Seeking Alpha
, Linkedin (5 clicks)
Alternative energy, restaurants, long-term horizon, growth at reasonable price
Profile| Send Message|
( followers)  

Summary

  • Zoe’s Kitchen, a fast-casual chain specializing in Mediterranean cuisine, looks ready to expand their store numbers toward a long-term stated goal of 1,600 stores.
  • As of June 5, 2014, Zoe’s Kitchen had 114 company-owned stores and six franchised stores.
  • For FY 2014, Zoe’s Kitchen indicated it has opened 18 locations as of June 5 with 23-25 more openings expected before year-end.
  • Recently, Zoe's Kitchen reported its restaurant contribution margin was 20.3%, up 70 BP from Q1 2013.

Zoe's Kitchen (NYSE:ZOES) recently went public at $15.00 per share on April 10, 2014, giving the company a $276 million market cap. Since its IPO date the shares have traded well, gapping up from $15 to open at $25.65 where they have traded over $35 intraday. Today Zoe's Kitchen shares trade around $31.80, giving it an estimated $613 million market cap, which may seem hard to justify using its current lack of profits and relatively small number of stores.

Let's look at a basic market cap/number of stores ratio in the table below to see how Zoe's Kitchen trades compared to industry peers:

  • Chipotle Mexican Grill (NYSE:CMG) offers Mexican-American-style cuisine such as taco salads and burritos.
  • Potbelly Corporation (NASDAQ:PBPB) was founded in Chicago and specializes in being a neighborhood sandwich shop.
  • Noodles & Co (NASDAQ:NDLS) is known for its wide variety of noodle-based meal offerings, such as mac and cheese.

Ticker

Q1 2014

(Stores)

Market Cap

Market Cap/# of Stores

ZOES

109

$613,360,000

$5,627,155

CMG

1637

$18,480,000,000

$11,288,943

PBPB

296

$446,560,000

$1,508,648

NDLS

331

$982,000,000

$2,966,767

Source: SEC Edgar and Google Finance.

Clearly, Zoe's Kitchen and Chipotle Mexican Grill are the most expensive based on this metric, but this metric does not take into account future store growth potential. In its In its S-1, Zoe's stated it's intention to reach 1,600 stores in the United States. It did not offer a timetable, but by using its past store growth rate as well as guidance issued, it may be possible to estimate when this milestone could be reached.

Year

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Number of Store

75

102

144

195

263

355

480

649

878

1186

1603

Growth Rate

31.6%

36.0%

41.2%

35.2%

35.2%

35.2%

35.2%

35.2%

35.2%

35.2%

35.2%

In order to reach 1,603 stores by FY 2022, Zoe's Kitchen would have to average a 35.2% annual increase in the number of stores for the next nine years. This is slightly slower than the average three-year store growth rate of 36.2% for 2011-13. From the table above, if Zoe's Kitchen traded at the sale multiple to the number of stores, it would value the company at about $9 billion given 5.62 million per store valuation. Discounted at 7%, this would give Zoe's Kitchen a NPV of $4.9 billion. Now that we can estimate the number of stores it is possible to determine the estimated sales for 2022.

In 2013, a store open for 52 weeks or longer recorded on average 1.47 million in average unit volume for FY 2013. Average unit volume is a measure that calculates the average annual sales per store at locations open at least 52 weeks. Over the past three years, revenue at these mature stores average unit volume has grown at 7.4%. However, considering there are limitations to average unit volume growth due to physical- and productivity-based limitations, it is plausible to assume a 4% average volume growth depending on the future inflation rate. This would deliver average unit volume of 2.01 million by FY 2022. Given the estimate of 1,603 stores by 2022, this would mean revenues of $3,224,593,257 for the year.

From this it is possible to apply a price-to-sales ratio that is common in the industry that accounts for a slowing growth rate after the initial 1,600 target stores are reached. For this comparison, McDonald's (NYSE:MCD) 3.6 price-to-sales ratio of was applied to Zoe's Kitchen FY 2022 sales estimate to provide a FY 2022 comparable valuation. This gives a valuation of $11.4 billion. Using a discount rate of 1.07 percent, Zoe's current day value is $6.2 billion. This would mean a potentially 1011% appreciation for the shares given this $6.2 billion NPV.

Conclusion

Zoe's Kitchen is a compelling long-term investment due to its projected remarkable store growth that is estimated to average over 35% per year. Risks to this investment include rising food costs, which could increase input costs for Zoe's Kitchen. As the company begins to open new stores outside its traditional operating area, this may have an material impact on average unit volumes due to the changing demographics and levels of competition in new markets. Also, the vast premium shares of CMG command on a market cap/store multiple to its peer group may be worth further investigation. Considering it has also reached the 1,600 store number, its prospects for future store growth -- or lack thereof -- could shed light on the future of Zoe's Kitchens growth prospects post-1,600 stores. Regardless of the risks, Zoe's Kitchen presents a tremendous growth opportunity in the fast-growing fast casual dining segment.

Source: Tracking The Store Growth Of Zoe's Kitchen