Investors are hungry for this month's hottest initial public offering (IPO). It's been two weeks since Cava Group (CAVA 10.50%) had its highly anticipated market debut. The rapidly expanding chain of 263 fast-casual restaurants specializing in Mediterranean cuisine priced its offering at $22 a share, and went on to roughly double.
Is it too late to place an order? Let's go over a few of the reasons Cava's future is bright for shareholders even at current levels. I hope you packed an appetite.
Image source: Cava Group.
1. This is still sort of the ground floor
Underwriters sold 14.4 million shares of Cava at $22 on June 15, but only institutional investors and connected individuals succeeded in getting in on the offering itself. The stock would open at $42 on its first public trade, closing at $43.78 by the end of its initial trading day.
Cava closed at $42.21 yesterday, so it's essentially where it was when it first started trading two weeks ago. It has traded as high as $47.89 and as low as $36.45, so it's just a few pennies away from the midpoint in its very short tenure as a publicly traded restaurant chain.
2. The best IPOs don't seem cheap at first
One can fairly argue that a market cap of $4.8 billion is not cheap for a young chain that is currently losing money. The stock trades at 8.5 times trailing revenue, a steep multiple in the restaurant space. Chipotle Mexican Grill (CMG 2.41%) -- the industry leader that championed the fast-casual movement of quick-service chains with food that's table-service quality -- is profitable and proven, and it only fetches 6.5 times its top-line results.
However, Chipotle's own 2006 IPO has some echoes in this month's Greek-inspired debutante. Chipotle also hit the market at $22 a share. Both stocks would go on to double on their first day of trading. Chipotle fared pretty well for investors, going on to be a 95-bagger.
Both concepts went into their initial stock offerings with similar trailing revenue, but Chipotle had roughly double the number of locations. The comparisons are unavoidable. An important distinction is that Chipotle was modestly profitable, but Cava will get there soon with its healthy restaurant-level profit margin north of 20%.
3. Acquiring Zoe's Kitchen in 2018 was brilliant
It's been five years since Cava announced that it would be buying Zoe's Kitchen in a $300 million deal. Zoe's Kitchen was the largest player in Mediterranean dining, but it was struggling, while Cava's own concept was thriving, and it was able to turn a competitor into an ally. More importantly, it gave Cava a cost-effective way to rapidly expand its reach. A whopping 145 of its 263 locations are Zoe's Kitchen conversions.
The math is kind. It costs between $600,000 to $700,000 to convert a Zoe's Kitchen into a Cava, roughly half of the $1.2 million to $1.3 million it sets Cava back when it's starting from scratch. The makeover doesn't take long to pay off. The average Zoe's Kitchen was generating just $1.4 million in annual sales in 2019; the converted units generated $2 million in annual sales in 2022.
This isn't an unlimited source of healthy return on invested capital; Cava expects to convert the remaining 28 Zoe's locations by the fall of this year. However, it's a testament to Cava's superior concept. The path to profitability will also become clearer once the project to upgrade the inferior Zoe's Kitchen model is complete.
Stirring the ingredients together
We're early in Cava's growth trajectory. This is a unique restaurant stock with several paths to success. The popularity of Mediterranean cuisine is growing, and Cava is also already a force in consumer-packaged goods. Many of its dips, spreads, and sauces -- including the cult fave Crazy Feta -- are available at your local Whole Foods and other retailers.
We will soon get to the point when the various firms that helped take Cava public will begin putting out what should be bullish analyst coverage. The story will get amplified. Like the jalapeño zing that spices up the smooth Crazy Feta cheesy spread, the kick is coming. Come hungry.
