ZOES Worth A Look

Investment Analysis Clubs Saul’s Investing Discussions
1

Hi Everyone,
I ended up deciding to stay in ZOES and increased my stake after the Q4 report.

Here how the earnings are shaking out:

Yr Q1 Q2 Q3 Q4
2014 -.06 -.04 .04 -.03
2015 .04 .05 .05 .13

Same store sales increased at 7.7%, which is impressive because many of the restaurants are located in areas particularly hard hit by the oil slump.

Stores grew from 140 to 166 (~19%), and revenue grew about 32%. PE is still 147 using the adjusted earnings so it is pricey. But earnings are increasing fast, and (if my memory serves me right) there is about a 2 year payback on the restaurants so the PE should be at an inflection point down and the earnings could be accelerating (depending on how aggressively the store count is grown).

Healthy/tasty eating choices are VERY limited in most parts of the country so ZOES could have a long runway.

This is probably a decent time to put this on your watch list. The concept is starting to prove out, efficiencies are growing. It wouldn’t surprise me if two more quarters and we will be at a more reasonable PE, and a PEG below 1.

bulwnkl

Long ZOES

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2

Thanks for writing. I like the concept. I think this could be a great stock but as I learned from Saul, I don’t like to own companies that are negative in p/e.
On my watch list though

3

Actually Zoes is profitable and has been over the full year 2015 on the usual non-GAAP basis. I expect this to accelerate nicely. They have bounced back from 25 to 38 pretty convincingly. Whilst they tend to take a trashing whenever they announce results that aren’t a beat on every angle, I like their business and performance.
A

4

Actually Zoes is profitable and has been over the full year 2015 on the usual non-GAAP basis. I expect this to accelerate nicely. They have bounced back from 25 to 38 pretty convincingly. Whilst they tend to take a trashing whenever they announce results that aren’t a beat on every angle, I like their business and performance.
A

Same, I think the last earnings the Street linked and outlook was positive. They are crowing store count without debt so far… hopefully without dilution as well but not dug into it that far.

5

Stores grew from 140 to 166 (~19%), and revenue grew about 32%. PE is still 147 using the adjusted earnings so it is pricey. But earnings are increasing fast, and (if my memory serves me right) there is about a 2 year payback on the restaurants…

I’ve been watching Zoes for a while and must admit it reminds me a bit of The Container Store. If there is such a quick payback on new store costs why isn’t the company making more profit now with 166 stores?

Too much debt is part of the problem as it is with TCS.

Just a quick thought.

JT

6

Hi Bulwinkl,

Apparently ZOE’s has a PE using GAAP of 684…684 ???

Using your own figures, adjusted earnings are 27 cents so the adjusted PE is 147. Wow!

Now coming off a small base, let’s say they grow earnings by an amazing 100% to 54 cents in 2016. At their current price, with no price improvement over the year, at this time next year in 2017, they’ll still have a PE of 73.5. Where am I going to get my price improvement?

Say in 2017 they grow earnings by another amazing 50% coming off a larger base. That would give them earnings of 81 cents. At this time in 2018, two years from now, with zero price movement from now, they’ll still have a PE of 49. Where am I going to get my price improvement? How do we see this company tripling in share price?

Say in 2018 they grow earnings by 30%, to $1.05. Pretty darn good! They are a restaurant chain after all and they can’t increase the number of stores each year by more than 20%, and that 20% becomes a bigger number of new stores every year. At this time in 2019, three years from now, with zero price movement from now, they’ll still have a PE of 37, getting down close to reasonable levels.

They’ve reached that difficult stage of losing their status as a story stock and having to become a real company, with real earnings, and a real PE.

Can you see any reasonable pathway to a doubling of stock price in three years??? PN just did it in three weeks, coming off a PE of about 5. PE’s do matter! Earnings do matter! Stock price does matter!

Best

Saul

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7

Too much debt is part of the problem as it is with TCS.

Just a quick thought.

JT

What debt are you speaking of? Long-term and short-term debt is 0 on the balance sheet

8

What debt are you speaking of? Long-term and short-term debt is 0 on the balance sheet

Just took a look and their debt is smaller than I had recalled, but it is still over fifty million. “Other liabilities” of $28.7M and Deferred Long Term Liability Charges of $25M. Interest expense was $3.3M last year.

http://finance.yahoo.com/q/bs?s=ZOES+Balance+Sheet&annua…

Thus I’m even more amazed that the net income is so small with so many stores and what looks like a reasonable debt level…??

9

Thank you for the analysis Saul. You are amazing! and have changed my investing style. From years of getting whipped on businesses that were not making money or had ridiculous p/e’s.
I’m not saying it can be done, BIDU was more than a 10 bagger with a sky high p/e in the hundreds and seemingly overnight grew into a reasonable valuation.
I’ve only had luck once with a company like that (TSLA) which I no longer hold.
Rest. of the time got slammed. Stocks like SSYS p/e 250 or so!?, bought at 130 and sold at 30. More than I care to count.

Thanks to everyone for contributing to this board. This is what I follow the closest and I appreciate the intelligence of everyone here.
Soth helped me stop considering ATW and move on.
Also, Thank you Saul for PN, 20% in a week. Wished I had gotten in at 3something but I’ll take a 6.40 entry at this point.

10

Skepticism is warranted but on the other hand it is entirely possible the company is currently compressing margins significantly ahead of growth as they open 30 to 40 units a year.

You can see that clearly in G&A - which basically was flat year over year in 2015 despite the huge additional unit increase. Why? Cause they put in an organization built for growth (otherwise it would scale higher).

Eventually they will need to further leverage margins which will be far more feasible if they continue with strong same store sales growth = but only after new openings don’t have such a disproportionate impact on profitability.

But a 10% operating margin is certainly feasible IMO - with 226m in revenue and a 35% tax rate the company could be earning 15m right now. Given the potential for 10x the units they have now, you can do a quick computation as to why the concept could be far attractive in the future. The key is achieving maturation where the base leverages the existing infrastructure but that will take a few quarters to become visible.

Plus, my guess is the share continue with a premium multiple. When 200 stores are doing well anybody can do the math to higher level. Course, there will be ups and downs along the way (and my guess is they do a secondary in the next three years), and surely the stock was more interesting at $26 than $39, but there is no reason why operating margins only need to reach 10% - plenty of restaurant concepts have achieved far higher numbers.

Bottom line - you can’t just compute units counts when looking at upside - margins will be more important. And those ought to move much higher over time (I hope). Combine the two, and earnings could go up 10 to 20x, not double or triple.

anyway, a different view

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11

Hi Saul,
Looks like you had plenty of coffee this morning (LOL).

Can you see any reasonable pathway to a doubling of stock price in three years???

Fair question. Let me give you a path forward. Last quarter, earnings were 0.13 (which is a nice acceleration). Let’s say earnings come in 15% higher each quarter due to greater efficiencies, more stores being paid off, and increasing same store sales. The next four quarters are 0.15, 0.17, 0.20, and 0.23. That places next years earning growth at 177%. That would then put the PEG below 1 at todays prices with a very long, significant runway.

Do they choose to expand more rapidly? Maybe, and then short term profits drop, but 7.7% same store sales increase in tough market is VERY impressive.

Yes. Price absolutely matters. Yes. This stock is WAY expensive. I pointed that out.

No. I didn’t say this is a better investment than your current holdings.

No. I didn’t recommend anyone buy this. What I am saying is that it is worthwhile to put on your radar. I THINK this is approaching a serious inflection point that will make it worthwhile in the near future.

Best,

bulwnkl

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12

I invest in a few restaurant stocks and passed on ZOES. I appreciate ZOES is investing in growing the business and earnings might not capture the entire story. That is why I like to look at sales per location when evaluating growing restaurant chains in addition to other metrics such as margins, the balance sheet, and income per location.

ZOES

http://finance.yahoo.com/news/zo-kitchen-delivers-strong-fou…

As of December 28, 2015 there were 163 company owend restaurants and restaruant sales for all of 2015 were $226,354,000.

That works out to $1,388,675 in sales per location for ZOES.

CAKE

http://finance.yahoo.com/news/cheesecake-factory-reports-res…

There were 200 restaurants (187 Cheesecake Factories, 12 Grand Lux Cafes, 1 RockSugar Pan Asian Kitchen) and restaurant sales for 2015 were $1,913,758,000.

That works out to $9,568,790 in sales per location for CAKE.

BJRI

http://finance.yahoo.com/news/bj-restaurants-inc-reports-fou…

172 BJ’s Restaurants and sales were $919,597,000 for 2015.

That works out to $5,346,494 in sales per location for BJRI.

CHUY

https://finance.yahoo.com/news/chuy-holdings-inc-announces-f…

70 locations and sales were $287,062,000 in 2015.

That works out to $4,100,886 per location for CHUY.

The numbers tell me ZOES is not performing as well as other restaurants in terms of sales per location so I decided ZOES was not for me and put my money to work elsewhere.

Wiseguy

Long CAKE and BJRI

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13

The numbers tell me ZOES is not performing as well as other restaurants in terms of sales per location so I decided ZOES was not for me and put my money to work elsewhere.

Wouldn’t sales per square foot be a better measure? I don’t know jack about restaurants and don’t pretend to, but I know that for retail store locations you don’t look at sales per location, but sales per square foot. Total sales per location may be less, but if the store is considerably smaller with lower associated expenses, I wouldn’t think that only looking at location sales would tell you the whole story. Again though, I don’t follow restaurant stocks at all, so I could be completely wrong.

Fletch
No investment, or interest, in any company mentioned in this thread

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14

Hi Fletch,

I wouldn’t think that only looking at location sales would tell you the whole story

Yes, you are correct. Only one number does not tell you the whole story. That is what I also look at balance sheets, market cap / location, income per location, and income to sales ratios. By all these metrics, ZOES doe not cut it for me when I compare ZOES to the competition.

Wiseguy

15

ZOES

That works out to $1,388,675 in sales per location for ZOES.

CAKE

That works out to $9,568,790 in sales per location for CAKE.

BJRI

That works out to $5,346,494 in sales per location for BJRI.

CHUY

That works out to $4,100,886 per location for CHUY.

This is not a good comparison given they are very different size and style restaurants. Maybe avg revenue per Sq ft would be better or comparing ZOES to more like type restaurants.

I think CHUY, BJRI, and CAKE are all reasonable to compare to each other but ZOES is much smaller and style of restaurant.

This from Zoes site for a location:

http://zoeskitchen.com/About-Zoes/real-estate.aspx

2,500 - 2,800 square feet (2,800 preferred)

For Cheesecake factory:
http://www.advfn.com/nasdaq/StockNews.asp?stocknews=CAKE&…

Cheesecake Factory is working on a new 8,000-square-foot model, which it expects to generate similar cash flow margins as its typical 10,000-square-foot

CHUYS: http://investor.chuys.com/secfiling.cfm?filingid=1193125-13-…

“Our restaurants range in size from 5,300 to 12,500 square feet”

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16

So by your numbers, CAKE has 4 times the square footage as ZOES but has almost 9 times the sales. That sounds like a win for CAKE to me.

You can do a similar calculation (sales per location) for Chipotle which is a smaller footprint chain and the numbers work out to be better than ZOES even with the E. coli issue.

Wiseguy

17

We needed an edit button. CAKE has almost 7 times the sales as ZOES per location and is only 4 times as large per location.

18

There’s no doubt that the sales per location is greater, but wouldn’t it stand to reason that older and more established restaurants have greater sales. Going off the max date on Google stock charts as a SWAG at how long the restaurants have been in business, we get:

CAKE public since 1992
BJRI public since 1996
CHUY public since 2012
ZOES public since 2014

bulnkl

who is no expert on restaurant stocks.

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19

There’s no doubt that the sales per location is greater, but wouldn’t it stand to reason that older and more established restaurants have greater sales. Going off the max date on Google stock charts as a SWAG at how long the restaurants have been in business, we get:

CAKE public since 1992
BJRI public since 1996
CHUY public since 2012
ZOES public since 2014

bulnkl

who is no expert on restaurant stocks.

there are many differences that make it difficult to just cherry pick a metric to compare. They are different style, size and age restaurants. Though CHUY may only be 2012 as a public company, I think it has been around much longer.

I am not recommending anybody buy Zoes. Zoes is still young and small. There was some discussion on their debt, but it is not clear that it is actually debt. It is not labeled that on the Yahoo BS but they do have roughly 50M in liabilities. Looking through the financial filings and some other sites on Balance Sheets, a lot of it looks to be deferred rent liabilities to pre-open stores that they don’t pay till later and it is amortized in a straight line fashion. As well as there are some liabilities around having to return structures to original condition.

How much of it is truly debt is not clear to me but will look more when I have time. But I think it takes closer look then what is sitting on the Yahoo BS as the filings look a bit different.

My interest is if they can continue to grow the number of restaurants and improve Sale Store Sales without incurring additional debt and floating shares. If so, they probably will look to have high PE or low earnings as they expand.

They have taken steps to increase SSS by offering a lot of catering from the existing stores which I think has done well.

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20

comparing CAKE to ZOES - that’s kinda curious

ZOES is a QSR - CAKE is full service
ZOES could have - what - at least 2000 units
CAKE is growing by 4% a year; ZOES nearly 20%
CAKE is saturated at 300 units (per Company, though you wonder if they could support more than that); ZOES in inning 1 or 2
CAKE is self-funding (existing base dwarfs new construction); ZOES is not

In terms of valuation, IMO CAKE is a mature slow grower whose PE is going to be compressed over time (natural function of slowing unit growth). ZOES is a fast grower - and will be 5 years from now too.

I actually like CAKE (as a trading vehicle - otherwise, 4% growth and 2% comps with 2% driven by price with near-peak margins isn’t my idea of a great long-term investment) but these are two different animals.

They have taken steps to increase SSS by offering a lot of catering from the existing stores which I think has done well.

Actually, the stores have always offered catering but all it is in my cases is a whole bunch of to-go orders. A whole bunch - which gives you a real indication of the popularity of the concept, no matter young these stores are. People take out their food - they just don’t have a formal ‘drive-thru’ but that’s how people treat it. ZOES is right in the fore-front of healthy eating and prices very sharply. What I like about them is their top performing stores are located in multiple states - so the popularity is proven everywhere.

Course, to be clear - this is not a CMG - not even close. But it is a story worth following. Ownership is up to the individual person…

my last post

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