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LD Micro Small-Cap Activity for the Third Week of August: Zoe’s Kitchen Market Rescue, End Is Near for Sears

From Chris Lahiji comes a new summary of the LD Micro newsletter covering microcap activity during the third week of August (August 12-19). The newsletter notes that the LD Micro Index continued its downward movement, dropping another 0.6 percent from the previous week. The Dow Jones Industrial Average Index, however, ended the week up 1.6 percent, Lahiji said.

In the newsletter’s ‘Impact’ section highlighting the most notable anomalies among the biggest gainers and volume leaders, Christian Galatti of Phase IV Research focuses on the Mediterranean-style restaurant chain Zoe’s Kitchen and Sears Holdings.

  • Zoe’s Kitchen (ZOES) Gets Bought Out, +45.77% – There and Back Again, the Coincidence of the Round Trip.

Since it first went public in Q2 2014, Zoe’s Kitchen’s fortunes have risen and plunged like a roller coaster. At its debut on the stock market, its shares were first valued between $13 and $15, setting the company’s worth at over $275 million. Share prices went on an upward trajectory, tripling in value one year later.

However, the following year, the tide turned, and Zoe’s Kitchen began a downward slide, with shares dropping under $10 in May 2018 after the company reported the latest in a string of disappointing quarterly results.

“For ZOES, it wasn’t just mall traffic that was eroding its business,” Galatti writes. “Behavior was quickly changing. America First was sweeping the nation, particularly in the South where Zoe’s Kitchen is mainly located. Their motto, ‘Delivering Goodness, through our food and our people, in the communities we serve,’ was getting lost.”

In the face of declining profits, Zoe’s Kitchen put the brakes firmly on its expansion plans, intending to instead focus on trying to increase sales, manage its cash flow and “explore new ways to strengthen [its] business over the long term in order to increase shareholder value,” according to CEO Kevin Miles.

On August 17, 2018, news emerged that Cava Group, a privately-owned company, is to buy Zoe’s for $300 million at about $12.75 per share, meaning that Zoe’s price at its buyout is at about the same level as when the company first went public.

The buyout has sparked additional interest because of the involvement of Ron Shiach, who is behind the investment fund that is providing the finances to enable Cava to buy Zoe’s Kitchen. Shiach, founder of Panera Bread, has a reputation for spotting trends in the restaurant industry, and it is thought that his involvement indicates that there could be a strong future for the niche market of Mediterranean cuisine, according to a CNBC report.

  • It’s Finally Over for Sears Holdings (SHLD) -31% – A Profound Mystery.

Sears Holdings became a microcap during the third week of August, as its share price plummeted to $1.45. Industry analysts have long regarded the company’s end as inevitable, and its CEO Edward Lampert has been criticized by many for missed opportunities and decisions that proved disastrous in hindsight.

Galatti quotes a Business Insider report about how Lampert’s obsession with Wall Street is what set Sears up for failure. “Sears has survived two world wars and the Great Depression. But after a decade under the control of a former Goldman Sachs executive turned hedge fund manager, the 124-year-old retailer is imploding,” the article says. Lampert, on the other hand, has defended all his decisions and generally blamed the media over reports speculating on a Sears bankruptcy.

Sears sales have been plummeting for years, and stock prices have been dropping constantly for months. Galatti notes that, in this respect, Sears shares the same fate as Woolworth, which went bankrupt after being ejected from the Dow in 1997. Sears has “been going out of business for so long that its fate has never been in doubt,” Galatti writes. “The profound mystery will always be why.”

For more information on LD Micro, visit www.LDMicro.com

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