Zoes Kitchen (ZOES)
By Paul Goodwin, Chief Analyst, Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 7/12/14 Sign up for Cabot Wealth Advisory—it's free!
Zoes Kitchen (ZOES) was founded in 1995 in Homewood, Alabama, as a place with simple food, cheerful service and quality ingredients. Its founders also had expansion on their minds as soon as the first location was solidly successful, with a second location opened in 1999, a third in 2001 and a total of 20 by 2007. At that point, big investors came aboard, and Zoes now boasts 114 company-owned stores and six franchised stores. 2014 has already seen 18 new locations opened and the company expects 23 to 25 additional openings this year.
Zoes isn’t profitable yet, preferring to use its cash flow to scale up. Revenue grew more than 50% per year from 2010 through 2012 and cooled to 46% in 2013.
It’s that process of scaling up through expansion of a chain of restaurants with a proven formula for success that makes Zoes such a favorite of Mike Cintolo's. He’s seen Buffalo Wild Wings (BWLD) grow from a company with 415 restaurants and annual revenue of $253 million in 2006 (when it was first recommended in Cabot Top Ten Trader) to a national chain with over 1,000 locations, plans to open 100 more this year and annual revenue of $1.33 billion.
If you cross the great example of Buffalo Wild Wing’s expansion with the healthy appeal of quality ingredients like Chipotle Mexican Grill, you can see why Mike's got Zoes Kitchen on his watch list.
From Cabot Wealth Advisory 5/12/14 Sign up for Cabot Wealth Advisory—it's free!
We’re all familiar with the success stories of McDonald’s, YUM Brands (KFC, Pizza Hut and Taco Bell) and Chipotle Mexican Grill. Restaurants can be great long-term investments because once a successful formula is established, growth is simply a matter of opening new restaurants, first across America and then throughout the world.
Mike Cintolo, chief analyst of Cabot Market Letter and Cabot Top Ten Trader, uncovered Zoes Kitchen (ZOES), which has 121 restaurants in 15 states.
The restaurant was founded by John Cassimus, who gave it his mother’s name and created a menu combining his Greek heritage and the Southern hospitality of Alabama where he was raised. That’s the formula that Zoes Kitchen has parlayed into an impressive growth streak; in the past three years, revenues have grown 55%, 59% and 46%.
I wish I could say I’ve eaten in a Zoes Kitchen, but I haven’t. As the company has grown out of Alabama, it’s gotten as far west as Arizona, and as far north as Pennsylvania, but it hasn’t gotten to Massachusetts. And I haven’t seen one in my travels—yet.
In any event, revenues were $116 million in 2013, which is impressive. But the company hasn’t turned a profit in recent years; it’s been too busy expanding.
Analysts are projecting that the company will lose two cents in 2014 and then make a profit of four cents per share in 2015, and that sounds fine to me. But what matters more to me, especially when it comes to gauging the long-term possibilities, are two other factors.
First is the food. America’s obese diabetic population needs more healthy foods, like those served by Zoes Kitchen, with its menu focused on Mediterranean foods. Admittedly, Zoes is not as cheap as McDonald’s—a spinach rollup costs $7.69 and a hummus and salad plate costs $6.99—but it’s still affordable for a large segment of the population.
Second is the chart. ZOES began trading on April 11 of this year, just one month ago, so most investors don’t even know about it! Here’s the chart.
ZOES came public at 15, but the lowest it traded on the first day was 23.73. Four days later, it hit a high of 31.43, and since then it’s traded mainly in a range between 26 and 28.
In short, the stock is stabilizing, which is good, especially considering the market’s recent intolerance of growth stocks. The stock’s relative performance line reveals that it’s subtly outperforming the market.
Ideally, what happens next is that more and more people become aware of Zoes Kitchen, as it opens new restaurants, and more and more investors become aware of ZOES (the stock) at the same time.
In any case, there’s a ton of potential buyers who could push the stock higher as they learn about the company. And I don’t think there’s much downside, given the company’s proven ability to expand and the probability that actual earnings are just over the horizon.
So that’s the first of my “10 Stocks to Buy & Hold Forever.” If you’re inspired to buy some ZOES now, I understand. Just note that trading volume in the stock has been waning since the IPO, and the lower it gets, the greater the potential for volatility, especially if a large number of trading orders appear overnight. So beware of placing orders when markets aren’t open, because you can’t be sure what price you’ll get.
If you want stock selections that are a little more timely—meaning they’re stocks that are going up now—I suggest you take a look at my Cabot Stock of the Month, which focuses on one stock per month. It’s quite affordable, too. Click here for more information.
|Zoe's Kitchen (ZOES)
5700 Granite Parkway. Suite 455
Plano, Texas 75024
|Index Membership: N/A
Full Time Employees: 2,760
051214 Zoes Kitchen (ZOES): A stock to buy and hold forever