Decelerating Comps, Higher Costs Dent Zoe's Kitchen Inc. Earnings

By Joe

Zoe's Kitchen Inc. (NYSE: ZOES) reported fourth-quarter results on Feb. 23. The Mediterranean-inspired restaurant chain is aggressively expanding its store base, but cost inflation and flat comparable sales are pressuring margins.

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Zoe's Kitchen results: The raw numbers

Data source: Zoe's Kitchen Q4 2016 earnings press release.

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What happened with Zoe's Kitchen this quarter?

Total revenue rose 17.6% year over year to $62 million, as Zoe's Kitchen opened seven new company-owned restaurants during the fourth quarter and a total of 38 in 2016.

Image source: Zoe's Kitchen.

Comparable-restaurant sales increased just 0.7%, as a 3.1% price hike was mostly offset by a 2.4% decrease in transactions and product mix. This was at the low end of Zoe's guidance for fourth-quarter comp growth of 0.5% to 2%, and a significant deceleration from Zoe's 7.7% comparable-sales growth in Q4 2015.

Moreover, restaurant contribution (defined as restaurant sales less restaurant operating costs) declined 1.4%to$10.3 million. As a percentage of restaurant sales, restaurant contribution margin fell 320 basis points year over year to 16.6% due to higher labor and store operating costs.

Additionally, EBITDA (earnings before interest, taxes, depreciation, and amortization) -- adjusted to exclude preopening costs, equipment disposals, and other nonrecurring items -- dropped 19% to $3 million, with adjusted EBITDA margin falling 220 basis points to 4.9%.

All told, Zoe's Kitchen reported a fourth-quarter adjusted net loss of $0.5 million, or $0.03 per share, compared to net income of $2.6 million, or $0.13 per share, in the prior-year period.

Looking forward

These results prompted Zoe's to issue a somewhat tepid outlook for 2017, including:

  • Total revenue between $325 million and $327 million, representing growth of approximately 18% compared to 2016
  • 38 to 40 company-owned restaurant openings
  • Comparable-restaurant sales growth of 1% to 2%
  • Restaurant contribution margin between 19% and 19.3%
  • General and administrative expenses between 10.7% and 10.8% of total revenue

CEO Kevin Miles also highlighted several initiatives that could help to spur growth in the year ahead.

Management also remains optimistic as to Zoe's Kitchen's long-term expansion plans.

"Our pipeline is strong, our new units continue to perform well, giving us the confidence in the near- and long-term growth strategies," said Miles during a conference call with analysts. "We believe that our sharp focus on these key initiatives will enable us to generate strong operating results, creating a lasting value for our shareholders over the long term."

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Joe Tenebruso 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.