Zoe’s Nips Guidance on Lower Comp Restaurant Sales

Restaurant chain reported a 21.7% increase in total revenue to $66.3 million in Q2 FY16

z1Mediterranean-style restaurant chain Zoe’s Kitchen Inc. (NYSE: ZOES) announced its Q2 FY16 financial results on August 22nd, 2016.

The Plano, Texas-based Company, through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22nd, 2016, Zoe’s operated 191 owned and franchised restaurants in 20 states across the U.S. It counts restaurants such as Fiesta Restaurant Group Inc. (NASDAQ: FRGI), Denny’s Corp. (NASDAQ: DENN), and Nathan’s Famous Inc. (NASDAQ: NATH) as its competitors. Read more about Zoe’s Kitchen’s financial results below.

Q2 FY16 financial highlights

During Q2 FY16, Zoe’s reported a 21.7% increase in total revenue to $66.3 million from $54.5 million in the year-ago period, but fell short of estimates of $67.2 million. Total revenue, which includes restaurant sales from Company-owned restaurants and royalty fees, grew largely as a result of new restaurant openings, and marks the 26th consecutive quarter of positive comparable restaurant sales growth. Zoe’s has opened 35 new restaurants since Q2 FY15.

Source: Zoe's Kitchen
Source: Zoe’s Kitchen

During Q2 FY16, Zoe’s comparable store restaurant sales increased 4%, mainly on account of a 0.9% increase in transactions and product mix, combined with a 3.1% increase in price. The comparable restaurant base includes those restaurants open for 18 full periods or longer and included 134 restaurants as of July 11th, 2016.

Restaurant contribution increased 23.7% to $14.3 million during the reporting quarter, up from $11.6 million in the year-ago period. As a percentage of restaurant sales, restaurant contribution margin increased 40 basis points to 21.7% as the Company continued to benefit from lower commodity prices, which were partially offset by an increase in labor and store operating expenses.

Zoe’s net income for Q2 FY16 jumped six-fold to $1.2 million, or $0.06 per diluted share, compared to a net income of $0.1 million, or $0.01 per diluted share, in the year-ago period. Net income for Q2 FY16 included $0.5 million of executive transition costs. Adjusted net income was $1.2 million, or $0.06 per diluted share, for Q2 FY16, compared to adjusted net income of $1.0 million, or $0.05 per diluted share, for the year-ago period.

Restaurant openings/closures

Source: Company's Website
Source: Company’s Website

Zoe’s opened 9 new company-owned restaurants during Q2 FY16. As of July 11th, 2016, Zoe’s had 183 company-owned restaurants and 3 franchised restaurants. The company also reopened a restaurant in Columbia, South Carolina, that was closed in Q3 FY15 after damage from Hurricane Joaquin. Subsequent to the end of the Q2 FY16, Zoe’s has opened 5 additional restaurants, bringing the total restaurant count to 191.

Other highlights

Cash and cash equivalents: Zoe’s cash and cash equivalents totaled $14.4 million at the end of the reporting quarter, versus $19.1 million at the end of the comparable period last year.

Source: Zoe's Kitchen
Source: Zoe’s Kitchen

Expanded kids menu: On August 23rd, 2016, Zoe’s announced that it is introducing an expanded kids menu, starting September 27. The new kids menu offers more wholesome and diverse selections for evolving taste buds. The new kids menu offers Inspired by the Mediterranean food philosophy, and dishes have ingredients such as whole grains, fresh vegetables, fruits, and seafood, and incorporate grilling as the predominant method of cooking. Each entrée is served with a choice of side.

New restaurant development: With 25 new locations opened year-to-date, Zoe’s is on track to open 35 to 36 restaurants in FY16. The increased footprint and growing brand presence is aimed at establishing Zoe’s Kitchen as the leader in the Mediterranean-type fast casual dining restaurant category.

Lower guidance for full year FY16

Despite its revenue and profit growth, Zoe’s lowered its guidance for FY16 due to a downturn in comparable restaurant sales. Zoe’s now projects total revenue of between $277 million and $280 million (earlier $277 million to $281 million), with comparable sales projected to improve 4.0% to 5.0% (earlier 4.5% to 6.0%). The Company plans to open 35 to 36 company-owned restaurants (earlier 34 to 36). Consequently, restaurant contribution margins are expected to come in between 20.5% and 20.8% (previously 20.5% and 21.0%). Lastly, general and administrative expenses are expected to range between 11.5% and 11.7% of total revenue (previously 11.6% and 11.8%). This is inclusive of $2.3 million of non-cash equity based compensation expenses (unchanged from earlier guidance).

Stock Performance

z5Zoe’s Kitchen stock ended the day at $28.37, slipping 4.32%, at the close on Friday, August 26th, 2016, having vacillated between an intraday high of $29.87 and a low of $28.12 during the session. The stock’s trading volume was at 794,206 for the day. The Company’s market cap was at $576.76 million as of Friday’s close.

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