Zoe’s Kitchen tests small-order deliveryZoe’s Kitchen tests small-order delivery

Zoe’s Kitchen Inc. began testing small-order delivery in the third quarter and sees the channel as a platform for sales growth, executives said.

The pilot delivery program was initiated in about 30 stores, using a third-party delivery service, and produced “encouraging results” in family meals and single orders, said Kevin Miles, Zoe’s president and CEO, in a post-earnings conference call Monday with analysts.

“Consumer preference is increasingly shifting to off-premise dining, and we intend to capture our fair share,” Miles said.

“We can envision a future catering delivery platform that could leverage a hybrid delivery model, utilizing a mix of internal labor and third-party services augmented by an improved app, which we're currently developing,” Miles said.

Sunil Doshi, Zoe’s chief financial officer, added that delivery is one way the 201-unit Plano, Texas-based company can drive transactions. 

“It really plays well into the dinner side of the business that we've been trying to grow,” Doshi said. 

Miles noted that Zoe’s Kitchen, which offers a menu of Mediterranean-inspired dishes, has been doing its own catering delivery since 2009 and has expertise in that area, so the company may do a hybrid of in-house and third-party delivery for a possible small-order delivery platform.

“We’ll continue to test,” he said. “We are testing even a bigger platform with our catering delivery in some of our stores today, which we think is beneficial. So you could see a mix of both.”

Stephen Anderson, an analyst with the Maxim Group, said Zoe’s management appears to be considering a larger delivery test in 2017 and can capitalize on its existing off-premise business. Catering already makes up about 17 percent of Zoe’s sales, he said.

“Given that Zoe’s already has made a significant investment in catering (e.g., catering trucks, dedicated staff) without the burden of having breakfast hours, we see little incremental cost for Zoe’s to develop the delivery business,” Anderson added in a note issued Tuesday. “Assuming the test is extended to half of all restaurants in 2017, we estimate there is the potential for an annualized comp lift of about 100 basis points from delivery.”

Zoe’s also is increasing slightly the number of units it plans to open this year. The company added four additional restaurants since the close of the third quarter, when it ended with 197 stores.

“Based on our openings thus far and the balance of our year outlook,” Miles said, “we now expect to open 37 to 38 new locations in 2016, ahead of our prior guidance of 35 to 36.”

The company has 32 leases signed for 2017, said Sharon Zackfia, an analyst with William Blair, and “management expects unit growth of at least 20 percent in 2017 (focused on existing markets and building out Denver and Kansas City).”

Anderson said Zoe’s would be in better shape than many of its fast-casual segment peers in taking advantage of real estate. “We believe softer sales trends in the fast-casual burger and pizza sub-segments are likely to lead to consolidation in these sub-segments,” he said.

For the third quarter, Zoe’s narrowed its loss to $293,000, or 2 cents a share, from $2.3 million, or 12 cents a share, in the same quarter last year. Revenue increased 19.4 percent, to $67.3 million from $56.4 million in the prior-year period.

Zoe’s same-store sales increased 2.4 percent in the quarter.

Zoe’s Kitchen has restaurants in 20 states.

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