Zoe's Kitchen: Fast Growth in Fast Casual

01/29/2015 8:00 am EST


Briton Ryle

Editor, The Wealth Advisory

‘Fast casual’ dining is a new wave in food service, offering quality food at reasonable prices, explains Briton Ryle, editor of Wealth Advisory.

The stocks in this space—such as Panera (PNRA) and Chipotle Mexican Grill (CMG)—have done very well.

Five years ago, Panera was a $65 stock. Today, it’s a $165 stock. Chipotle shares have done even better, growing from $100 to $650.

Well, now it’s time to add another to the list of rapidly-growing fast casual restaurants: Zoe’s Kitchen (ZOES), which brings Mediterranean-style food to the fast-casual dining space.

That means lots of grilled chicken, grilled beef, seafood, soups, several salads, and humus. Like Chipotle, Zoe’s uses preservative- and antibiotic-free meat and everything is made daily, so it is fresh.

In keeping with the trend toward healthier offerings, you won’t find French fries at Zoe’s. Instead, you can get side orders of roasted veggies, braised white beans, fruit, a Greek-style slaw with feta cheese, rice, or pasta salad.

Zoe’s Kitchen was founded in Birmingham, Alabama in 1995. It currently has 128 company-owned stores, and just three franchises, after it recently bought three back from the owners.

It is adding ~30 stores a year and has boasted 50% revenue growth for the last couple of years. In the most recent quarter, it posted +5% same store sales growth, which is very good.

The company wants to have ~1,500 locations open by 2022. If the company can simply maintain the average of $1.5 million in annual sales per location, that would mean $2.4 billion in annual sales.

So far, Zoe’s has done $160 million in trailing 12-month revenue. For the full year 2014, it should do $170 million and analysts expect $218 million for 2015.

There is a lot of growth ahead for Zoe’s Kitchen. It’s in prime position to ride the trend toward healthier fast-casual food. The company does not pay a dividend, but in a few years, that will likely change. We look forward to having Zoe’s Kitchen in the Wealth Advisory portfolio for a long time.

We rate Zoe’s Kitchen a Strong buy under $35 a share. Our 12-month price target is $48, suggesting 60% upside from current levels around $30.

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