Company considers strategic alternatives, slows development
Facing same-store sales headwinds, Zoe’s Kitchen Inc. is evaluating its fleet of restaurants with a goal of closing five to 10 underperforming units, perhaps by the end of the year, executives said Thursday.
Zoës Kitchen, the Plano, Texas-based company’s Mediterranean fast-casual brand, has 258 locations. The company is looking to strengthen its restaurant base, which booked a 2.3 percent decline in same-store sales in the first quarter ended April 16.
Zoe’s board has also has created a panel to look at strategic alternatives, though nothing specific is being considered, according to CEO and president Kevin Miles.
Executives said they were also slowing planned development or pushing some new-store openings planned for this calendar year into the next as well as looking at franchising opportunities. Zoe’s currently has one franchised unit; the rest are company owned.
“We need to take a more aggressive step to strengthen our existing restaurant base, channeling our efforts into recouping traffic losses, reversing our negative comp-store sales trends and improving restaurant-level profitability,” Miles said.
Sunil Doshi, Zoe’s chief financial officer, said the company was taking a “deep-dive holistic look at our current restaurant fleet” without focusing on geography and more on performance trends and competition.
“It's a holistic look, where we have already started that process and expect, like I said, to complete that here in the second quarter,” Doshi said. Because the process is in its early stages, he added, Zoe’s was not yet including possible closures in its financial guidance.
“With the evaluation of our existing real estate portfolio,” Doshi said, “there is potential in fiscal year 2018 for one-time non-cash impairment charges. Our initial estimate is a range of $8 million to $16 million before taxes.”
The company has identified the locations that may be closed at or before their lease expiration, he said.
“While we are very early in this process, our initial estimate of cash cost associated with the potential early lease termination and closure of these locations is approximately $2 million to 4 million,” he said. “Recognizing that this process will take some time to evaluate and complete, we would expect these cash costs to be incurred in the later portion of fiscal year 2018.”
Miles said units in smaller to mid-tier markets were seeing the most sales pressure.
General industry trends toward delivery and discounting have created headwinds for the Zoe’s, he added.
“We have seen a decline in single-person checks or those checks that are typically under $10 in size,” Miles said. “While these transactions are less than 30 percent of our transaction base, underperformance in this group explains the majority of our overall comp result.”
Other steps to improve performance include slowing planned development, Miles said.
“We have reduced our future development plans for fiscal 2018 and fiscal year 2019 to approximately 35 new restaurants,” he said. “While we are maintaining our plan for 25 units for fiscal 2018, there may be a slight degree of timing push between restaurants originally scheduled to open late 2018 and early 2019.”
While franchising is not new to the Zoe’s brand, it has focused on company development since its public offering in April 2014.
“While our franchise base currently reflects a single franchisee,” Miles said, “we believe that our progress over the past few years in developing our brand, menu, store design and digital capabilities makes franchising a logical strategic choice to consider as a complement to our own company store growth.”
Any decisions on further franchising would come in the last half of the year, he said.
For the first quarter, Zoe’s swung to a net loss of $3.6 million, or 19 cents a share, from a profit of $19,000, or zero cents a share, in the same period last year. Revenues increased 12.7 percent to $102.1 million from $90.6 million in the prior-year period.
The Zoës Kitchen concept, founded in 1995, has locations in 20 states.
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