although by any value-based metric Chipotle and Panera will look a lot better. As a smaller chain, Zoe's Kitchen can also grow its store count by a much larger percentage in upcoming years. However, many investors will consider same-store sales when they decide whether they will invest in Zoe's Kitchen.

This Southern- and Greek-inspired chain has greatly outperformed some other fast-casual chains that have gone public recently under this metric. With comps growth of 11.9%, 11.8%, and 13.4% in 2010, 2011, and 2012 respectively, Zoe's Kitchen has been performing like a younger Chipotle. While the chain's comps growth sank to 6.9% in 2013, many restaurants struggled over the period and this figure did exceed Chipotle's 5.6% figure for the year. Panera trailed behind both of these fast-casual peers as its comps grew 2.3% for the year.  However, the burrito chain posted a very strong 9.3% comps gain in the fourth quarter of 2013 so staying ahead of Chipotle may not be easy for Zoe's Kitchen.

Unit volumes
In its S-1 Zoe's Kitchen also provided figures on the revenue generated by its restaurants. Here the chain trails both Chipotle and Panera, although this could also indicate a growth opportunity. Zoe's Kitchen has seen its average unit volume soar from $1.13 million in 2008 to $1.47 million in 2013. Meanwhile, in 2013 Forbes reported that the average Panera brought in revenue of $2.43 million and the average Chipotle brought in revenue of $2.11 million.

Zoe's Kitchen restaurants may have more room to grow their revenue than Panera and Chipotle restaurants have. First, Panera has had to make efficiency improvements to maintain its same-store sales growth, which indicates that its restaurants may be getting close to their maximum sales potential. Second, Zoe's Kitchen gets a sizable share of its revenue from dinner customers; the chain said that without including its catering sales it made 40% of its sales during dinner hours. Fast-casual chains frequently make most of their sales during the lunch rush. This limits the number of customers they can serve and limits their margins since restaurants can charge higher prices at dinner. Third, Zoe's Kitchen has higher prices than other fast-casual chains; the restaurant said that its average customer paid $9.57 to eat there, although casual-dining chains still typically charge more than that. Specifically, the research firm NPD reported 2013 average spending figures of $7.40 for fast-casual chains and $13.66 for casual-dining restaurants.

Customer incomes
Fast-casual restaurants tend to attract customers who have cash to spend, and Zoe's Kitchen has done a good job in this area. In its prospectus, the chain said that women who visit its restaurants live in households that bring in more than $100,000 per year on average. Economic conditions could limit this growth driver; according to the National Restaurant Association, the number of households in this category declined by 3% between 2007 and 2012 and this hurt casual-dining restaurants. However, Zoe's Kitchen could also benefit if wealthier customers trade down from costlier casual-dining restaurants. This factor has already contributed to the growth of other fast-casual chains like Chipotle and Panera, which have also benefited as other customers trade up from lower-end quick-service restaurants.

Foolish takeaway
Zoe's Kitchen looks like it's off to a great start. While it had a tougher time in 2013, it still posted relatively strong results that suggest that it could do even better if the economy improves. The chain also looks like it's benefiting from trends that have favored its larger fast-casual peers and its concept based on Greek and Southern food provides some differentiation. In addition, the chain also looks like it's developed a customer base that can afford higher-than-usual prices. Although Zoe's Kitchen has not proven itself as a national concept yet, its regional expansion plan seems like it's on track. While this is a risky pick, it looks like it has investment potential.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

 


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2914869, ~/Articles/ArticleHandler.aspx, 10/22/2014 10:09:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement