This Restaurant Is Just Getting Going

Zoe's Kitchen is generating buzz, but this restaurant story is more than just stock market hype.

Jun 20, 2014 at 8:00AM

Mediterranean restaurant extraordinaire Zoe's Kitchen (NYSE:ZOES) had an excellent IPO in April and continues to perform well after the IPO -- it's up around 30%. Now that the company has turned in its first earnings report as a public company, investors want to know if this story is all hype or if there's something fresh about this chain.

The earnings report
Zoe's just reported its first-quarter 2014 results, and they were good. Here are the highlights:

  • Revenue up 47%
  • 12% unit growth (just this quarter!)
  • Adjusted EBITDA up 43%
 
The company did report a net loss, but attributed this to IPO costs.
 
Here's where Zoe's knocked the ball out of the park: comparable sales increased 5.7% this quarter. Remember that this covers the same period of time when fast-casual chains like Noodles & Company (NASDAQ:NDLS), Panera (NASDAQ:PNRA), and Potbelly (NASDAQ:PBPB) all reported disconcerting results. 
 
CompanyComp-Sales
Noodles & Company down 1.6%
Panera up 0.1%*
Potbelly down 2.2%
Chipotle Mexican Grill up 13.4%
Zoe's Kitchen up 5.7%
 
*transactions down 2.8%
 
Management at Noodles, Panera, and Potbelly all cited the incredible winter weather as the culprit for their respective losses, but investors need to ask why some concepts -- like Zoe's and Chipotle Mexican Grill (NYSE:CMG) -- still managed to thrive in spite of the hard circumstances.
 
There may be a simple geographic explanation for Zoe's. G

 
Source: www.zoeskitchen.com/locations/map-view.aspx 

 
The vast majority of Zoe's locations are located in the southern United States -- areas which were less effected by the extreme winter weather. Compare that to Chicago-centric Potbelly, and consider the larger exposure of Noodles and Panera in the Northern states, and that may explain why Zoe's sprinted forward while others limped along.
 
But Chipotle is a different story. With over 1,600 locations, the chain has plenty of exposure in regions that the extreme winter affected. Management explained that sales were obviously down on cold days, but they were above average on warmer days. In order to capitalize on this fluctuation, Chipotle's crew met the increased crowds with increased throughput -- a task many attempt, but few execute as well as Chipotle.
 
But while increased throughput certainly accounted for some of the comp-sales success, it doesn't completely explain the best Chipotle quarter in eight years. The real reason for its success is Chipotle's loyal customers. These customers are willing to brave the elements for Chipotle's "Food With Integrity." 
 
Chipotle resonates with its customers. Consider that last year over 100,000 people attended Cultivate Festivals -- Chipotle festivals that celebrate sustainability in food production. Chipotle's four-episode program "Farmed and Dangerous" was in the top five programs on Hulu as millions viewed it. Chipotle's mission and message resonates with a large population, and these folks are willing to trek through the snow if need be for a good burrito.

Does the concept resonate?
So does the comp-sales increase prove that Zoe's resonates with customers the same way that Chipotle resonates with its customers, or is the Mediterranean chain just geographically fortunate? There's compelling evidence that Zoe's indeed has a Chipotle-esque following.

Zoe's claims that 70% of customer visits are from "educated" and "affluent" women. By educated, it means women with college degrees. By affluent, it means women with six-figure household incomes. These women are busy, so they are looking for a quick yet healthy food choice. Considering that it prepares all food from scratch daily, and doesn't offer fatty fried foods, Zoe's wins the business of these women.

However, Zoe's may not be as healthy as it seems, as demonstrated by a comparison between Zoe's Chicken Salad Sandwich and McDonald's Big Mac.

SandwichCaloriesTotal FatCholesterolSodiumTotal Carbohydrates
Big Mac 590 34g 85mg 1070mg 47g
Chicken Salad Sandwich 700 47g 65mg 1000mg 41g

As you can see, there's not a whole lot here to be excited about health-wise. But sometimes it's less about reality and more about customer perception. The fact is that Zoe's is targeting women with food that is simple, tasty, and fresh, and 17 consecutive quarters of comp-sales growth suggest that Zoe's is succeeding in selling its desired image to consumers.

At the end of 2013, Zoe's had 102 locations. This year it plans on opening 30 new locations -- or 29% unit growth for the year. And this year's no fluke. If anything, this year is a slow year. Since 2008, the company has averaged 38% unit growth annually. And at just over 100 locations, it has a long long way to go before it reaches its 1,600-unit goal.

Final thoughts
To sum it up, Zoe's is a new concept resonating well with consumers, which is leading to market-beating comp sales and stellar unit growth. The chain looks well positioned to execute its long-term growth plans and cash in on these consumers who are buying into the Mediterranean zoe -- the Mediterranean life.

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Jon Quast owns shares of Potbelly. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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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