Zoe's Kitchen (ZOES) is trading lower today (-7%) after reporting disappointing Q2 earnings results last night. Unless you live in the southern US, there is probably a decent chance you have never heard of Zoe's Kitchen. It's a fast growing, fast casual restaurant concept serving Mediterranean-inspired dishes delivered with Southern hospitality. It basically is trying to bring Mediterranean cuisine to the masses in a fast casual concept (think of it as the Panera of Mediterranean food).
Management likes to say it serves "real food" -- from hummus, made fresh daily and served with warm pita bread, to flavorful salads and kabobs. By real food, ZOES means food made from simple ingredients, such as raw vegetables, fruits and legumes. There are no microwaves or fryers in its restaurants. Zoe's Kitchen currently operates 232 restaurants in 20 states across the US. ZOES believes it has the potential to operate 1,600 locations in the US over the long term.
Turning to the Q2 results, non-GAAP EPS came in at breakeven, down from $0.06 in the prior year period. Revenue rose 12.1% year/year to $74.3 mln. Both EPS and revenue were shy of market expectations. Comparable restaurant sales decreased -3.8%. On the positive side, ZOES reaffirmed guidance for FY17, sees FY17 revs of $314-322 mln and comps of flat to negative 3.0% (unchanged from previous guidance). ZOES also reaffirmed it expects to open 38-40 company-owned restaurants in FY17.
Management concedes that Q2 results remained challenged, however, based on improved quarter-to-date trends, they believe ZOES is still on track to meet full year guidance. In 1H17, ZOES says it made meaningful progress on multiple strategic initiatives. For example, ZOES is excited with the launch and early results of all of its new menu items, featuring better for you ingredients and bold new flavor profiles, which are designed to extend its leadership position in the Mediterranean restaurant segment.
In early August, ZOES launched its re-platformed website and by the end of Q3, the company expects to launch its new mobile app and loyalty programs. These tools, along with the infrastructure initiatives completed earlier this year, sets the stage to drive results in the back half of this year. On the development front, ZOES' plan for 2017 remains on track for 38-40 new restaurants. In 2018, ZOES expects to moderate new unit growth with a plan to open 25-30 new restaurants. While new units continue to open at or above expectations, ZOES wants to focus on building brand awareness and sales in its current markets.
ZOES talked in some detail on the call about its menu changes. It started out the year with introducing new products like snack boxes, which address critical convenience factors for busy guests. Performance of these new items continues to build and is resonating with guests. In late June, ZOES completed its largest new menu rollout in eight years, where it built on its Mediterranean positioning by bringing forward new menu items with better-for-you ingredients and bold new flavor profiles. Guests have responded favorably to these items and performance has outpaced test results driving increased mix. ZOES plans to feature these items in marketing messages in the back half of the year.
In sum, this was a disappointing quarter for ZOES. They missed on revenue and EPS and comps were disappointing as well. However, it was good to see ZOES reaffirming prior guidance for the full year. From a broader perspective, Zoe's Kitchen was once a growth investor's dream stock. For one thing, it has a unique concept. Rather than just another burger joint, ZOES is really the first chain to bring Mediterranean food to the quick service channel on a national basis. It's pretty unique. The new store growth had been impressive as well.
ZOES was a hot IPO in April 2014 when it priced at $15, opened at $25.65 and was briefly trading above $45 in July 2015. But the stock has been under pressure since then due to a series of disappointing earnings results. It will be interesting to see if ZOES can get back on a growth trajectory, hopefully the new menu helps.