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How the Better Burger Is Killing Zoe's Kitchen

When Zoe's Kitchen debuted as a public company in 2014, all indications were that the small Mediterranean-inspired chain would be a massive success. The fast-casual dining experience was on fire, better-for-you meals were the rage, and crowds were flocking to Zoe's stores. Fast-forward a few years, and it looks like the final chapter is about to close on Zoe's stock, ending a forgettable run for most investors.

Reasons for the restaurant's struggles have been many, including the general dining industry's overexpansion and Zoe's decision to focus on regional growth in the Southeast instead of full-blown nationwide development. But there could be another reason for the stallout: America likes burgers a lot more than anything else.

The problem with averages

Though declining foot traffic remains a problem, the restaurant industry has seen an uptick this year as new store development has slowed down and consumers have accepted higher menu prices. Two years of average same-store sales declines have reversed and the metric is managing limited gains in 2018.

Chart by author. Data source: TDn2K.

According to research group TDn2K, fast-casual dining is leading the 2018 rebound. A combination of higher-quality food without sacrificing convenience is still winning over American diners, especially during lunch hours. It would seem like that trend would help Zoe's turn things around, but the exact opposite has happened.

While its peers have begun to thrive once again, Zoe's Kitchen has been near the bottom of the barrel in terms of comparable-store trends -- an important metric because average sales per location help a chain manage average profit margins. While the industry is back in positive territory this year, the Mediterranean cuisine specialist is headed in the wrong direction, posting comps of -2.3% and -2.5% in the first and second quarters, respectively.

Image source: Getty Images.

America loves the burger more

The better-burger movement has been one of the leaders in the fast-casual rebound. Hamburgers are a crowded subset of the restaurant scene, with fast-food joints dominating top-10 American dining chain lists in terms of annual sales and number of stores. Yet it would seem the consumer can't get enough; private chains like Five Guys and Whataburger consistently post annual growth, and smaller start-up burger concepts are popping up across the country to capitalize on the craze. Annual hamburger sales are estimated to be over $80 billion.

Some specific insight into the trend can be gleaned from two of Zoe's competitors in the fast-casual space: Shake Shack (NYSE: SHAK) and Habit Restaurants (NASDAQ: HABT). Both better-burger establishments shared industrywide struggles due to aggressive expansion for two years, but things have been trending positively thus far in 2018, leaving Zoe's fresh and healthy fare in the dust.

Restaurant

2017 Comparable Sales

Q1 2018 Comparable Sales

Q2 2018 Comparable Sales

Zoe's Kitchen (NYSE: ZOES)

(2%)

(2.3%)

(2.5%)

Shake Shack (NYSE: SHAK)

(1.2%)

1.7%

1.1%

Habit Restaurants (NASDAQ: HABT)

(0.1%)

(1.4%)

1.2%

Data source: company-specific quarterly earnings.

Comp sales are back on the rise at both chains, in spite of new store openings that continue to put them -- along with myriad other burger joints -- on an eventual collision course. At the end of the second quarter, Shake Shack and Habit domestic restaurant counts increased 31% and 23% year over year, respectively. Shake Shack had 110 U.S. stores at the end of the quarter to Habit's 227. Zoe's, on the other hand, has had to scale back expansion, with only 14% year-over-year growth in the second quarter and plans to scale back even more in the coming years. Zoe's had 258 stores at quarter's end.

With Zoe's getting left behind during a restaurant industry rebound, it would seem that its Mediterranean cuisine is struggling to gain traction with the public. Better-burger peers are doing well and continuing to expand against all odds, indicating that America's love of the hamburger is alive and well. As Zoe's Kitchen is finding out, breaking down cultural barriers can be hard.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoe's Kitchen. The Motley Fool has a disclosure policy.

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