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Zoe's Kitchen Q2 Results: Underwhelming, at Least for a Picky Market

By Eric Volkman - Sep 3, 2015 at 12:24PM

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The casual dining specialist sees strong top-line growth and raises guidance, but fails to wow investors.

Was it steak or sizzle? Mediterranean casual dining restaurant operator Zoe's Kitchen (ZOES) released its Q2 results late last week, with the company showing some impressive revenue growth, although other line items were less tasty.

Let's pick apart the numbers to see what the restaurant chain operator is serving up to its investors.

Expanding waistline
For the period, revenue saw an impressive year-over-year jump of 30% to land at $54.5 million. By contrast, net income of around $120,000 ($0.01 per diluted share) was a steep 89% below the $1.1 million ($0.06) recorded in Q2 2014.

Much of the former figure was due to a roughly $500,000 payment Zoe's Kitchen had to pay former CFO Jason Morgan "pursuant to the terms of his employment agreement." Morgan left Zoe's Kitchen in June; the company said that his "departure was not related to any disagreement with the Company's board of directors, audit committee or the Company's auditors."

Adjusting for that payout and other adjustments, the bottom line improved to $1.0 million ($0.05) from the year-ago quarter's adjusted net income of roughly $700,000 ($0.04). Those results slightly exceeded the market's expectations. On average, analysts were projecting revenue of $54.0 million, and per-share net profit of $0.04.

As far as operating metrics are concerned, comparable-restaurant sales rose by nearly 6% this past quarter. The company didn't hesitate to point out that this marks the 22nd consecutive quarter of growth in the metric.

Meanwhile, seven new restaurants were opened during the quarter, bringing the total to 148. So far this fiscal year, Zoe's Kitchen has opened 19 outlets, putting it slightly ahead of pace to reach its goal of 31 to 33 for the entirety of 2015.

The healthy growth in top line and store openings has apparently made the company more optimistic for the future. It lifted its fiscal 2015 revenue guidance to $220 million to $224 million, up from the previous $218 million to $223 million. It also upped the lower end of its comparable sales growth estimate to 5%-6% (formerly 4%-6%).

Zoe's Kitchen is still missing an important cook, as a permanent replacement for Morgan has not yet been found. Serving as interim CFO is James Besch, the company's controller.

All in all, Zoe's Kitchen had a decent quarter. But not good enough for investors, who have collectively traded the company's shares down slightly since the results were announced.

I think that's because the fast-casual dining segment is an overstuffed burrito holding a lot of stocks -- Shake Shack, El Pollo Loco Holdings, Wingstop, etc. More often than not, these are young, ambitious companies aiming to be The Next Big Thing in chow.

This plethora of stocks and the rapid growth of some of these enterprises leads the market to be more demanding. Like a hungry, impatient patron at the order counter, they want their big returns now.

Zoe's Kitchen didn't deliver on that heightened expectation. But its results indicate it's growing as it should, opening new restaurants, lifting the top line, and staying (at least marginally) in the black as it does so. It's a company with an interesting niche, and it has the potential to get bigger and richer.

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