Can Zoe’s Kitchen Stock Bounce Back After Last Week’s 47% Plunge?

Last week’s biggest loser on the New York Stock Exchange was Zoe’s Kitchen (NYSE: ZOES), which plunged 47.3% after posting disappointing quarterly results. The news sent the shares plummeting to the single digits for the first time in its four years as a public company. At least three analysts would go on to downgrade the former casual-dining darling specializing in Mediterranean eats.

Zoe’s Kitchen revenue rose 12.7% to $102.1 million in the first quarter, a rough showing since it has grown its restaurant base over the past year by nearly 19% to 254 units. Dine-in traffic continues to decelerate, resulting in a 2.3% decline in same-restaurant sales. Comps at company-owned eateries have now declined in four of the past five quarters. Margins contracted, and Zoe’s Kitchen’s adjusted net loss of $0.13 a share was well below the roughly breakeven results that analysts were targeting.

Image source: Zoe’s Kitchen.

Negative trends only continue for the company

Zoe’s Kitchen is now coming off of back-to-back quarters of adjusted deficits, and with the bad tidings continuing early in the current quarter, Zoe’s Kitchen is hosing down its guidance for all of 2018. The struggling chain now sees $345 million to $352 million in revenue this year, revised from $358 million to $368 million. Zoe’s Kitchen comps and restaurant contribution margin projections are also being tweaked lower.

Wall Street was left understandably unimpressed. Sharon Zackfia at William Blair lowered her rating from outperform to market perform, concerned about the volatile and problematic sales trends at Zoe’s Kitchen.

Stephen Anderson at Maxim downgraded the stock from buy to hold, blaming the sharp decline in profitability and the revised guidance for his change of heart. With Zoe’s Kitchen likely to take an aggressive stance in discounting to win back traffic and a turnaround in comps likely several quarters away, Anderson is also slashing his price target from $20 to $12.

The news gets even worse at Piper Jaffray, already neutral on the stock heading into the report. The analyst is downgrading the stock to sell with a price target of just $7. That is now the lowest price target out there among analysts.

Zoe’s Kitchen was a rock star when it went public at $15 four years ago, more than tripling when it peaked a year later. The stock is going the other way. The once impressive streak of positive comps is now going the other way. The problems don’t appear to have easy fixes, but the stock’s big dive makes it a tempting bottom-feeding pick at current levels for risk-tolerant investors.

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Rick Munarriz owns shares of Zoe’s Kitchen. The Motley Fool owns shares of and recommends Zoe’s Kitchen. The Motley Fool has a disclosure policy.

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