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Can Zoe's Kitchen Bounce Back After Last Week's 23% Drop?

By Rick Munarriz - Aug 29, 2016 at 4:16PM

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The fast-casual dining chain takes a hit after a rough quarter and some bearish analyst stock target revisions.

Image source: Zoe's Kitchen.

One of last week's biggest losers was Zoe's Kitchen ( ZOES ), the growing chain of Mediterranean restaurants. Zoe's Kitchen plunged 23% on the week following a poorly received quarterly report. At least three analysts slashed their price target on the stock following the unsettling financials. 

Revenue clocked in at $66.3 million, 22% ahead of where it was during last year's second quarter. The opening of new locations over the past year -- the company-owned eatery count has gone from 148 to 183 over the past year -- accounted for the lion's share of the top-line gain. Comps did rise 4%, but that was entirely the handiwork of folks spending more since traffic was flat. 

It's a relative success to its peers. Industry tracker NPD Group reported earlier that visits to fast-casual restaurants posted their first year-over-year decline in more than a decade. An analyst coined the "restaurant recession" term that's gaining traction as many chains begin to feel the pinch of having to push menu prices higher to account for higher labor costs at a time when consumers are seeing food costs actually decrease at the supermarket. It's a trend that should make investors hesitant to invest in anything other than the quality outfits, something that Zoe's Kitchen seemed to be in the eyes of Mr. Market until last week.   

Zoe's Kitchen's profit of $0.06 a share came in line with expectations, but this is the first time in its brief time as a public company that the fast-casual darling didn't exceed Wall Street's profit targets. The real dagger for investors came in the outlook for Zoe's Kitchen. It tweaked its guidance for all of 2016 slightly lower following the report, and analysts have responded by slashing price targets and profit forecasts on the stock. 

Lamb ho

Analysts at Credit Suisse, Baird, and Piper Jaffray lowered slashed their price targets on the stock following the report. The tweaked guidance wasn't much -- revenue growth of $277 million to $281 million is now $277 million to $280 million and 4.5% to 6% in comps gains are now 4% to 5% -- but it was enough to get Wall Street pros that were already nervous given the stock's premium valuation a reason to pull back. 

  • Credit Suisse's Jason West lowered his price target from $32 to $30, concerned about the flat traffic and issues with the productivity at new locations. He sees comps continuing to decelerate into the second half of the year, up 2.1% for the current quarter and just 1.6% over the holiday quarter. 
  • Piper Jaffray's Nicole Miller went from $35 to $31. She was not pleased to see comps growth of 4% when the market was holding out for a 5.3% uptick. 
  • Baird's David Tarantino went from $44 to $40 on his stock price goal, but he continues to have a bullish outperform rating on the stock. 

Tarantino is comforted with his bullish long-term perspective, arguing that the reasons for the soft trajectory for comps is based on external issues that are not indicative of any structural problem with Zoe's Kitchen itself. He sees the pullback as a buying opportunity, but now it's time to see if the rest of the market sees it that way. With expectations pared back for the second half of its fiscal year, Zoe's Kitchen can't afford to come out cold again.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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