Industry News | August 18, 2017 | By Danny Klein | QSR Exclusive Brief

Sales, Stock Drop as Zoës Kitchen Slows Growth

Zoës reported a 5 percent decrease in transactions in the second quarter. Zoës Kitchen
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Shares of Zoës Kitchen slid in after-hours trading Thursday and throughout the day Friday following a sluggish second quarter that saw same-store sales and traffic dip across its 232-unit system.

Heading into Thursday’s earnings release, shares were down nearly 70 percent over the past year. They popped as much as 11 percent on Wednesday, proving investor optimism leading up to the announcement.

That didn’t turn out to be the case, although president and CEO Kevin Miles said several sweeping initiatives, including the chain’s biggest menu overhaul in eight years, will likely show positive in the coming quarter.

“These tools, along with the infrastructure initiatives completed earlier this year, set the stage for us to drive results in the back half of this year and provide the platform for future growth,” Miles said in a statement.

Comparable restaurant sales at Zoës’ restaurants, of which all but three are company owned, dropped 3.8 percent in the second quarter versus the prior year period. Income from operations fell 60.9 percent to $1.1 million. Net income was $0.6 million, or 3 cents per diluted share, compared to net income of $1.2 million, or 6 cents per diluted share. Total revenue increased 12.1 percent to $74.3 million.

Additionally, Zoës reported a troubling 5 percent decrease in transactions and product mix, somewhat offset by a 1.2 percent increase in price. The comp sales and traffic declines occurred at restaurants open for 18 full periods or longer, which measures to a base of 169 restaurants.

These numbers sent shares down 4 percent in after-hours trading. The stock was trading at $12.41 Friday afternoon, a decline of 6.4 percent.

In a conference call Thursday, Miles admitted the results were “challenged” but said top-line numbers improved toward the end of June. And there’s reason to believe that uptick will continue.

Mainly, the brand is hoping to build momentum from its June 27 rollout of two new protein options, three pita sandwiches, three bowls, four sauces, and a new appetizer.

The goal, Miles said, was to bolster Zoës’ Mediterranean positioning, and take a deeper dive into its bold and better-for-you ingredient stance.

“Our guests have responded favorably and performance has outpaced our test results, driving increased mix. We plan to feature these items at our marketing messages as we move through the back half of this year,” he said in the call.

The new menu is also driven by customization. The bowls are build-your-own style, with three base options (cauliflower rice, ancient grains, salad) and three protein choices (lamb, harissa salmon, and Mediterranean chicken). 

This change has run parallel to some older items exiting the menu. “The trade-in and the trade-out is working as we had hoped it would,” said Sunil Doshi, the chain’s chief financial officer.

“We see that the new food is working and we are excited about that,” he said earlier in the call. “… the penetration rate has exceeded our test results. We are only a few weeks into the quarter.”

Despite the results, Zoës reaffirmed its fiscal outlook for the year. It predicts comp sales of flat to negative 3 percent and total revenue between $314–$322 million.

The company opened 13 restaurants in the quarter and five since August 17. Zoës still expects to debut 38–40 stores in the fiscal year, although, moving forward, the chain will moderate its growth. Miles said Zoës plans to track down to 25–30 in 2018, “as we balance our new store growth plans and continue to focus on building brand awareness and traffic.”

There are a couple of other initiatives on the dock for Zoës. On August 9, the chain launched a revamped website designed to enhance the customer experience with an updated location finder, easily accessible menu viewer, and quick online ordering—both for individuals and catering requests. Zoës is also on track to release a new app before the end of the third quarter.

Online catering and a new omnichannel loyalty program will be part of the launch.

Miles also noted that Zoës is moving forward with delivery. “In addition to third-party services, we have also initiated a small lunch and dinner delivery test, using in-house labor in two of our restaurants, and we will continue to gain valuable operational insight,” he said.

Zoës is dedicating additional attention to its catering as well, Miles added.

All of these technology initiatives are allowing Zoës to improve its guest experience through better data. It will help the brand reach out to customers individually through the loyalty program and email platform.

“As we move through the back half of the year, we remain focused on executing initiatives that we believe will drive sales and traffic. We are listening to our guests and providing our restaurant teams, with the tools they need to bring the brands alive each and every day,” he said.