zoe’s kitchen, inc. (zoes) memo - university of virginia€™s kitchen, inc. (zoes) memo...
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Zoe’s Kitchen, Inc. (ZOES) Memo
Company Description Zoe’s Kitchen, Inc. is a casual fast-‐dining Mediterranean restaurant chain that focuses on providing its customers with fresh, wholesome, homemade food along with an unparalleled in-‐store customer experience. Founded in 1995 by a couple in Birmingham, AL, Zoe’s does its best to combine its priority of fresh food with its roots of southern hospitality. Heading into 2015, Zoe’s will have over 130 stores, with 30-‐32 planned openings in 2015. They are currently based mostly in the Sunbelt of the United States, but are beginning to grow into the Midwest and mid-‐Atlantic regions. Thesis / Key Points Strong and Smart Financial Growth: Since going public, Zoe’s Kitchen has shown great financial growth. They used the proceeds from their IPO to pay off their debt and going forward will only grow organically using their cash flows. Since the April 2014 IPO, they have kept zero debt on their balance sheet. Store growth has been constant, with the restaurant count more than doubling since 2011. In the three quarters since the IPO, sales growth has increased by no less than 48% each quarter (year over year) and comparable store growth has increased by no less that 6% each quarter (year over year). The average store breaks even in about 12 weeks, which is very impressive on an industry standard, proving Zoe’s has a cost-‐efficient model that allows for fast growth. Zoe’s is on its way to breaking even in 2015 as earnings continue to increase. Over the past year they faced huge SG&A costs related to their IPO and equity-‐based compensation that came with it. On an EBITDA basis the company is doing very well, with consistent growth year over year. The costs related to the IPO are not recurring and going forward, investors shouldn’t be worried about such high SG&A costs. Management has said that they plan to double store count in the next four years. In 2015, they plan on opening 30-‐32 new restaurants mainly around existing markets but with a few in new markets, specifically Kansas City. The Zoe’s leadership team is committed to smart growth and rather than putting a store where there may be very little knowledge of Zoe’s, they plan to expand to areas where they can capitalize off of brand awareness. Economies of Scale: Zoe’s is working on creating an economy of scale through owning and operating all of their stores. In 2014, they acquired 2 of their 8 franchised stores, and hope to repurchase the remaining 6 in the coming months. Their goal is to create efficiencies through increased buyer power. On their earnings calls, they have mentioned that they are streamlining almost all of their processes across the country in order to increase this power. They are leveraging this strength not just with commodity prices, but also in areas such as store maintenance, software, and security. As the store count grows, leadership believes the synergy will only increase and allow them to grow margins even more. Unique Competitive Advantage: Zoe’s biggest strength is their business model that gives them a competitive advantage. Unlike most fast casual dining restaurants, Zoe’s strives to be a lifestyle brand that is involved in all aspects of their customer’s lives, not just their meals. Because of this, they have developed an extremely loyal customer base that is willing to recommend Zoe’s to friends and pay more for meals. Management reported that 98% of first time customers would come back, 94% of customers would recommend Zoe’s to a friend and the average amount spent at a Zoe’s is $9.57, significantly above the industry average of $7.40. These statistics prove that Zoe’s does a great job of pleasing their customers and ensuring that they have the best in-‐store experience as possible. To complement the in-‐restaurant dining experience, Zoe’s does many things to keep its customer base involved with the Mediterranean lifestyle. They have an active blog about staying positive, Mediterranean recipes, and many other things in line with their motto of “Love Life, Love Zoe’s!” They also recently launched a campaign called “Live Mediterranean” where they encourage customers to incorporate the Mediterranean lifestyle into all parts of their day—not just meals. There is an entire section of their website dedicated just to this campaign, and it has many aspects (such as recipes, where to travel in the region, and how the Mediterranean culture can help your health) that all end up connecting the customer back to the benefits of the Zoe’s menu. Another aspect of Zoe’s competitive advantage is their knowledge of their target customer. Zoe’s targets affluent, educated women and their families, and they do many things to attract her and keep her as a customer. A young, educated and affluent woman will probably be a working mom, so Zoe’s has created a solution for her called “Mediterranean Meals on the Go”. This product is meant to feed 3-‐6 people for under $40 and is perfect for working mothers who may not have time to cook but still want to provide their family with a healthy meal. They have also partnered the initiative with the hashtag #ZoesTableTalk where moms are encouraged to film their kids asking them questions such as “What makes you most happy?” or “What was the best part of your day?” and then post the results on Facebook/Instagram with the hashtag. This gives moms a chance to show off their cute kids but also stay positive and “Love Life” as the Zoe’s motto says. Zoe’s Kitchen is also very good at keeping up with consumer trends and fits right in with current consumer sentiments. Most US consumers today want to live a healthy lifestyle but may not have a ton of disposable income to spend on expensive food. Zoe’s offers them the chance to still live healthy but not spend too much each meal. They advertise the fact that everything they make is cooked from scratch, all of their products are fresh and organic, and they want all of their customers to have a “wholesome” experience. All of these things also line up with current consumer trends of organic, healthy living and eating. Lastly, Zoe’s is unparalleled in its customer service, especially when compared to other casual fast-‐dining restaurants. They truly embody their southern roots and strive to be extremely pleasant and caring towards every single customer. Management even said they see customers as part of the Zoe’s family and they make sure that all of their team members believe the same. Strong Industry Growth: The casual fast-‐dining segment is one of the fastest growing in the restaurant industry, with a 10% CAGR and a
Name: Selena Kowalski Phone #: 847-‐714-‐4979 College/School: Commerce Year: 3rd
Zoe’s Kitchen, Inc. (ZOES) Memo projected worth of $50B by 2017. Zoe’s is poised to take advantage of this growth as customers want affordable, healthy options but do not have the time for a typical sit-‐down restaurant or to cook their own meals.
Misperception Competition is extreme: Many people are turned off of Zoe’s and the entire casual fast-‐dining segment because they are convinced it is crowded and thus hard to differentiate oneself. This is true for many restaurants, but as described above, Zoe’s has an extremely unique competitive advantage in this marketplace. It is one of the only (if not the only) Mediterranean restaurant in this segment, and it is the only one focused on being extremely healthy, wholesome, and most importantly, a lifestyle brand. No other restaurant chains are trying to integrate themselves into the daily lives of customers, and this is where Zoe’s has an advantage in a competitive industry. It has a loyal customer base that loves to be involved in the Zoe’s community, and that is unique to the Zoe’s brand. “But it doesn’t make money”: Many investors are also concerned that Zoe’s has not posted a profit yet, however, they are failing to see the tremendous organic growth that has been occurring. As mentioned above, Zoe’s is using their own cash flows to generate growth and is still trying to recover from one-‐time costs. Like any other growth company, they are spending a lot and fast, but their customer base is solid and they are well on track to break even. VAR Customer Service: I talked to the manager of the Charlottesville Zoe’s store about their employee training program and how Zoe’s encourages the mantra of “Mediterranean food with southern hospitality”. She said that corporate puts the employees, and especially the managers, through extensive training programs. They are told that they are the faces of the organizations and usually the only point of contact the customers will have with the company, so it has to be as pleasant and enjoyable as possible. When I asked her about the Sothern Hospitality aspect of the firm’s culture, she said it is very apparent not only in training but also in the firm’s management. They are all very southern and very polite to everyone in the organization. Employees are told to be as polite and patient with customers as possible and to do their absolute best to satisfy their requests. Brand Perception: In a survey of just under 100 people, 70% said they had been to Zoe’s kitchen and 96% had heard of it. When asked why they did or didn’t like Zoe’s, they responses where overwhelmingly positive. The only complaints were prices that may be a bit “too high” for their college budget, but they wish they could afford to go there more. On the flip side, many more people said that for the quality of the food, the prices are extremely reasonable. There were also many positive comments about the service and the Mediterranean theme. How It Plays Out Zoe’s Kitchen should continue to grow in terms of store growth and comparable stores sales. With this continued growth and increased cash flow, they should continue to organically expand their restaurants into different areas of the country and thus gathering an even larger customer base. As the move into larger metropolitan areas such as New York, Chicago and especially cities in California, they should have heightened brand awareness to aid their competitive advantage of being a lifestyle company that truly understands its customers. The company is smart and should continue to develop new programs to increase and retain their customer base, with smart campaigns on social media and in-‐store. In a few years, Zoe’s should be a national (or possibly international) restaurant chain that has a name as familiar as Chipotle. If bought, MII should consider exiting the position when the market seems saturated with Zoe’s Kitchen stores and the brand is known amongst most consumers. This can be determined by number of stores and the regions in which Zoe’s operates. We should also be careful of the stock being overpriced and/or competition in the segment heating up in current regions or regions in which Zoe’s hopes to expand. Risks / What Signs Would Indicate We Are Wrong? Commodity prices: Zoe’s is exposed to changes in commodity prices that are needed for its operations such as poultry, certain fruits and vegetables, and labor. Their margins could be affected by fluctuations in these prices, but management has made clear that as their economy of scale grows, they will become more and more insulated to major price changes. Additionally, Zoe’s customers have already proven that they are willing to pay a premium for Zoe’s products. Competition: The casual fast-‐dining segment is extremely competitive and there is a change that other companies could decrease Zoe’s chance for success going forward. One of the biggest threats is that another Mediterranean food company opens stores in areas of the country where Zoe’s plans to go in the future. This would make it much harder for Zoe’s to penetrate that market. However, because of the extremely loyal customer base, it is hard to believe that Zoe’s wouldn’t do well wherever it opens a store. When following the stock, MII would know the thesis points are incorrect if the company struggles to break even, margins are hurt severely, the customer base/brand equity starts to erode or comparable stores growth slows or goes negative. These would all be signs that Zoe’s is not as successful as we thought it could be. Signposts / Follow-‐Up Metrics to follow:
• Comparable store sales • Store openings • Sales growth • Gross and Operating margins • EBITDA growth
Important Company Financial Data (as of 11/30/14) Current Price: 31.63 Market Cap: 581.7 million 52 Week Range: 23.73-‐38.42 EPS: -‐0.73 Revenue: 160.4 Million Price/Book: 4.94
Zoe’s Kitchen, Inc. (ZOES) Memo Exhibit 1: Stock performance since Initial Public Offering in April 2014
Exhibit 2: EBITDA and EBITDA Growth (dollars in thousands)
Apr-14 Apr-13 % Change
3,847 2,700 142%
Jul-14 Jul-13 % Change
4,713 3,270 126%
Oct-14 Oct-13 % Change
4,651 3,657 127% Exhibit 3: Restaurant Growth
Zoe’s Kitchen, Inc. (ZOES) Memo Exhibit 4: AUV Growth
Exhibit 5: Equity to Number of Stores Comparison in the Casual Fast-‐Dining Segment
Equity per Store Market Cap Stores Equity/Store Chipotle 20,580,000,000 1,600 12,862,500
Noodles & Co. 729,230,000 340 2,144,794
Panera Bread 4,470,000,000 1,800 2,483,333
Potbelly 381,760,000 300 1,272,533
Zoe's Kitchen 581,700,000 130 4,474,615 Exhibit 6: Zoe’s Kitchen Locations (as of February 2014)
Zoe’s Kitchen, Inc. (ZOES) Memo Exhibit 7: “Live Mediterranean” Campaign
Exhibit 8: #ZoesTableTalk Campaign
Zoe’s Kitchen, Inc. (ZOES) Memo Ideas for the Club Over the past year, and especially over the past semester, I believe MII has done some great things and made tremendous improvement. I love that we are taking steps to ensure that the club is made up of members who are passionate not only about investing but also the club and making a difference in it. By “forcing” people to be on associate teams and submit a memo, I think we are going to ensure that the members next semester are more dedicated than ever before. However, I think we need to continue making steps to enhance the member’s experiences so that they will be just as passionate about the club as we are. Based on what I’ve heard from members, I think the first thing we need to do is more clearly define the role of Associates. By requiring that everyone be on an associate team, we greatly increased the responsibilities of the associates but almost forgot to remind them of it. I think starting next semester we must sit them all down and tell them that in this new structure, their role is no longer to just submit memos, it is to generate ideas and most importantly, to mentor a group of 8 or so members. I think we definitely took a step in the right direction by requiring that members be on teams, but we failed in terms of making sure the teams were a good experience for everyone. Going forward we need to have constant check-‐ins with the associates, asking how their members are doing, what sorts of work they’ve been doing, etc. I also think as managers we could host workshops or events and invite 2 or 3 associate teams to them. That way people get to know each other, we get to know the various associates and teams, and we can ensure that analysts are learning a lot from their experience on an associate team. I think the structure we set up is really great and has a lot of potential, we just need to continue to work with it until it’s perfect and even the new members feel like they are truly contributing to the club. I’ve been saying this for forever, but I also really think that we need to have a much more structured education system. People come into MII because they want to learn and we are failing if we don’t teach them. What we have isn’t good enough and throwing together a PowerPoint the night before the meeting isn’t good enough either. I really think we all need to sit down and outline a plan for a logical order in which to teach topics, what we should teach older vs. younger members, etc. It may have to happen over the summer, but if we put in effort once, we’ll never have to do it again and the future management teams can use what we made for them. If we succeed in doing this, our members will be much happier because they will be learning (which is ultimately why they joined MII) and I’d bet that our portfolio would improve as well because we would have an army of educated members submitting ideas to us each semester. I also think that we can better use our meeting times to do things that are beneficial to everyone. After talking to various members, people want to have more group activities and discussions during regular meeting time. We could have managers leading various discussions about news topics, industries, etc, and it would give members a place to voice opinions in a smaller and less intimidating setting. A problem I heard from many members was that they felt like they had nothing to contribute to the large group because they felt like everyone was smarter than them and they were very intimidated. If we conduct small-‐group activities during normal meeting times (they could literally be anything: each group takes a stock in our portfolio and discusses it, people split up and are walked through a DCF, etc), members would be much more likely to participate. It almost doesn’t matter what the activity is as long as it involves a smaller setting in which they can voice their opinions. People hate it when they feel like they can’t contribute, because they feel useless. Let’s not make our members feel useless. I think there are also a lot of little things we can do to enhance the member experience that wouldn’t take much on our part, but could mean a ton to our members. For instance, we could do manager office hours (set up in a way that members would actually come), or have an accounting review session before the final or midterms (s/o to COMM 2010, everyone’s favorite class), or older managers could do mock interviews with members. There’s so much we could do that members would love, and it would also offer them yet another small group setting to get to know one another. Additionally, I am excited to continue discussions with all the women in the club, and hopefully grow it into a really cool network by the time I leave. I think it can be something really great, where the girls in the club can find (yet another) small group setting in which to find friends, mentors, and support. I hope to continue to have discussions with them at least once a month, set up a Facebook group in which they can share ideas/news or sign up to pitch together, and possibly set up an event with Dean Leonard to come chat with them and talk a little about women in business.