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Share's ofZoe's Kitchen (NYSE: ZOES)hit a three-month high yesterday. The stock has now rallied 32% since bottoming out at $20.20 in early October, breathing new life into a stock that the market had left for dead this summer.
The growing chain of fast-casual restaurants specializing in Mediterranean eats hasn't had any major developments triggering the rise. Zoe's Kitchen is merely riding the bounce that's lifting most restaurant operators -- even those that are out of favor.
Recent investors may be cheering the big gains through the past two months, but Zoe's Kitchen stock has a long way to go to claw its way back where it used to be. Shares of Zoe's Kitchen are trading 43% lower than their all-time peak two summers ago. But the company has a much easier way out of the hole it dug itself into earlier this year, as it's now trading just 5% lower year to date. The rally in recent weeks is welcome, but right now the stock gains are making promises that its fundamentals have yet to keep.
Zoe's Kitchen was a market darling following its 2014 IPO. Investors were hungry for fast casual chains, and Zoe's Kitchen fit the bill with its unique menu. It lived up to the hype, posting quarter after quarter of blowout results and positive comps.
The restaurant operator has proved mortal lately. It's merely met Wall Street's profit targets in back-to-back quarters. Eatery-level sales continue to deliver year-over-year growth, but that's not enough to justify the lofty valuations that Zoe's Kitchen stock was commanding at its peak.
Zoe's Kitchen is also coming off back-to-back quarters of lowering its sales guidance, though the downward revisions haven't been much. It went from a top-line range between $277 million and $281 million for all of 2016 to between $277 million and $280 million four months ago. Last month, the range was lowered to between $276 million and $277 million. Comps guidance has also been inching lower but remains squarely positive.
All hope isn't lost for the 201-unit chain, but if it wants to become a market darling again, it will have to get back to beating Wall Street's profit targets and boosting its guidance -- two things it did during this year's first quarter. The stock is rallying these days because investors are rotating back into restaurant stocks, but sooner or later it's going to have to earn those upticks.
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Rick Munarriz owns shares of Zoe's Kitchen. The Motley Fool owns shares of and recommends 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.