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High Expenses to Hurt Zoe's Kitchen's (ZOES) Q2 Earnings

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Zoe's Kitchen, Inc. (ZOES - Free Report)  is slated to report second-quarter 2018 results on Aug 16, after the market closes.

Consistent unit expansion is expected to have aided overall revenues in the second quarter of 2018. Meanwhile, high costs of restaurant operations are likely to have dented profits in the to-be-reported quarter.

Notably, the company’s earnings surprise history has not been impressive, as it delivered an average negative surprise of 214.1% in the trailing four quarters. Backed by such uninspiring earnings trend, Zoe’s Kitchen’s shares have lost 25% in the past year against the industry’s collective growth of 4.6%.

Unit Expansion to Drive Revenues

Despite the negative comps, the top line improved 12.7% year over year in the first quarter of 2018 on several unit openings. The trend is likely to have continued in the to-be-reported quarter, buoyed by consistent unit expansion along with an increased focus on catering and delivery services. The Zacks Consensus Estimate for second-quarter revenues is pegged at $83.4 million, reflecting 12.2% year-over-year growth.

Moreover, the company is investing heavily on menu innovation, which is likely to have aided its revenues in the to-be-reported quarter as well. In 2017, Zoe’s Kitchen completed the largest menu rollout that featured Lamb Kafta, bowls with cauliflower rice and power grains, revamped pita sandwiches, and four new sauces, highlighting Mediterranean ingredients and flavors.

High Costs to Affect Earnings

While menu innovation and increased focus on catering and delivery services are likely to have aided overall top line, those are weighing on the company’s margins. Moreover, owing to increased labor and other operating costs, the company’s restaurant contribution margin contracted 370 basis points (bps) year over year to 16.2% in the first quarter of 2018. In the same quarter, Zoe's Kitchen posted adjusted loss of 13 cents per share, comparing unfavorably with earnings of a penny in the prior-year quarter.

We believe costs to have impacted the company’s earnings in the second quarter, as the consensus estimate predicts loss of 5 cents in the to-be-reported quarter, comparing unfavorably with break-even earnings in the second quarter of 2017.

Our Model Suggests a Beat

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zoe's Kitchen has an Earnings ESP of +15.79% and a Zacks Rank #3, a combination that increases the odds of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zoe's Kitchen, Inc. Price and EPS Surprise


Peer Releases

McDonald's (MCD - Free Report) has reported impressive second-quarter 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings per share of $1.99 surpassed the consensus mark of $1.92 by 3.6% and increased 15% from the year-ago quarter (12% in constant currencies). The upside reflects stronger operating performance.

Darden (DRI - Free Report) has reported better-than-expected results in the fourth quarter of fiscal 2018. Adjusted earnings of $1.39 per share outpaced the consensus estimate of $1.35 by 3%. The bottom line also increased 17.8% year over year on the back of higher revenues. Notably, the reported quarter marked the 15th consecutive earnings beat for the company. Darden’s relentless efforts in improving the basic operating factors of the business — food, service and atmosphere — drove its bottom-line performance.

Noodles & Company (NDLS - Free Report) has reported mixed results in the second quarter of 2018, wherein earnings missed the Zacks Consensus Estimate while revenues surpassed the same. Adjusted earnings of a penny missed the consensus mark of 3 cents but remained flat with the year-ago quarter’s EPS.

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