3 Things That Zoe's Kitchen Got Wrong in Q3
Image source: Zoe's Kitchen.
Share's ofZoe's Kitchen (NYSE: ZOES)moved lower on Tuesday following another rough quarter out of the fast-casual chain specializing inMediterranean dishes. The stock is closing in on last month's all-time low.
I singled out three things that Zoe's Kitchen had to do to get back on track last month, and it has fallen short on all three fronts. Let's revisit those three items, and how things haven't gone Zoe's Kitchen's way.
1. Fast casual needs to win back Wall Street's respect
A lot of fast-casual concepts went public in recent years, riding the coattails of Chipotle Mexican Grill (NYSE: CMG). The burrito roller shook up the industry with its assembly-line eats, offering casual dining quality food with the convenience of fast food.
Zoe's Kitchen was a solid company before its 2014 IPO, but its debut as a publicly traded company probably wouldn't have happened if underwriters weren't knocking on the doors of growing fast-casual concepts that they could market as the next Chipotle. Fast casual was hot, and Zoe's Kitchen was one of the many market beneficiaries.
We've seen how things have fallen apart at Chipotle since food-borne illness outbreaks smacked the brand late last year. It hasn't been able to bounce back, cranking out four consecutive quarters of double-digit declines in comps. Its latest results were rough, sending the stock to a fresh three-year low. Zoe's Kitchen was the right stock at the right place when it went public in 2014, but now it's definitely not in the right place.
2. The market needs to redefine its valuation parameters
Investors overlooked the lofty valuation at Zoe's Kitchen because it was the price of admission to ride a darling in the once hot fast-casual niche. As I pointed out last month, when Zoe's Kitchen stock peaked at $46.61 during the summer of last year it was trading at 466 times that year's eventual earnings and 3.96 times that year's revenue. Now that we've seen the stock shaved by more than half as Zoe's Kitchen's top-line grows andZoe's Kitchen's P/E and P/S multiples now check in at 205 and 1.6, respectively, based on this year's analyst targets.No one is going to argue that Zoe's Kitchen is cheap even after the stock's massive haircut. However, if it pits its revenue-based multiple to Chipotle, it's looking pretty good for a chain that is still posting positive comps and top-line growth.
3. Nov. 14 needs to go well
The third and final stipulation to get this turnaround going is that Zoe's Kitchen had to impress the market with its third-quarter results. It was a mixed showing out of the 201-eatery chain. Revenue climbed 19%, just shy of expectations. Its adjusted profit of $0.04 a share fell short of last year's bottom-line results, but in line with expectations given the contracting contribution profit margin that Zoe's Kitchen is experiencing.
The news gets worse as we belly up to guidance. For the second quarter in a row, we see Zoe's Kitchen hosing down its revenue, comps, and contribution profit margin forecasts for the entire fiscal year. This was the news thatclobbered the stocklast time out, and the carnage would've been ugly today if it hadn't already shed so much of its value over the past three months.
Zoe's Kitchen investors can find silver linings in the streak of positive comps that is still intact and that the chain is still profitable, at least on an adjusted basis. Marching its way back to market fancy won't be easy, but one way for that to start is for Zoe's Kitchen to stop having to tweak its forecasts lower every three months.
Forget the 2016 Election: 10 stocks we like better than Zoe's Kitchen Donald Trump was just elected president, and volatility is up. But here's why you should ignore the election:
Investing geniuses Tom and David Gardner have spent a long time beating the market no matter who's in the White House. In fact, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Zoe's Kitchen wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of November 7, 2016
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.