Zoe's Kitchen Comps: Transitory Issue oOr Structural Problem?

Baird’s David E. Tarantino believes the recent slowdown in the comps trajectory for Zoe's Kitchen Inc ZOES is a transitory issue, driven by external causes, rather than being a structural problem related to internal brand fundamentals.

Tarantino maintained an Outperform rating on the company, while lowering the price target from $44 to $40.

“As such, with the stock likely to pull back sharply after year-to-date strength, we would view prospective levels as a good entry point for longer-term investors who can look past short-term headwinds,” the analyst mentioned.

Related Link: Zoe's Kitchen Shares Slip By 13% After Revenue Miss, Guidance Cut

Mixed Q2

Zoe’s Kitchen reported mixed Q2 results, with the pro forma EPS in line with the estimate and the consensus and the EBITDA of $6.5 million beating expectations, driven by favorable food costs mitigating the comps shortfall.

Revenue grew 21.7 percent during the quarter, on 24 percent growth in company units and comps of 4 percent, with comps meaningfully below the guidance and consensus.

Slower Comps

“Comps decelerated as Q2 progressed, and commentary suggested the slower trend line exiting Q2 has continued thus far in Q3, causing ZOES to trim 2016 guidance for revenue, comps, and restaurant-level margin,” Tarantino noted.

The analyst explained that the slower comps were likely to be a cyclical issue rather than a structural one, saying that “slower comps likely are a function of external issues that ultimately could prove transitory, resulting in a temporary setback for ZOES within a bullish long-term growth trajectory.”

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