Why Zoe's Kitchen and Habit Restaurants Inc Declined in 2016

By Asit Sharma Markets Fool.com

Image source: Getty Images.

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What happened

Stock inZoe's Kitchen Inc(NYSE: ZOES)and Habit Restaurants Inc(NASDAQ: HABT)fell 14.3% and 25.2%, respectively, in 2016, according to data provided byS&P Global Market Intelligence.

So what

Both chains came under pressure from a trend that plagued the restaurant industry for the entire year: decreasing traffic counts. According to restaurant analytics firm TDn2K, same store sales for the restaurant industry declined 3% during the first 12 months of 2016, with traffic as the primary culprit.

A look at food price trends illuminates why visits to restaurants have dipped. The Bureau of Labor Statistics (BLS) reports that for the 12-month period ending in November 2016, the Consumer Price Index for All Urban Consumers (CPI-U) revealed an average decrease in "food at home" (grocery) prices of 2.2%, and a corresponding increase in "food away from home" (restaurant) prices of 2.3%.

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This differential of lower grocery costs versus climbing menu prices has effectively created a headwind for the restaurant industry. The fast-casual sector, to which both Zoe's and Habit Restaurants belong, is more vulnerable to discretionary caution among consumers than the quick service sector, in which fast food restaurants regularly entice their core customers to return through value and dollar menus.

Softer traffic has certainly cut into Zoe's momentum. Through the first three quarters of 2016, Zoe's posted a comparable sales increase of 4.9% versus the same period in 2015, one percentage point below the 2015 gain over 2014 of 5.9%. And comps may be weakening further: In the third quarter of 2016, the company managed a comparables increase of just 2.4%, which consisted of a 0.5% decrease in traffic, offset by an average ticket price increase of 2.9%. This mirrors the CPI-U grocery/restaurant dynamics discussed above.

Habit Restaurants, or "The Habit" as it is fond of referring to itself, may also be on a weaker comps footing at the close of 2016. After comparables increases of 2% in Q1 2016, and 4% in Q2 2016, the burger chain posted only a 0.2% bump in Q3 2016. As in Zoe's case, menu price hikes of 2.6% were negated by a drop in traffic of 2.4%.

Now what

While Zoe's and The Habit certainly aren't the only restaurants to have experienced a stock decline in 2016 due to investor pessimism over deteriorating customer visits, the companies are two of the higher profile fast-casual chains, both having debuted on the public markets within months of each other in 2014.As investors regard each as having growth potential that well exceeds the fast-casual sector as a whole, it's incumbent for them to show reinvigorated comps in 2017.

What should have been an acceptable alternative to comps growth really didn't impress investors last year. While we still will need to see final numbers when each company reports on its fourth quarter of 2016 in February, it's safe to say that both organizations will have expanded their store bases by roughly 25% in 2016. Still, this impressive pace of new store openings did little to support either company's stock price over the last 12 months.

Zoe's plan for improving comparables involves meals served outside its restaurants. The franchise is proving a popular Mediterranean-style, healthy option for catered business meals, and company management has signaled its intent to play to this strength in 2017. Zoe's has also started experimenting with small order meal delivery, and recently completed a 30 store test of family and single meal delivery with a third party. With a promising catering and delivery revenue stream, Zoe's may be able to weather some in-house traffic deterioration and still boost its comps in the coming quarters.

The Habit has taken a different tack to lifting traffic, which consists of introducing frequent, premium limited time offerings (LTOs), to build comps based on recurring customer visits and price increases. In the company's most recent earnings conference call, CEO Russ Bendel singled out a well-received strawberry balsamic chicken salad selling for $7.50 as the type of item that drives traffic and commands a higher price point. The Habit also intends to step up the use of technology in 2017, leaning on "targeted digital strategies" to complement its LTO innovation.

Regardless of approach, Zoe's and The Habit will have to execute with purpose in 2017, as they're up against larger macroeconomic trends that won't be easy to surmount. Investors looking for performance clues on either chain may want to pay more attention than usual to the government's monthly CPI press releases this year.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Zoe's Kitchen. The Motley Fool has a disclosure policy.