What happened
Shares of Mediterranean restaurant chain Cava Group (NYSE: CAVA) skyrocketed this morning as soon as shares started trading on the open market. The market for initial public offerings (IPOs) has been slow in 2023. But Cava's success today may suggest that investors' appetites are improving. As of 1:30 p.m. ET, Cava stock was up 93% from where its IPO shares priced.
So what
Investors see several things in Cava that are desirable for a restaurant stock. First, the company believes there's room for over 1,000 locations by 2032, whereas it only had 263 locations as of April. Moreover, annual sales per location -- otherwise known as average unite volumes (AUV) -- are high at around $2.5 million.
Because Cava has high AUV, it's able to leverage fixed costs, and that unlocks strong restaurant-level profitability. Its restaurant-level profit margin was 25% in the first quarter of 2023. For comparison, restaurant-level operating margin for Chipotle Mexican Grill was 25.6% in the first quarter of 2023. And Chipotle stock has been an amazing investment.
Given the strong unit economics and the big expansion plan, investors were eager to gobble up shares of Cava as soon as they became available, sending the stock skyrocketing today.
Now what
Cava does have many desirable traits, and I understand the market's enthusiasm. But there are some risks to be aware of as well -- there are risks with any investment.
For me, a big part of the investment thesis for Cava will revolve around the company's ability to grow AUV over time. After all, it may be profitable on a restaurant level. But zooming out to the whole company to include corporate expenses, it had a net loss of $59 million in 2022 -- larger than its net loss of $37 million the year before. Growing AUV will be an important profit driver.
On that note, Cava's AUV is actually lowest in the two regions that have been the focus of recent development: the Southeast and the Southwest. With the company expanding into the Midwest this year, it's fair to wonder if AUV will be lower than average there as well.
In my opinion, it's often a good idea to wait to buy IPO stocks -- first-day hype can really send shares to high valuations. I'd say the same of Cava stock. Therefore, while I'm waiting on the sidelines, I'll be watching AUV as management expands its footprint.