Uh-oh. Fast-casual Mediterranean chain Zoe's Kitchen (NYSE:ZOES) announced Friday that Chief Financial Officer Jason Morgan had abruptly resigned "to pursue other business interests" -- an often used catchall phrase that ranks up there with "personal reasons" when companies want to report disturbing news.
While the restaurant said the resignation had nothing to do with any disagreement between Morgan and the company, the board of directors, or auditors, the stock slumped almost 10% on the news. Markets do not like surprises like that, and investors prefer smooth executive transitions rather than sudden departures, particularly when it comes to the top finance guy, which is often a harbinger of bad news.
Still recording hearty growth
Yet it does not seem as though any bad news is brewing. In fact, the first quarter earnings report released earlier this month indicated business was improving. Revenue soared 36% to $63 million on a near-8% jump in comparable-store sales, an important retail metric that measures organic growth. It also recorded a surprise $0.04 per share profit, which handily beat Wall Street expectations for a penny-per-share loss.
Unlike the many me-too chains such as Shake Shack and The Habit that seek to exploit the fast-casual trend with burgers, Zoe's Kitchen offers a fresh take on the concept using Mediterranean food featuring kabobs, pitas, and Greek salads with fresh vegetables, whole grains, and healthy fats.
That differentiation has led to some phenomenal growth since its April 2014 IPO that saw the stock surge 65% on its first day of trading. Even after the recent pullback, shares still sit over 160% above the original $15 offer price.
Zoe's Kitchen opened 30 new restaurants in 2014, ending the calendar year with 129 company-owned restaurants and three franchised locations. It has opened 17 more stores this year, bringing its total restaurant count to 149.
That meteoric rise and the CFO's sudden resignation is why investors were jittery. Was there something more they should be concerned about?
An ill wind that blows no good
There are plenty of examples that show such worries are not unfounded. Flooring specialist Lumber Liquidators is under legal and regulatory scrutiny, and though it initially gave a strong defense for its position, the CFO suddently quit, followed a month later by the CEO and then the chief compliance officer a week after that. The stock has lost three-quarters of its value from its 52-week high of $77 one year ago.
Last year, Radio Shack's CFO suddenly resigned due to those aforementioned "personal reasons," heralding the electronics retailer's eventual bankruptcy filing.
Nation's Restaurant News reported that analysts were being cautious about the development, pointing to Piper Jaffray's senior research analyst expressing wariness at executive turnover like this, though management "left us feeling comfortable that this transition was in the natural course of business."
Similarly, Baird Equity Research felt this was just a short-term blip, and a company of this caliber would be able to find a replacement in short order. William Blair reiterated its outperform rating, though Piper Jaffray, despite its confidence, downgraded the stock from overweight to neutral.
Investors should remain cautious, too. While Zoe's Kitchen says it is really just a natural progression of the business, shoes rarely fall so soon after a development like this, and it could be a case of fire soon following the smoke.
Zoe's Kitchen's fresh take on the growing fast-casual trend appears real and sustained, but that does not mean investors should not keep a careful eye on future developments.