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Zoe's Kitchen Weathers the Storm

Hurricanes and dining out don't go so well together. That was evident in Zoe's Kitchen's (NYSE: ZOES) third-quarter results, which it released on Nov. 9. Yet with these storms now behind it, the Mediterranean-inspired restaurant chain is ready to move forward with a revamped growth plan in the year ahead.

Zoe's Kitchen results: The raw numbers

What happened with Zoe's Kitchen this quarter?

Total revenue rose 15.7% year over year to $77.9 million, even though hurricanes Harvey and Irma had a $1.1 million negative impact on sales. The revenue increase was driven by new restaurant openings, including 11 new locations in the third quarter.

Yet comparable restaurant sales declined 0.5%, as a 1.8% price increase was more than offset by a 2.3% decrease in traffic and product mix. Zoe's estimates that the hurricanes had a negative impact of 0.9% on comps.

"While the momentum from our new menu introductions continued into the third quarter, our results also reflect the impact that hurricanes Harvey and Irma had on a significant portion of our store base," CEO Kevin Milesvsaid in a press release. "In total, the storms affected approximately one-third of our restaurant base."

In addition to these storms, higher labor and store opening costs weighed on Zoe's restaurant contribution margin, which decreased 0.3% to 18.8%.

All told, EBITDA -- adjusted to exclude preopening costs, equipment disposals, and other nonrecurring items -- rose 4.7% to $6.9 million, while adjusted EPS declined to $0.01 from $0.04 in the year-ago quarter.

Looking forward

Zoe's updated its full-year guidance to account for its hurricane-impacted third-quarter and early fourth-quarter trends. Its forecast now includes:

  • Total revenue of $314 million to $316 million, down from a previous estimate of $314 million to $322 million
  • Comparable restaurant sales down 2% to 2.5%, compared to flat to down 3%
  • Restaurant contribution margin of 3% to 18.5%, versus 18.3% to 19%

Miles also said that the company would open 25 restaurants in 2018, down from a prior forecast of 25 to 30 new stores.

While Zoe's more measured pace of expansion is disappointing to many investors, it's also a prudent move given the company's tepid comp growth in recent quarters. Moreover, it will allow Zoe's to rely more on its operating cash flow to fund growth and less on debt, which in turn should result in a stronger balance sheet and a lower overall risk profile -- two things that may make Zoe's Kitchen more attractive to investors.

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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.