Restaurant stocks don't often captivate the market, but one recent initial public offering (IPO) is getting a lot of buzz. Cava Group (CAVA 10.50%), a fast-casual chain known for Mediterranean food, saw its shares pop in its June IPO and then surge again this past week after a chorus of analysts weighed in with buy ratings after the quiet period ended.
Cava has inspired a number of comparisons to another hot restaurant stock, Chipotle Mexican Grill (CMG 2.41%), for its menu, business model, and even its financial numbers. Like Chipotle, Cava offers a menu of customizable ingredients, allowing patrons to mix and match proteins, vegetables, and dips, ordering a bowl or a rolled-up pita sandwich that looks like a burrito.
Similar to Chipotle, all of Cava's restaurants are company-owned, a rarity in the fast-food industry as neither one franchises nor licenses its restaurants with the exception of one licensed Cava location. Even the aesthetics of Cava restaurants are reminiscent of Chipotle with an industrial minimalist look, and the restaurants are similarly sized at around 2,500 square feet on average.
So should investors hop aboard Cava's stock? Let's find out.
Image source: Cava Group.
Cava vs. Chipotle
Cava's fundamentals resemble Chipotle's at the time of its IPO although with not quite as many locations. When the burrito roller went public in 2006, it had 489 restaurants, making it about twice the size of Cava today. As of April 16, Cava owned and operated 263 restaurants in 22 states and Washington, D.C. Much of its growth has come from its acquisition of Zoes Kitchen, converting 145 Zoes locations into Cava restaurants.
Chipotle had grown comparable sales by double-digits in three of the previous four years and posted 8.7% same-store sales growth in the first three quarters of 2005. It was also profitable at the time of its IPO with $23.3 million in operating income on $452.6 million in revenue in the first three quarters of 2005.
Cava, by comparison, finished 2022 with $564 million in revenue, even more than Chipotle had at the time of its debut. The company has also seen strong comparable sales growth over the last two years of the pandemic recovery (as has much of the restaurant industry) across eight consecutive quarters.
The young restaurant chain also finished last year with average unit volumes at $2.3 million, which is significantly better than Chipotle's at $1.4 million at the time of its IPO. However, comparing those two numbers is a bit misleading due to the impact of inflation and digital sales today, which did not exist at the time of Chipotle's IPO.
On the bottom line, Cava is unprofitable on a generally accepted accounting principles (GAAP) basis with an operating loss through the first sixteen months of 2023 of $2.3 million.
At the restaurant level, Cava's margins are similar to Chipotle's. It finished 2022 with a 20% restaurant-level operating margin, which should support overall profitability as the chain expands. By comparison, the burrito chain had a restaurant-level operating margin of around 18% when it went public.
Will Cava be the next Chipotle?
Chipotle stock is up more than 3,000% since its IPO, so it's easy to see why investors are excited about the similarities between it and Cava. However, Cava seems likely to face more of an uphill battle than Chipotle as its stock is significantly more expensive than Chipotle's was when it went public.
Cava, which is still unprofitable, currently trades at a price-to-sales ratio of 9. The chart below shows how Chipotle, which was profitable when it debuted, was valued on a sales basis following its IPO.
CMG PS Ratio data by YCharts
As you can see, Chipotle traded at a P/S multiple of around 2 at the time of its IPO, about four times cheaper than Cava is today. In fact, Chipotle has never been as expensive as Cava is now on this basis.
At the time of Chipotle's debut, investors didn't think much of the restaurant chain as there was no similar example to come before it. Chipotle's own success has made it that much more difficult for every fast-casual stock that comes after it to be a winner because investor expectations are now much higher than they were when Chipotle came on the market.
While Cava seems to have the components of a strong business with high average unit volumes, solid restaurant-level operating margins, and generally positive reviews, other promising fast-casual chains like Sweetgreen and Shake Shack have had similar pedigrees and struggled to deliver results on the stock market.
Even Chipotle tried and failed several times to copy the burrito chain's success with similar concepts that offered different cuisine, striking out with ShopHouse Southeast Asian Kitchen, Pizzeria Locale, and Tasty Made (burgers and fries).
Cava could end up being a long-term winner if it executes its growth plan. But at this point, investors are better off waiting for a lower price to get a piece of the hot fast-casual stock.
