Zoe's Kitchen Stock Is Getting Hungry

By Markets Fool.com

Image source: Zoe's Kitchen.

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This would seem to be a great time for Zoe's Kitchen (NYSE: ZOES). The popularity of Mediterranean cuisine is on the rise. The flavors are trendy and awareness about the health benefits of a Mediterranean diet is growing.

Zoe's Kitchen is the undisputed leader in a niche that typically consists of small indie eateries. It should be on top of the world, but the stock is somewhere else. Shares of the company giving Mediterranean cuisine a fast-casual spin have been crushed since posting mixed financial results last month.

Zoe's Kitchen stock took a 17% hit the day after posting its second-quarter results. Some stocks bounce back after taking a big hit, but even a dead-cat bounce hasn't been in the cards here. Shares of Zoe's Kitchen have moved lower in 12 of the 14 trading days following the initial drop. The stock has now shed a third of its value since announcing its poorly received quarterly report. It dipped below $25 today for the first time since mid-February.

A million bucks can be a pretty big deal

The actual report wasn't horrendous. New locations and a modest 4% uptick in comps helped deliver a 22% year-over-year spike in revenue. A profit of $0.06 a share was in line with Wall Street expectations.

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It was weak guidance that doomed the 183-unit chain, creating the falling dominoes of bearish sentiment that finds the stock at a new seven-month low today. Zoe's Kitchen went from targeting revenue of $277 million to $281 million for the entire year to a new range of $277 million to $280 million. Its comps outlook was also nudged lower, going from between 4.5% and 6% to 4% and 5%.

Just a $1 million haircut at the top end of its range and tweaking its comps by 0.5% to 1% was enough to send the stock crumbling to the point where it has shed 33% of its value. That wasn't the only thing that send bulls packing.

At least three analysts slashed their price targets on the stock. They were generally concerned about slowing comps and traffic trends.

The silver lining for those still holding on through the deluge or those considering an entry point now is that the stock is trading a lot lower than it was at the time of the report. Valuation concerns are no longer as ominous.

Credit Suisse, Piper Jaffray, and Baird analysts lowered their price targets to $30, $31, and $40 respectively last month, but even the smallest of those goals translates into decent upside from here. This dry spell where the stock has closed lower in all but two days over the past three weeks won't last forever. As long as Zoe's Kitchen can live up to its adjusted outlook, the market reaction appears to be overdone.

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Rick Munarriz owns shares of Zoe's Kitchen. 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.