Zoe's Kitchen Private Equity Investor Prepares To Sell Shares And Updates Its Store Count

Jul.31.14 | About: Zoe's Kitchen (ZOES)


On Monday, July 29th Zoe's Kitchen filed an S-1 form.

Maximum offer size is 4.6 million shares.

All shares offered are from existing shareholders.

Since its IPO on April 11th 2014, shares of Zoe's Kitchen (NYSE:ZOES) have been red hot, trading from an IPO price of $15 to a high of $35.59. Other stocks in ZOES' sector have be active recently, with Chipotle Mexican Grill (NYSE:CMG) spiking post earnings announcement and El Pollo Loco (NASDAQ:LOCO) rallying over 100% since its IPO July 18th. Excitement for this sector is beginning to build as investors are reacting to new consumer trends which lean towards healthier offerings. With the recent IPOs of ZOES, LOCO and Papa Murphy's (NASDAQ:FRSH), the sector may risk oversaturation if too many more fast-casual IPOs occur this year.

After becoming ZOES' majority shareholder in 2007, Brentwood Capital held a majority interest until the recent IPO, where they saw their ownership stake diluted to 45%. They did not sell any shares in the IPO, with ZOES offering all the shares for the IPO. Brentwood Associates is a private equity group with current investments in Lazy Dog Restaurants as well as Allen Edmonds shoes.

It seems that Brentwood Associates is taking advantage of the recent surge in ZOES' price to offload some of its shares. Currently, Brentwood Assoicates owns 8,703,317 shares of ZOES, and is looking to sell as many as 4.6 million in a secondary offering. The S-1 ZOES filed currently does not have a definitive price, but uses the closing price July 24, 2014, $30.51 for an estimate of filing fees. The details of the pricing will be released closer to the offering date, and should provide valuable information for investors as to where the stock will trade post offering. The stock should trade slightly below where the offering prices, unless unusual circumstances come into play.

As of the Q1 earnings report on June 5th, ZOES had 120 locations: 114 company-owned and 6 franchised. Updated as of July 14, 2014, ZOES had 122 locations; 116 company-owned and 6 franchised. For 2014, ZOES' goal was to open 28-30 company-owned restaurants, and as of July 14th, 2014, it has opened 20 year-to-date. Although no updated guidance was issued, ZOES should easily meet guidance and could easily install several more stores than projected during 2014.


The registration of a secondary offering by ZOES should be noted by investors, because this means up to 4.6 million shares will be added to the public float when the offering closes. This could create a short-term oversupply of shares and drop the share price over the next several months. It is also concerning that Brentwood, who has been a shareholder of ZOES since 2007, is selling approximately half of its holdings. It is impossible to discern their rationale, but the recent run-up in the share price could suggest that Brentwood does not see ZOES as undervalued. Current shareholders will not see their ownership stake diluted by this offering. Positive news on the number of stores opened as of July 14th, 2014 showed that ZOES is on track with its expansion plans and may be able to beat its target of 28-30 new store openings for 2014. As an investor, it is best to take this sale in stride and see if the offering causes the price of ZOES to drop towards $25, potentially setting up a nice buying opportunity.

Disclosure: The author is long ZOES. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.