Zoe's Kitchen Slashes Growth Forecast

Zoe's Kitchen (ZOES) reported first-quarter results on May 24. The fast-casual restaurant chain is struggling with declining traffic and shrinking margins, prompting it to cut its financial outlook for 2018.

Zoe's Kitchen results: The raw numbers

Data source: Zoe's Kitchen Q1 2018 earnings press release.

What happened with Zoe's Kitchen this quarter?

Total revenue rose 12.7% year over year to $102.1 million, driven by new store openings. Zoe's Kitchen opened 11 new company-owned restaurants in the first quarter and a total of 40 restaurants over the past year, bringing its store count to 251 locations at the end of the first quarter.

However, comparable-restaurant sales fell 2.3%, as a 2.1% increase in price only partially offset a 4.4% decrease in transactions and product mix.

"In select markets where we had the first mover advantage, competitive restaurant square footage growth is having an impact on our sales and transaction trends," CEO Kevin Miles said during a conference call with analysts. "We also believe that disruption from delivery and discounting has created headwinds."

Intensifying competition is taking a toll on Zoe's Kitchen's results. Image source: Zoe's Kitchen.

Moreover, restaurant contribution margin declined 3.7 percentage points to 16.2%, mostly due to higher labor and marketing costs. Restaurant contribution was lower by 8% to $16.5 million.

All told, EBITDA -- adjusted to exclude preopening costs and equipment disposals -- plummeted 31% to $5.6 million. And Zoe's Kitchen delivered an adjusted net loss of $2.6 million, or $0.13 per share, compared to adjusted net income of $0.3 million, or $0.01 per share, in the year-ago quarter.

Looking forward

These results, along with weak early second-quarter traffic trends, led Zoe's Kitchen to cut its full-year outlook. The company now expects: 

• Total revenue of $345 million to $352 million, down from a prior forecast of $358 million to $368 million.
• Comparable-restaurant sales down 2% to 4%, compared to flat to up 2%.
• Restaurant contribution margin of 16% to 17%, down from 17.3% to 18.4%.

Zoe's Kitchen maintained its full-year store openings target at approximately 25 company-owned restaurants. Yet the company said it would reduce its pace of expansion in 2019 to about 10 store openings. 

Management also said that it might look to close five to 10 lower-performing stores. "While we are still early in this evaluation process, we have identified a handful of older restaurants approaching the end of their lease term that we may prefer to close when the lease expires and other locations that we may decide to close prior to the end of the lease term," Miles said. 

Management believes these actions -- combined with cost cuts and increased marketing investments -- will help place the company back on track.

"We are fully committed to reversing our traffic trends and our team is laser-focused on operational execution and sales driving initiatives," Miles said. "We believe the steps we are taking are right for the long-term health of the brand and to maximize shareholder value."