Fast-casual restaurants are a dime a dozen these days, and so it's important for companies seeking to do well in the space to stand out from the crowd. Mediterranean-food specialist Zoe's Kitchen (NYSE:ZOES) has done a good job in making a good initial impression during its young history as a publicly traded company, and coming into Wednesday night's fourth-quarter financial report, Zoe's Kitchen investors hoped that the company would keep growing at an accelerating pace. For its part, Zoe's largely delivered solid results, and although it wasn't profitable during the quarter, it seems to be on track toward consistent profitability in the near future. Let's take a closer look at Zoe's Kitchen and what its latest results show us.
Zoe's heats up
Zoe's Kitchen did a good job of growing during the fourth quarter. Revenue jumped almost 40% to $40 million, with comparable-store sales growth of 7.8% actually accelerating from the 5.9% it posted during the third quarter. That sales growth didn't stop Zoe's from reporting an adjusted net loss of $700,000 for the quarter, or $0.03 per share, but the loss was about half of the red ink Zoe's posted during last year's quarter and was also better than the nickel per share loss that most investors had expected from the restaurant chain.
Revenue got upward support from a combination of factors. About half of Zoe's comp growth coming from increased customer traffic, but higher prices and a shift toward pricier products also contributed to revenue gains for the fast-casual chain as well. Zoe's also continued its expansion plans, opening six company-owned restaurants and three new franchise restaurants during the quarter.
The challenges that Zoe's faces, though, come largely on the expense side of the income statement. Labor costs grew at an even faster rate than sales, with the company spending 41% more on its employee costs, and gross margins also fell slightly. Yet Zoe's has done a good job of reining in store operating expenses as well as general overhead costs, and that helped narrow the company's operating loss and drive it ever closer to profitability. Those cost savings were enough to overcome higher costs for beef and poultry.
CEO Kevin Miles was pleased with the results. "We remain excited by the health of our business," Miles said, "and continue to grow and strengthen our brand through investments in our people, differentiated menu, and operational excellence." Miles also touted Zoe's 20th straight quarter of gains in comps as indicating of "our positioning as both a leading lifestyle brand and the dominant player in the Mediterranean fast casual space."
How will Zoe's fare in 2015?
Zoe's guidance for the coming year was also fairly upbeat. The restaurant chain expects sales of between $215 million and $220 million, fitting nicely with the $216.5 million consensus figure among those following the stock. In addition to expecting between 31 and 33 new restaurants to open over the course of the year, Zoe's believes that comparable-restaurant sales growth of 4% to 6% will help drive overall sales higher. Already, the company has opened seven more restaurants since the beginning of 2015, showing the pace at which Zoe's is trying to expand its store count and become a bigger presence in the restaurant industry.
The interesting question that Zoe's Kitchen has to answer is whether it can keep capitalizing on the healthy-food movement to drive new customers into its restaurants. Throughout the fast-casual industry, the drive toward healthy ingredients has reflected changing eating patterns among restaurant-goers, and Mediterranean cuisine resonates with many health-conscious consumers. If Zoe's can maintain its lock on the Mediterranean space, then it has the chance to go after chains in other specialties by demonstrating the superiority of its menu compared to its competitors.
Zoe's Kitchen investors were clearly pleased with the results, closing the after-hours session 6% higher than it had traded before the announcement. Even though competition in the restaurant industry remains fierce, Zoe's seems to be on track to continue its impressive performance into 2015 and recapture some of the momentum that its shareholders want to see in the coming months and years.