Cava Group (CAVA 2.77%) got off to a buoyant start last month, spiking sharply higher at its June 15 initial public offering. The Mediterranean-style restaurant chain set the share price at $22 per share, but the stock closed at $43.30 per share.
However, the shares have come down slightly since that time. And with investors looking more closely at the company and other restaurant stocks, it could struggle over the next year. Here's why.
Could Cava be the next great restaurant stock?
Cava has a fast-casual approach and a focus on healthy ingredients, which has led many observers to call it the Mediterranean food version of Chipotle Mexican Grill. The restaurant chain has grown to 263 locations as of April 16. This includes conversions of Zoe's Kitchen locations, a chain it acquired in 2018.
Indeed, Cava will likely continue to grow rapidly. In the first quarter alone, it opened 26 new locations. It also believes it can grow to about 1,000 U.S. locations by 2032. That would increase the footprint size by nearly four-fold, not including possible prospects to open locations outside the U.S.
Nonetheless, according to Google Trends, Mediterranean food does not come close to matching the popularity of Mexican food. Moreover, many customers turn to Mediterranean cuisine for healthy ingredients. But since Chipotle focuses on natural ingredients, it reduces the need to turn to alternative food types.
Additionally, investors need to remember that numerous restaurant stocks underperform the market. While Chipotle has succeeded, many stocks like El Pollo Loco and Red Robin Gourmet Burgers debuted with high hopes but have dramatically underperformed the S&P 500 in recent years. Hence, Cava will probably have to show that it can sustain investor confidence over time to grow long term.
Cava's financials and growth
While the health of its food is not in question, Cava's financials might be slightly more of a concern. In the 16-week period that ended April 16, Cava's revenue of $203 million grew 28% compared with the same period in 2022.
Operating expenses grew 15% in that time frame, resulting in a $2 million loss for the period. That compares favorably versus the $20 million lost in the same period in 2022. Still, for fiscal 2022 (ended Dec. 25), revenue grew by only 13%, and losses increased to $59 million versus $38 million in fiscal 2021.
Additionally, Cava's valuation leaves little room for error. The current $7.8 billion market capitalization implies that it trades at nearly 14 times its fiscal 2022 sales. Even though Chipotle appears pricey from a valuation perspective, it sells for less than 7 times its 2022 sales. So the shares are at risk of seeing more selling to come.
Cava in one year
Ultimately, Cava Group is likely to underperform over the next year. Indeed, Mediterranean food has a following among health-oriented customers, which could bode well for the company.
However, a more established restaurant stock like Chipotle Mexican Grill offers healthy food with a more popular food type. Moreover, unlike Cava, it currently earns a profit and holds the potential to add more locations across the U.S. With post-IPO hype likely sustaining the current valuation, Cava stock probably has further to fall in the current environment.
