Zoe's Kitchen (ZOES) already has passed its first key market test — pricing well in its IPO and remaining elevated since — but a second milestone is rapidly approaching: the initial quarterly report for the Mediterranean-style chain.
When Zoe's posts its numbers, expected Thursday after the market close, Wall Street will be looking for a loss of 3 cents a share and sales of $44.8 million, according to FactSet. The projected loss, a trend Zoe's entered the public market with, might make this stock a no-go for some investors. But plenty of others have looked past that, choosing to focus instead on sales growth and expansion potential for this still small Plano, Texas-based restaurant operator. As has been the case with similar stocks in the past, to little avail, this group is hoping to find "the next Chipotle (CMG)."
Zoe's hasn't disappointed so far in its very brief history. It's been on the market for less than two months; its first day of trade was April 11. After pricing at $15 a share — the high end of its range — amid significant pre-IPO demand, Zoe's opened at $25.65. The low for shares also came that day, at $23.73. A few sessions later, it reached its high at $31.43. It closed the trading day on Tuesday at $28.31 and is up 0.64% to $28.49 in early Wednesday trade.
On average, analysts who follow the stock have a price target of $32, though Stifel Nicolaus is the most optimistic, saying it believes Zoe's can get to $42. The consensus is close to 11% above where it is now, and the upcoming results will have a lot to do with whether it gets there soon or makes its early believers look foolish.
When compared with another recent restaurant IPO, Papa Murphy's (FRSH), Zoe's has looked even brighter. Papa Murphy's had weak interest ahead of its initial offering, and it currently trades at $9.75, below its $11 pricing. The performance of the two reflects how investors view their prospects. Papa Murphy's is a pizza chain with a "take and bake" model; the customer orders the toppings in the store, then handles the baking at home. Like Zoe's, it has losses, but it's also well established, with more than 1,400 stores in almost 40 states. Zoe's, meanwhile, has just over 100 shops and isn't found in many parts of the country. Add to that the fact that hummus, pita and kabobs aren't everyday fare, and Zoe's appeal as a growth investment is clearer.
Zoe's certainly won't get a free pass forever on its lack of profits, but owing to its newness, it has time with shareholders, provided sales growth is there. As is the case with all retailers and restaurants, same-store sales will be critical to its perception in these early months, considering the overall top line gets a boost every time a new location opens. Zoe's rapid expansion plans have to be taken into account in terms of evaluating revenue. The company ended 2012 with 75 stores and 2013 with 102 stores, and this year it expects to finish with as many as 132. Largely because of expansion-related capital spending, more cash went out than came in last year.
For individual investors, the IPO "price" has little value, since getting any of the small number of shares floated is extremely difficult. A better way to look at the strength, or lack of it, for a new stock is from its actual market open to the current level. Zoe's is up 11.8% from its first quote on the New York Stock Exchange, putting it well ahead of the 5% gain for the S&P 500 since the close April 10. Chipotle is up 3.2%, and Starbucks (SBUX) has risen 5.7%. Panera (PNRA) and Einstein Noah (BAGL) have dropped more than 8% in that time period. That said, it's also aided by the fact that its shares remain in short supply, with only 35% of those outstanding floated. As more become available over time, the scarcity factor will have less influence on propping up the stock.
Restaurants haven't been nearly as strong this year as they were last year, so anyone looking to make a few dollars in the group doesn't have many momentum choices. That's also likely helping Zoe's look like a winner for the short-term greedy, again, with being new, small and having an unusual menu. Plus, it's arguably "healthier" than burgers, fries and traditional pizza offerings. Together, those aspects can temporarily drown out its money-losing history and heavy spending on new builds.
Yahoo Finance said before Zoe's IPO that a price in the mid-$20s was defensible based on its sales. Traders have agreed, and it's been in a narrow band from day one. But even as they're willing to pay for outsized growth, many undoubtedly would view $32 as rich — unless the quarterly report is out of this world. We'll know soon.