3 Things Zoe's Kitchen Stock Needs to Bounce Back

By Markets Fool.com

Image source: Zoe's Kitchen.

Continue Reading Below

These aren't savory days forZoe's Kitchen (NYSE: ZOES)if you're a shareholder. Zoe's Kitchen stock hit an all-time low earlier this month, and while that may not seem like a big deal for a restaurant chain that has only been trading publicly for two years, it's a major unraveling for an investment that was previously praised as a market darling.

The fast-casual chain specializing in Mediterranean dishes is clearly out of favor, but it's not in the same kind of sorry shape as some of the other doghouse stocks that it's rubbing elbows with in the list of equities hitting fresh lows this month.

Let's take a look at the few things that Zoe's Kitchen needs to do to regain its winning stride.

1. Fast casual needs to win back Wall Street's respect

Chipotle Mexican Grill (NYSE: CMG) has been the poster child for fast casual, but its popularity has taken a blow since a couple of food-borne illness outbreaks hit the burrito roller late last year. Chipotle's trying to recover, but we've yet to hit bottom. The chain is all but a lock to report its fourth consecutive quarter with a double-digit decline in comps when it announces fresh financials a week from today.

Continue Reading Below

What does Chipotle have to do with Zoe's? The two concepts are clearly miles apart in terms of cuisine, and with Zoe's eateries clinging to positive comps, it's a good thing that they're different. However, Chipotle played a big part in whetting investor appetite in this niche.

Fast casual is a segment in the eatery space that bridges fast-food and casual dining, offering the speed and convenience of a fast food with the higher-quality eats associated with traditional table-service operators. When Chipotle took off, it attracted market attention to the niche. It led to several fast-casual and better-burger chains to go the IPO route, and many of them have faltered lately. Chipotle proving mortal has cooled investor interest in fast casual, and it follows that a recovery in Chipotle stock could bring back investors that see fast casual as a tasty niche again.

2. The market needs to redefine its valuation parameters

Zoe's Kitchen -- the stock -- is in a funk. It has shed more than half of its value since peaking at $46.61 in July of last year. Zoe's Kitchen -- the restaurant chain -- is holding up considerably better. It's still growing in terms of both units and comparable-restaurant sales.

Growth investors flocked to Zoe's Kitchen in 2014 and 2015, ignoring sky-high top- and bottom-line multiples. The silver lining through all of this is that sales and earnings continue to improve, even as the stock retreats.

At its peak during the summer of 2015, the stock was trading at 466 times the earnings that it would go on to deliver that year and 3.96 times that year's revenue. Zoe's Kitchen's P/E and P/S multiples now check in at 198 and 1.53, respectively, based on this year's analyst targets.

The earnings multiple is rich, and it will remain that way with its store-level profits being reinvested in more locations. However, a price-to-sales multiple of 1.53 is actually more than reasonable. It's nearly half of Chipotle's top-line multiple, and Zoe's isn't even on the wrong end of a turnaround.

3. Nov. 14 needs to go well

Zoe's Kitchen reports financial results for its third quarter in four weeks. Analysts see revenue climbing 21%. Wall Street's also eyeing a profit of $0.04 a share, just shy of the $0.05 a share it posted a year earlier.

Most of the slide at Zoe's Kitchen has come since disappointing the market withho-hum quarterly resultsin late August. A strong of even a modest report should reverse that trend, especially now that the slowdown in performance has already been priced into the stock. If Zoe's Kitchen gets back to beating Wall Street earnings expectations -- something that it was doing consistently before merely meeting expectations last time out -- this dud stock can resume its role as a market darling.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Rick Munarriz owns shares of Zoe's Kitchen. The Motley Fool owns shares of and recommends Chipotle Mexican Grill 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.