Zoe's Kitchen's Rebound Hinges on New Food, Marketing, and Time

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After a first-quarter earnings report that saw comparable-restaurant sales turn negative for the first time since its IPO, Zoe's Kitchen (NYSE: ZOES) stock is currently trading right around its all-time lows. At a recent conference appearance, Zoe's management provided details on how it expects to get things moving in the right direction again.

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New menu items to help drive sales and traffic

While Zoe's isn't the only restaurant struggling with a decrease in diners, its comps slowdown was swift and steep. In the first quarter of 2016, comps rose 8.1%. A year later, comps declined 3.3%, and the company now expects full-year 2017 comps to come in between flat and negative 3%.

In an attempt to revive its flagging traffic and comps numbers, Zoe's is rolling out several new menu items -- its largest revamp since 2012. The company is introducing three new bowls (a new category for Zoe's): Cauliflower Rice, Power Grains, and Mediterranean Salad Trio. Diners can customize these with a choice of proteins, including a new lamb kofta that has performed very well in test markets. There are also two new pita sandwiches (lamb and salmon) along with a variety of new sauces (Greek tzatziki, Israeli skhug, Moroccan harissa, and Italian salsa verde) that will help Zoe's menu reflect a broader set of Mediterranean flavors. In addition, Zoe's is introducing pre-made grab-and-go snack boxes, aimed at customers who don't always have the option to wait for takeout.

The new menu will be launched over the next couple of weeks. While that's too late to impact the company's second-quarter numbers, by the third quarter, management should have a good understanding of whether the new items have been able to boost sales and/or traffic.

More efficient, targeted digital marketing

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Zoe's previous efforts at marketing and advertising have centered around building Zoe's brand and showing the type of food it serves. Going forward, the company's marketing investments are shifting toward more digitally focused tactics that it can use to directly drive traffic to its stores.

The company will be rolling out a new online ordering platform later this summer, as well as a new loyalty app that it can use to target consumers with customized offers. Zoe's also plans to ramp up social media marketing and has made additional investments in making Zoe's more visible when consumers are searching online for things like catering or Mediterranean food.

Zoe's expects one big improvement...in 2020

One additional disappointment from last quarter's results was Zoe's restaurant-level profit margin, which slid 2.1 percentage points to 19.9%. The company expects this trend to continue throughout the year, and lowered its guidance for full-year restaurant-level margin to 18.3%-19%. One of the primary reasons for this is that Zoe's continues to aggressively open new restaurants that, on average, have lower average sales and higher labor costs during their first two years of operation.

At the end of 2016, those less-profitable restaurants (less than three years old) still made up around 54% of Zoe's total store base. But as restaurants mature, they become more efficient, with stores that are at least 3 years old averaging restaurant-level margins of 23%. By the end of 2020, the company estimates that 60% to 70% of its stores will fall into this more mature category, turning Zoe's lower-margin headwind into a higher-margin tailwind. At that point, CFO Sunil Doshi stated during the William Blair Growth Stock Conference, the company should be in a much better cash position, too, where cash from operations could be used to fund additional store growth.

Will any of this be enough?

While Zoe's clearly hopes the efforts above can help reverse its comps situation, management said surprisingly little else about the factors that led to last quarter's poor performance, and didn't give any update on second-quarter trends.

The company is continuing to test delivery, but that option is still only available in less than half of the company's stores. And with profit margin relief seemingly a long way off, Zoe's has an awful lot riding on the company's new menu features and digital initiatives.

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Andy Gould owns shares of SBUX and Zoe's Kitchen. Andy Gould has the following options: short January 2018 $57.5 puts on SBUX, long January 2018 $57.5 calls on SBUX, short January 2018 $30 puts on Zoe's Kitchen, and long January 2018 $30 calls on Zoe's Kitchen. The Motley Fool owns shares of and recommends SBUX and Zoe's Kitchen. The Motley Fool owns shares of PNRA. The Motley Fool has a disclosure policy.