Here's Why You Should Steer Clear of Zoe's Kitchen Stock

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Shares of Zoe's Kitchen, Inc.ZOES have underperformed the Zacks categorized Retail-Restaurants industry in the past six months. While the stock plunged 50.3%, the industry registered an increase of 14.3% in the same time period.

Moreover, this Zacks Rank #4 (Sell) company that specializes in Mediterranean cuisine has been witnessing downward estimate revisions, reflecting analysts' pessimism about its growth prospects. Over the last 30 days, the Zacks Consensus Estimate for 2017 and 2018 moved down 150% and 25%, respectively.

Additionally, Zoe's Kitchen has a number of other aspects that make it an unattractive investment option at this point.

Industry Headwinds

Over the past few quarters, the U.S. restaurant space has not been too enticing. Despite economic growth, somewhat lower energy prices and higher income, consumers increased their spending only modestly on dining out that resulted in low consumption over the last few quarters. This is because, along with wage growth, inflation is also on the rise, which translates to lower real income and in turn less disposable income. In fact, the situation has taken a worse turn, thanks to higher health care costs and tightened credit availability in the country.

Moreover, as consumers demand high-quality products at lower prices, it is pushing grocery stores to decrease their food prices in order to remain competitive. This, in turn, is resulting in a bigger gap between food-at-home and food-away-from-home indices.

Consequently, same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the first quarter of 2017 marked the fifth consecutive quarter of negative comp sales for the restaurant industry as a whole, thereby continuing the somber mood. Zoe's Kitchen is no exception to the trend and resultantly, the company's sales have come under pressure.

2017 Guidance Trimmed

Along with its first-quarter 2017 results, the company stated that it expects total revenue in the band of $314 million to $322 million in 2017, down from the earlier guided range of $325 million to $327 million.

Moreover, the company anticipates comp sales to range from flat to negative 3% compared to the growth in the band of 1-2%, projected earlier.

Furthermore, consolidated restaurant operating margin is expected to be roughly 19% as compared with the previous expectation in the range of 19.5% to 20%.

Lackluster ROE

Zoe's Kitchen's trailing 12-month return on equity (ROE) of 1.20% undercuts its growth potential. Further, it compares unfavorably with the broader industry's ROE of 8.04%, reflecting the fact that it is less efficient in using shareholders' funds.

Stocks to Consider

Better-ranked stocks in this sector include Dave & Buster's Entertainment, Inc. PLAY , Red Robin Gourmet Burgers, Inc. RRGB and Fogo de Chao, Inc. FOGO . While Dave & Buster's and Red Robin sport a Zacks Rank #1 (Strong Buy), Fogo de Chao carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Dave & Buster's earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 30.50%. Meanwhile, for fiscal 2017, earnings per share (EPS) is projected to witness a rise of 23.2%.

The Zacks Consensus Estimate for Red Robin's 2017 earnings climbed 4.4%, over the past 60 days. Moreover, the company's trailing four-quarter average earnings surprise is a positive 17.27%.

The Zacks Consensus Estimate for Fogo de Chao's 2017 earnings moved up 2.2%, over the past 60 days. Moreover, for 2017, EPS is expected to improve 6.4%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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