Over the past three years, fast casual restaurant chain Zoe's Kitchen (ZOES) has doubled its store count, growing to more than 200 locations today. And despite a rough 2016, which saw the company reduce its guidance twice, Zoe's isn't hitting the brakes on new store growth anytime soon. At the ICR Conference in early January, management presented a summary of their expansion efforts to date and more importantly, their roadmap for the future.

Image source: Zoe's Kitchen

2x by 2020 looks quite likely

The most important number Zoe's affirmed was for its store growth ambitions, with CEO Kevin Miles stating that by the end of 2020, Zoe's believes it will reach the 400-store mark. After adding 34 new stores in 2015 and 38 new stores in 2016, Zoe's will have to step up the pace, opening an average of 49 stores annually over the next four years to meet this goal. Looked at another way, Zoe's will need to grow its store base at an 18% compound annual growth rate (CAGR) for the next four years. But this hardly seems a stretch when you consider that over the past five years, Zoe's has grown its store count at a 29% CAGR.

A successful concept nowhere close to saturation

Zoe's has locations in just 20 states to date, with only six of them boasting 10 or more locations. That means a majority of the U.S., including populous states New York and Illinois -- as well as the entire West Coast -- represents untapped opportunity. While some may think the company should plow full speed ahead into larger, more health-conscious markets like California, Zoe's says it will continue to utilize a hub-and-spoke approach, placing 75% of its new stores in 2017 in existing markets, and just 25% in new markets, including Denver and Kansas City. Even in Texas, where Zoe's has 51 stores, CEO Miles says there are still many parts of the state where it can expand. Zoe's clearly believes its stores have plenty of room to grow in existing markets, and is targeting 2% to 4% annual comparable restaurant sales growth for the foreseeable future.

Improving unit economics point to a tasty future

In perhaps the most compelling part of the ICR presentation, CFO Sunil Doshi outlined one important way the company will gain momentum over the next several years.

Years of operation 1 Year (Target) 3 Years (Target) More than 3 years (Actual)
Sales $1.3 million  $1.5 million $1.7 million
EBITDA margin 10% to 12% 18% 23%
Cash-on-cash return 16% to 19% 30% 47%

As Zoe's stores mature, their restaurant-level metrics improve. Data source: company presentation. Chart by author.

In their first full year, Zoe's sets targets for new stores of $1.3 million in sales and 10% to 12% EBITDA margins for a cash-on-cash return of 16% to 19% (the company calculates cash-on-cash return by dividing store-level EBITDA by average total unit investment). As these restaurants mature, by their third full year of operation, Zoe's expects stores to average $1.5 million in sales and 18% EBITDA margins, with a cash-on-cash return of 30%.

Now, here's where things really start to get good. The actual data from stores that are more than three years old blows these targets away. These units average $1.7 million in sales and 23% EBITDA margins, producing cash-on-cash returns of 47%.

Zoe's is still very early in the maturity curve, and this last category of stores currently represents less than 50% of locations. By the end of 2020, however, stores that are more than three years old will make up 61% of the total, providing what should be a sustained tailwind for margins and cash flow in the years to come as newer restaurants continue to mature. Coupled with a rapidly increasing store count, the company believes this dynamic can help it achieve 20%+ annual EBITDA growth.

According to Zoe's, this is just the beginning

Zoe's pioneering approach to fast casual Mediterranean food has helped the chain deliver winning results, including 27 consecutive quarters of comparable restaurant sales growth, and sales that have held up better than the rest of the industry during the recent slowdown in consumer traffic. Even so, the company believes it has only scratched the surface, saying the ultimate potential exists for 1,600 Zoe's locations in the U.S. Reaching the 400-store milestone by 2020 while hitting its targets for margins and comps growth would likely turn a lot more skeptics into believers.