Why Zoe's Kitchen Stock Rallied 13.8% in August

MarketsMotley Fool

What happened

Shares of Zoe's Kitchen (NYSE: ZOES) popped nearly 14% last month, according to data provided by S&P Global Market Intelligence. The Mediterranean-inspired restaurant chain's stock received a boost from better-than-expected second-quarter results and an analyst upgrade.

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So what

Zoe's popped 9% ahead of its second-quarter report when Telsey Advisor Group upgraded its stock to outperform from market perform. It then held onto most of those gains after it delivered Q2 earnings per share of $0.03, while Wall Street was only expecting a breakeven quarter. Zoe's $74.3 million in revenue, however, came in below analysts' estimates of $77.7 million.

Zoe's also said that it remains on track to hit its full-year financial targets. The company still expects comparable-restaurant sales growth of flat to down 3%, despite a 3.8% decline in comps in the second quarter. Management also reiterated its guidance for revenue of $314 million-$322 million, restaurant contribution margin of 18.3%-19%, and 38-40 new restaurant openings. Zoe's did, however, say that it plans to "moderate" its store count expansion to 25-30 restaurants in 2018.

Now what 

Despite its double-digit climb in August, Zoe's stock price is still down nearly 50% in 2017 following a brutal first half. Last month's move seems like a relief rally, with investors likely comforted by the restaurant chain's decision to not cut its outlook again like it did in the first-quarter.

Yet I find Zoe's announcement that it would be slowing its pace of new restaurant openings in 2018 to be troubling, as it's now unlikely that it will hit its long-term expansion targets. It also suggests that new locations may be cannibalizing the sales of Zoe's existing restaurants. Both of which would make the stock far less interesting to growth investors, and could make its August rally only a temporary reprieve before a renewed move downwards. As such, investors may wish to remain cautious when considering an investment in Zoe's Kitchen, and perhaps wait for evidence that its key operating metrics are stabilizing before initiating or adding to a position in the company.

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