Zoe's Kitchen Inc Second Quarter Earnings: What to Watch

By Markets Fool.com

Image source:Zoe's Kitchen.

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Shares of Zoe's Kitchen (NYSE: ZOES) started the year off with a whimper, falling nearly 15% by February. Yet the stock of the Mediterranean-inspired restaurant chain rallied sharply off its February lows, and by April, shares were up more than 30% for the year.

Data by YCharts.

In the months since, the stock has largely treaded water. Is Zoe's Kitchen poised for another breakout to new highs? Or is this rally losing steam? The company's upcoming second-quarter results will likely determine the answer to those questions -- and here are the essential things investors should be watching.

Is this growth story still intact?

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An investment in Zoe's is very much a bet on its future growth potential. In the first-quarter earnings release, the restaurant chain issued its fiscal 2016 outlook, including total revenue of between $277 million and $281 million, which would represent year-over-year growth of approximately 23% at the midpoint. Much of that sales increase will be driven by new store openings, with Zoe's planning to open 34 to 36 company-owned restaurants in 2016. But an equally important metric is comparable-restaurant sales, which provides insight into Zoe's competitive positioning within its industry.

Strong comp growth can signal that Zoe's restaurants are taking share within their markets. In addition, within these comp figures, traffic growth can give investors confidence that Zoe's Kitchen is not cannibalizing its existing store base as it opens new restaurants. And if the company is able to raise prices, while traffic remains strong, that's a sign that Zoe's may be able to pass on rising costs to its customers -- something that could help to preserve the company's margins in the years ahead.

In this regard, investors will likely want to see an increase in traffic and overall comp growth of at least 5%, which is near the midpoint of Zoe's guidance for full-year comparable-restaurant sales growth of 4.5% to 6%.

Margins

One of the benefits of an expanding restaurant count is the ability to leverage costs over a larger revenue base. As such, profit margins should improve over time. A key measure of profitability for Zoe's Kitchen is what the company refers to as restaurant contribution margin, defined as restaurant sales less restaurant operating costs, as a percentage of restaurant sales.

Restaurant contribution margin improved to 22% in the first quarter, up from 21.7%in the prior-year period, as lower commodity prices helped results. Zoe's full-year forecast includes a restaurant contribution margin target of between 20.5% and 21%, so investors will want to see that Zoe's remains on track to meet -- and preferably exceed -- this goal when the company reports.

How to access the results

Zoe's Kitchen will announce its second-quarter earnings on Monday, Aug. 22after the U.S. markets close. Investors can tune in to its live earnings call, where management will discuss the results at4:30 p.m. Eastern Daylight Time. Both the earnings release and a link to the conference call will be available on the company'sinvestor relations website.

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Joe Tenebruso 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.