The fast-casual concept has become one of the hottest trends in the restaurant industry. Chipotle Mexican Grill (CMG 2.41%) was one of its pioneers, offering a limited menu of quality food made from fresh ingredients, made to order, at reasonable prices. From those humble beginnings, a burgeoning industry was born.
Since the company's initial public offering (IPO) at $22 in 2006, Chipotle shares have risen an astonishing 9,213% (as of the market close on Thursday). Given the company's unbridled success, it isn't surprising that investors are always on the prowl for the next Chipotle.
The recent debut of Cava Group (CAVA 10.50%), which offers fast-casual dining with a Mediterranean flair, has investors revisiting this frequently asked question. The stock just dished up one of the best IPOs since 2021, with shares soaring 99% on its first day of trading.
Digging a little deeper into the comparison shows that there's plenty to be excited about. Based on its early success, if Cava continues along its current trajectory, it will be unstoppable.
Image source: Cava.
Pull up a chair
Cava opened its first fast-casual Mediterranean restaurant in 2011, and a line from co-founder Brett Schulman's letter to investors paints a vivid picture: "Using fresh ingredients while roasting, grilling, and braising with fire enables us to make the layered flavors our guests have come to love."
The company offers 38 ingredients that can be combined into a pita, grains bowl, salad bowl, or greens and grains bowl. The combination of main ingredients, dips, toppings, and dressings yields many combinations, with something for virtually every taste. Its fare includes such Mediterranean staples as braised lamb, grilled chicken, harissa honey chicken, falafel, roasted eggplant dip, hummus, tzatziki sauce, and more.
Many of Cava's ingredients come directly from growers, ranchers, and producers and are sustainably sourced. Furthermore, the ability to customize the ingredients meets a wide range of dietary preferences, including vegan, vegetarian, gluten-free, dairy-free, paleo, keto, and nut-free diets. There are also plenty of options for carnivores.
At first glance, Cava appears to be following Chipotle's limited menu, customizable options, and "food with integrity" ethos, each of which was a key ingredient to the company's success.
Show me the money
Cava is off to an impressive start, with exceptional unit-level economics that compares favorably to its fast-casual peers. The company closed out 2022 with an average unit volume (AUV) -- or individual store sales -- of nearly $2.4 million and a restaurant-level profit margin of 20.3%. The company generated revenue of $564 million in 2022 but lost $59 million. On the bright side, it generated operating cash flow of $6 million and should pave a path to profitability with its impressive volume and restaurant-level profit margins.
Management believes that for new locations, Cava can achieve an AUV of $2.3 million by its second full year of operations, generating a restaurant-level profit margin of 20%. It's worth noting that Cava has a track record of increasing its AUV as locations mature. Locations open four years or longer boast an AUV of between $2.6 million and $3.3 million, depending on the geographic region.
For context, Chipotle ended 2022 with an AUV of $2.8 million, according to industry publication QSR Magazine, and reported a restaurant-level operating margin of 24%. While this isn't an apples-to-apples comparison, it illustrates that Cava is clearly in the same league as Chipotle.
Cava also boasts robust comps in the form of same-restaurant sales growth, which came in at 14.2% in 2022, well ahead of Chipotle's comps, which increased by 8%. It remains to be seen if Cava can still continue that performance as its markets become more saturated, but it's off to a healthy start.
A long runway for growth
It's still very early in Cava's growth story, so the company still has much to prove. It currently boasts 263 restaurants in 22 states, and management expects to open between 34 and 44 new locations before year-end. Furthermore, the company believes there is potential for as many as 1,000 Cava locations in the U.S. over the coming decade, with 100 prospective sites in the pipeline.
In addition to opening locations in new markets, management cites long lines and the accelerating increase in digital adoption as evidence that there's still significant demand in existing markets.
For context, Chipotle currently has about 3,200 stores and has a long-term goal of 7,000 locations in North America alone, which dwarfs Cava's ambition by comparison. That said, it's still early days for Cava and the company could -- and likely will -- revise its growth targets as time goes on.
The comparisons are undeniable
Given the stock's massive gains over the years, it's easy to understand Wall Street's obsession with finding the next Chipotle -- and Cava has many of the necessary ingredients to be a contender.
Plenty of things will have to go right over the ensuing years for Cava to be the next Chipotle. That said, given its focus on fresh and sustainable ingredients, unit-level economics, solid comps, and measured growth plan, Cava is off to an impressive start and could well be unstoppable.
