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Zoe's Kitchen Succeeds Outside The Fast-Casual Box

T he term “fast casual” conjures up a certain image in the restaurant industry — eateries that serve fresh food at affordable prices but without full table service.

Beyond that, there are vast differences.

At one end of the spectrum are “burger in a bag” restaurants, as Kevin Miles calls them. These places specialize in fresh-made burgers, hand-cut fries and soft drinks.

At the other end are restaurants that focus on wholesome fare that is free of additives and preservatives, and offer choices for customers on vegetarian, vegan and gluten-free diets.

That’s the end occupied byZoe’s Kitchen ( ZOES ), where Miles serves as CEO.

Zoe’s specializes in healthy, freshly prepared Mediterranean food such as chicken pita sandwiches, hummus, kabobs, salads and tabouli. Although it occupies a place in the fast-casual universe, several things set Zoe’s apart from the usual crowd.

For one thing, much of its competition comes from outside the traditional fast-casual sector.

Although Miles seesChipotle Mexican Grill ( CMG ) andPanera Bread ( PNRA ) as his rivals, “there are a few in the space that we don’t see as direct competitors, such as burger or pizza restaurants. When our customers aren’t eating at Zoe’s, they are eating atWhole Foods ( WFM ) or at ‘better-for-you’ grocers.”

Another thing that sets Zoe’s apart is the fact that it serves beer and wine. Most of the large fast casual chains don’t. And unlike most chains, customers at Zoe’s have food brought to their tables after they order at the cash register.

Upscale Appeal

Zoe’s clientele also sets it apart. Women make up about 70% of customers, according to a recent note from analyst Stephen Anderson of Miller Tabak. Its core customer base is composed of college-educated women in the 25-to-54 age group who come from households with at least $100,000 in annual income.

“Women are our predominant consumer because most of the dining decisions are made by women,” CEO Miles told IBD.

Because Zoe’s gets most of its business from women, it tends to locate restaurants where the women are.

Analyst Anderson notes that the company “seeks co-tenancy with retail chains catering to more affluent women with active lifestyles, such asLululemon ( LULU ),Ulta (ULTA) andAnn Taylor (ANN) . Zoe’s also seeks properties with high concentrations of offices nearby to sustain daytime traffic.”

Finally, the way Zoe’s picks its markets is also different from the industry norm.

The company uses a “hub and spoke” strategy whereby it locates a major U.S. market — the hub — and then “spokes out” new locations from there. Most restaurant chains base their locations on local population density metrics.

Where Zoe’s Goes

Miles points to the Dallas metro area as an example of its hub and spoke strategy. The company has 14 locations in the Dallas metro area and can probably expand to as many as 50 locations, he says.

“That’s a huge concentration of locations, so from there we could spoke out to locations an hour or so from Dallas,” Miles said. “We could manage it from Dallas and be able to penetrate a lot of surrounding markets and bring a lot of efficiencies. We’ve done that in a lot of markets, including Atlanta, Charlotte (N.C.) and Jacksonville (Fla.).”

As of March 12, Zoe’s had 140 restaurants in 15 states, including three franchises. Most are located in Southern states such as Texas, Georgia, Alabama, North Carolina and Virginia, though it will soon move into the Kansas City metro area, which will put it in both Kansas and Missouri.

The vast majority of its restaurants — about 90%, according to Anderson — are located in shopping centers rather than as stand-alone locations.

The company has delivered robust overall sales growth through the years thanks to an aggressive expansion plan. It opened 30 company-owned restaurants last year and acquired five franchise units.

Anderson looks for management “to ease back to a high-teens to low-20% unit growth rate through the end of this decade, followed by 15% unit growth thereafter.”

Most of its near-term growth will take place in or near existing markets, Miles says.

Food And Finance

During its fourth quarter, Zoe’s opened six company-owned restaurants and acquired three franchises. It logged overall Q4 sales of $40 million, up 40% from a year earlier and slightly above consensus views. Comparable-restaurant sales increased 7.8%.

The company posted a loss of 3 cents a share on an adjusted basis, better than the 5-cent shortfall that analysts had expected and vs. a 6-cent loss a year earlier.

For 2015, Zoe’s expects revenue of $215 million to $220 million. The company guided 2015 comparable-restaurant sales growth to a range of between 4% and 6%, down from 2014’s 6.7% gain.

Analysts polled by Thomson Reuters expect full-year EPS of 6 cents in 2015 and 16 cents in 2016.

Like many restaurant chains, Zoe’s got hit last year by rising costs of chicken and other food items, Miles says. He expects the company’s cost of goods to decline “ever so slightly” this year as it gets bigger and as the company gains more buying power.

“A few years ago, we were too small to have much purchasing power, but that’s not the case anymore,” Miles said. “We will continue to leverage our size with manufacturers and distributors” to lower food costs.

Progress Since IPO

The restaurant chain had its initial public offering last April, priced at 15 a share. Zoe’s stock rose as high as 38.42 on Oct. 31 and currently trades near 33.

The company has an IBD Composite Rating of 82. It belongs to IBD’s Retail-Restaurants group, which ranks No. 9 out of 197 industries tracked. Top-rated stocks in the group includeFiesta Restaurant Group (FRGI),Denny’s (DENN) andNathan’s Famous (NATH).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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Zoe's Kitchen Succeeds Outside The Fast-Casual Box Reviewed by on . T he term "fast casual" conjures up a certain image in the restaurant industry -- eateries that serve fresh food at affordable prices but without full table ser T he term "fast casual" conjures up a certain image in the restaurant industry -- eateries that serve fresh food at affordable prices but without full table ser Rating:
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