Zoe's Kitchen Serves Up an Unexpected Profit

By Markets Fool.com

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Source: Zoe's Kitchen.

The restaurant space is a crowded industry, with dozens of concepts vying for customers' disposable incomes. As you'd expect, though, some fast-casual restaurants have fared better than others, and those that have distinctive offerings have shown a competitive advantage over their rivals.

Mediterranean-food specialist Zoe's Kitchen has fared particularly well, and coming into Thursday night's fiscal first-quarter financial report, investors wanted the restaurant chain to keep producing the growth that has impressed them so much in the past. This quarter, Zoe's Kitchen lived up to those hopes, earning an unexpected profit and delivering even faster sales growth than most had expected. Let's look more closely at how Zoe's Kitchen did this quarter, and what it says about the chain's future.

Zoe's is cooking up fast growth
As we've seen in previous quarters, Zoe's Kitchen showed impressive growth during the first quarter. Revenue climbed more than 36%, to $63 million, and comparable-store sales growth of 7.7% showed that not all of the chain's rising sales came from expansion efforts. More importantly, Zoe's has progressed toward profitability more quickly than most had expected, with the company posting an adjusted net profit of $800,000, or about $0.04 per share, defying calls for a $0.01-per-share loss for the quarter.

Zoe's has been using all the means at its disposal to try to support its sales growth. Embedded in the rising comps was a rise in customer traffic, which accounted for about half of the gains. In addition, Zoe's implemented a price increase that pushed sales up 1.2%, and customers tended to order food with higher price tags, as well, accounting for a 2.8% increase.

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Zoe's also accelerated its expansion with new locations. The company opened a dozen new stores during the quarter, bringing its total to 141 company-owned locations. Moreover, Zoe's has opened another six stores in just the past six weeks, further extending the chain's reach, and demonstrating just how vital a role expansion is playing in the company's overall growth strategy.

In contrast to last quarter, the fast-casual chain also saw improvement in its costs. New pricing agreements for obtaining key ingredients like olive oil, feta cheese, and fresh produce helped boost margins. Some of the declines came from timing of an annual conference, which could potentially weigh down second-quarter results somewhat. Overall, however, Zoe's demonstrated an impressive ability to control expenses.


Image: Zoe's Kitchen.

CEO Kevin Miles continued to express his optimism about Zoe's Kitchen. "We continue to bring [our] Mediterranean lifestyle to more guests," Miles said, with its "differentiated concept offering wholesome, freshly prepared Mediterranean dishes with Southern hospitality."

And for dessert, higher guidance
Zoe's also gave investors good news by pushing up its guidance for the full 2015 year slightly. The company now believes that sales will finish between $218 million and $223 million, essentially reflecting the better performance in revenue that the company managed in the first quarter. Zoe's still expects to open a total of 31 to 33 new restaurants this year, and guidance on comps of 4% to 6% was unchanged from what the fast-casual player predicted last quarter.

The biggest thing on investors' minds, though, is whether Zoe's Kitchen will manage to sustain its profitability. Already, shareholders have gotten extremely optimistic about the restaurant's future, anticipating profits to continue throughout this year and to nearly triple in 2016. Zoe's doesn't have a huge amount of competition on the Mediterranean fast-casual space, but the company still has to demonstrate its ability to keep competitors at bay, and keep customers interested.

For now, though, investors in Zoe's Kitchen couldn't have been happier with the results, with shares climbing another 3% in the first 45 minutes of after-hours trading following the announcement. Coming on the heels of a 4% gain in the regular session on a down day for the market as a whole, investors in Zoe's Kitchen clearly expect good things from the restaurant company for the rest of the year and beyond.

The article Zoe's Kitchen Serves Up an Unexpected Profit originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Zoe's Kitchen. The Motley Fool owns shares of Apple and 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.