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This Weeks Free Stock Pick

|Includes: DRI, EAT, IRG, MCD, SBUX, YUM, Zoe's Kitchen (ZOES)

Zoes Kitchen Restaurants

This Weeks Free Stock Pick - Investing in Restaurant Earnings Growth

The latest Retail sales report shows that US consumers have finally started spending their savings from lower gas prices. In fact, they had increased spending on dining out even before they opened their wallets for clothes and other discretionary items. Sales gain at restaurants during May marked the 15th increase in the last 16 months, per National Restaurants Association.

With rebounding economy, rising consumer confidence, improving wages and still low gas prices, the outlook for the Restaurant industry remains positive.

About the Company

Founded in 1995 and based in Plano, TX, Zoes's Kitchen (NYSE:ZOES) is a fast casual restaurant concept serving Mediterranean-style food. The company currently has 149 restaurants in 16 states across the US. They became a public company in April 2014.

The company calls their concept "Contemporary Mediterranean experience with Southern hospitality". Their range of restaurant formats includes in-line, end-cap, and free-standing restaurants. They also grant licenses to qualified franchisees to construct and operate restaurants.

They use traditional Mediterranean preparation methods such as grilling and baking and fresh ingredients that are predominantly free of preservatives.

Excellent Quarterly Results and Improved Guidance

The company delivered a strong beat for Q1 on earnings as well as revenue. Total revenue increased 36.2% to $63.0 million from $46.3 million in the same quarter last year. Comparable restaurant sales increased 7.7%, with 3.7% increase in traffic, a 2.8% increase in mix and a 1.2% increase in price.

Net income for the quarter was $0.8 million or $0.04 per share as compared to a loss of $10.0 million in the first quarter of 2014 or $0.76 per share.

The company increased its revenue guidance and restaurant contribution margin guidance for 2015. Revenues are expected in the range of $218.0 million to $223.0 million, compared with the previous expectation of $215.0 million to $220.0 million. Restaurant contribution margin is expected in the range of 20.0% to 20.5%, up from the previous expectation of 19.7% to 20.2%

They opened 12 new company-owned restaurants during the quarter and plan to open 31 to 33 new restaurants this year.

Rising Estimates

After a strong quarterly report, analysts have raised their estimates for the company. Zacks Consensus Estimates for the current and the next fiscal year now stand at $0.08 per share and $0.15 per share respectively, up from $0.04 per share and $0.12 per share, 30 days ago.

The company has beaten Zacks Consensus Estimate in each of last four quarters, with an average quarterly surprise of 96%.

Strong Growth Story

With a loyal customer base, comprised predominantly of educated and affluent women, Zoe's is able to inspire brand advocacy, increase customer frequency and also grow off-premise business. Further, with less than 150 locations as of now, they have significant expansion opportunity. Their diverse revenue mix and industry leading comparable restaurants sales growth make them an attractive growth story. The stock has a Zacks Style Score of "A" for Growth.

The Bottom Line

Thanks to favorable industry trends, a diversified revenue mix and a loyal customer base, the company is moving in the right direction. The Restaurant industry is currently ranked 55 out of 265 Zacks industries (top 21%), indicating further upside potential for this hot industry.

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