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Zoe's Kitchen Inc. Trims Full-Year Forecast Amid Lower Comps and Higher Costs

By Joe Tenebruso - Nov 15, 2016 at 4:35PM

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Rising labor costs and decelerating comparable sales growth dented the restaurant chain's third-quarter results.

Image source: Zoe's Kitchen.

Zoe's Kitchen ( ZOES ) reported third-quarter results on Nov. 14. The Mediterranean-inspired restaurant chain's profits were crimped by higher labor costs, and slowing sales growth led the company to lower its revenue and profit outlook for the year.

Zoe's Kitchen results: The raw numbers

 Metric

Q3 2016

Q3 2015

Growth (YOY)

Revenue

$67.296 million

$56.384 million

19%

Net income

($0.293 million)

($2.256 million)

N/A

Earnings per share

($0.02)

($0.12)

N/A

YOY = year over year. Data source: Zoe's Kitchen Q3 2016 earnings press release.

What happened with Zoe's Kitchen this quarter?

Total revenue leapt 19% year over year to $67.3 million, as Zoe's Kitchen opened 11 new company-owned restaurants during the third quarter and a total of 36 in the past year.

Comparable-restaurant sales rose 2.4%, driven by a 2.9% increase in price, partially offset by a 0.5% decrease in transactions and product mix. That was below Zoe's full-year comp growth target of 4% to 5%.

Restaurant contribution (defined as restaurant sales less restaurant operating costs) grew 5.9% to $12.9 million. As a percentage of restaurant sales, restaurant contribution margin fell 240 basis points to 19.1% due to higher labor and store operating costs. That too was below Zoe's full-year guidance, which included a restaurant contribution margin goal of between 20.5% and 20.8%.

EBITDA (earnings before interest, taxes, depreciation, and amortization) -- adjusted to exclude preopening costs, losses related to equipment disposals, and executive transition costs -- increased 7.9% to $6.6 million.

Adjusted net income, however, declined to $0.7 million from $0.9 million in the year-ago quarter. And adjusted EPS fell to $0.04 from $0.05.

Looking forward

These results prompted Zoe's to lower its full-year guidance, including:

  • Total revenue of $276 million to $277 million, down from prior estimates of $277 million to $280 million.
  • Comparable-restaurant sales growth of 4% to 4.5%, compared to 4% to 5%.
  • Restaurant contribution margin of between 20% and 20.3%, versus 20.5% to 20.8%.

The company did, however, boost its target for new store openings to 37 to 38 company-owned restaurants, from 35 to 36, and highlighted Zoe's Kitchen's expansion goals for the years ahead.

"We opened 11 new Zoe's Kitchen restaurants during the quarter, and now have more than 200 locations, doubling our store count in the last three years," said CEO Kevin Miles in a press release. "With that in mind, we are well positioned to double our store count again by the end of 2020."

Miles also remains optimistic that Zoe's Kitchen's store count expansion strategy will ultimately result in substantially higher profits. "We are confident that this restaurant growth coupled with strong unit economics will result in significant EPS growth," he said.

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