Zoes

Image source: Zoe's Kitchen.   

Last week was brutal, but there were a handful of stocks that managed to move higher. A few of the winners happened to be restaurants. 

Zoe's Kitchen (NYSE:ZOES) was one of them, soaring 15% higher in a week that saw most consumer-facing companies going the other way. The fast-growing restaurant operator that is giving Mediterranean food a fast-casual spin moved higher after presenting at the 18th Annual ICR Conference in Orlando last week.  

Zoe's has a good story to tell. It's a unique player with plenty of expansion room in its future. There are currently 166 restaurants in operation, 34 more than it had a year earlier. Comparable-store sales have been tripping up some chains lately, but Zoe's has come through with annual comps growth of 6% or better through at least the past six years.

The combination of brisk expansion and healthy store-level sales growth has resulted in strong top-line growth. Revenue has grown 33% over the past year, and that's actually decelerating from the pace of prior years.  

Zoe's isn't just about walk-in traffic. A good reputation for quality and brand awareness is also helping Zoe's score gigs outside of the restaurant. A significant 16% of its business came from catering in 2014. It's one more part of the Zoe's pie that should continue to grow as the brand becomes a household name. 

The model works. The average location has gone from grossing $1.2 million in sales a year five years ago to more than $1.5 million today. 

Contribution margin has held steady above 20% over the years, and this would result in explosive profitability if Zoe's wasn't so bent on investing in building out new locations. Nearly all of its locations -- 98% -- are company-owned. All of the 34 locations that opened last year are owned and operated by Zoe's itself, and it costs an average of $750,000 to build out a new location.

The end result is that even though the chain has come through with better-than-expected earnings results consistently since going public at $18 less than two years ago, it hasn't been exactly blazing on the bottom line. Analysts see Zoe's posting a profit of $0.07 a share for all of 2015 when it reports in early March. Wall Street's only forecasting net income of $0.13 a share for 2016. 

That may make the stock seem expensive on an earnings basis, but the multiple is pretty reasonable if we eye the top line. Zoe's Kitchen stock is trading for two times this new year's projected sales. Even with growth decelerating -- and analysts see revenue climbing just 23% higher this year -- it's a compelling entry point for a stock with the potential to start taking off on the bottom line given its proven model and its expanding store base. 

Zoe's expects to double its store base in four years. Sprinkle in the impressive string of periods of positive comps -- we're at 23 consecutive quarters and counting -- and the stock should be trading quite a bit higher in the future. Zoe's stock may have shed more than a third of its value since peaking last summer, but the long-term outlook is encouraging for Zoe's Kitchen.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Zoe's Kitchen. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.