One of the best-performing stocks in the food and beverage industry is a newcomer, Cava Group (CAVA -1.67%). This recent initial public offering (it debuted in June) has taken the market by storm, generating strong investor interest while surging well ahead of the S&P 500 index. It's also leapfrogging higher than the stocks of two popular sector mainstays, Chipotle Mexican Grill and Starbucks.
It's not every day that a company in the typically low-margin food and beverage space captivates investors. Here's a closer look at why investors like it so much, and whether it might turn into a solid long-term performer like Chipotle or Starbucks.
The trends are its friends
Cava has a bunch of positive factors going for it that make it an attention-grabbing investment. A major one is that it operates on the fast casual model with which Chipotle has had great success. Like the burrito slinger, Cava offers an assembly line experience for visitors. These folks can choose among a collection of proteins, sides, vegetables, and condiments to quickly build a meal packed into a pita wrap or bowl. Set menu items are also available.
The food is Mediterranean-inspired, which hooks into two current trends in the restaurant industry. The more significant one is the emphasis on healthy eating; the items on offer from Cava tend to be comparatively light on calories, and also nutritious.
The second is the heightened curiosity for international cuisines like those coming from Southeast Europe. While this style of cooking has been a staple of mom-and-pop restaurants for decades, it's never really been successfully rolled out on a major, national level.
Can Cava buck that trend? Management is certainly trying. An assertive growth strategy has seen the number of restaurants balloon from 22 in 2016 to 263 at the end of this year's first calendar quarter. The company bulked up through both organic development and an acquisition, namely that of fellow Mediterranean chain Zoe's Kitchen in 2018. Cava is at the tail end of its project to convert all Zoe's locations into its own outlets.
Like many fresh arrivals to the stock market, Cava has not been profitable. However, in its most recently reported quarter the company narrowed its bottom-line deficit considerably (to $2 million from $20 million in the same period of 2022). Revenue growth was also impressive for that frame, coming in at 28% (to $203 million).
Management has set its sights on exceeding the 1,000-restaurant mark by 2032. While at first blush that might seem like a monster number, it can be achieved. Good old Chipotle nearly tripled its restaurant count from 2007 to 2015...and from that only continued to advance, expanding at a nearly-60% rate over the years to hit a total of 3,187 in 2022.
A tasty strategy
That means there's plenty of space to grow, and I feel that Cava has the right cuisine, the right approach to serving it, and the right impatient-but-not-reckless stance on expansion. It also seems that management is disciplined, judging by that sensible business strategy and the significant trimming of bottom-line losses recently.
Given all that, I believe Cava has the right ingredients (sorry!) to become, if not a ubiquitous presence in American municipalities like Starbucks or a common sight like Chipotle, at least a familiar, recognized, and well-liked fast casual option.
This is an expensive stock to own, though, particularly so early in its life -- it trades at a price-to-sales ratio of 8.2. By comparison, even though it's been a rocket of a stock over the years, Chipotle's figure is significantly lower at 6.4. The less high-flying but still successful and popular Starbucks trades at 3.4.
We should also remember that both Chipotle and Starbucks are habitually profitable; they even managed to land in the black much more often than not throughout the pandemic, which is quite the impressive feat.
So Cava has a lot to prove, and it has a lot of distance to cover to reach the scale of a Chipotle or a Starbucks. But it's certainly pointed in the right direction, and often we have to pay a meaty premium for potential. This company has it in spades, making me think it's got a fine shot at joining its peers as a top food and beverage stock.
