Why Shares of Zoe's Kitchen Are Plunging Despite a Solid Second Quarter

By Markets Fool.com


Image source: Zoe's Kitchen.

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What: Shares of Zoe's Kitchen, Inc. (NYSE: ZOES) are being pummeled this morning and are down nearly 20% after the market had a chance to react to the company's second-quarter results. Surprisingly, considering the sharp decline in stock price, Zoe's Kitchen actually met expectations.

So what: Starting from the top, Zoe's Kitchen booked slightly more than $66 million in revenue, a 22% jump over the prior-year result. Comparable restaurant sales increased 4% and restaurant contribution spiked 24% to $14.3 million. Looking closer to the bottom line, adjusted EBITDA increased 20% to $7.1 million and net income checked in at $1.2 million, or $0.06 per diluted share.

"We continue to execute on our development plans, opening nine new Zoe's Kitchen locations during the second quarter and have since added another five locations in the third quarter. With 25 new locations opened year-to-date, we are on track to open 35 to 36 restaurants in 2016. Our increased footprint and growing brand presence continue to establish Zos Kitchen as the leader in Mediterranean," said President and CEO Kevin Miles.

Now what: Zoe's Kitchen had a decent quarter, with growth remaining strong and meeting analyst expectations. But the sharp drop in stock price was due to the company's guidance. Management trimmed the high end of its revenue guidance for the full year. It now estimates full-year revenue to check in between $277 million and $280 million, down only slightly from the previous high end of $281 million, and its comparable restaurant sales growth to land between 4% to 5%, down from the previous guidance of 4.5% to 6%.

Investors have to remember that, prior to the release of second-quarter results, the stock was more than 30% higher year to date. So, a little decline in full-year guidance was all it took to convince some to take profits off the table. The long-term investment thesis for Zoe's Kitchen, however, remains unchanged.

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Daniel Miller 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.