Cava Group (CAVA -1.67%) stock was "priced for perfection" heading into Tuesday afternoon's earnings report. Shares of the fast-growing chain of 279 fast-casual restaurants specializing in Mediterranean cuisine had more than doubled since hitting the market with its initial public offering (IPO) priced at $22 a share. Judging by the stock's reaction to this week's financial update, Cava has exceeded perfection.
Revenue surpassed expectations, fueled by monster double-digit growth in comparable-restaurant sales. Cava also surprised the market with an actual profit. The recent market debutante made a great first impression with its mid-June IPO. It's keeping the party going with a blowout performance in its first quarterly earnings report as a public company.
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Cava has hit the ground running as one of this year's hottest IPOs. Revenue rose 62% to $171.1 million, comfortably ahead of the 55% year-over-year spurt that analysts were modeling. Cava's impressive growth comes largely from its heady expansion. It has increased its locations by 43% over the past year, adding 102 net new locations over the past year including 16 net units during the second quarter itself.
Wall Street knew the unit count was growing briskly. It's easy to track store openings that take place in plain sight. The secret to the beat here is the impressive 18.2% surge in comps during the quarter. The performance wasn't competing with depressed results a year earlier. Comps climbed a healthy 13.3% in the second quarter of last year. The concept's popularity is clearly resonating with consumers at the individual eatery level. Cava restaurants are ringing up an average of $2.6 million in annual sales, up from $2.4 million a year earlier.
The news is even better as we work our way down Cava's income statement. Margins are widening, and the chain's restaurant-level profit of $44.6 million in the second quarter is a 92% leap from where it was a year earlier. Analysts were bracing for a small loss, but Cava is clocking in with net income of $6.5 million. The profit for the 12-week quarter ending on July 9 translates to reported earnings of $0.21 a share, but Cava pointed out in its earnings call that this was based on a weighted share count that is much lower than its current post-IPO presence. Cava's net income would be $0.06 a share adjusted for its current outstanding share count.
Image source: Cava Group.
Cava is tempering expectations. Its full-year guidance suggests that comps and growth will slow in the second half of the year. The restaurateur points out that climbing gasoline prices, rising utility bills given the hot summer, and the restart of student loan repayments in the fall could weigh on consumer activity for the restaurant industry.
Expansion itself will also start to decelerate. It's winding down the number of acquired Zoe's Kitchen locations it has converted over the past couple of years to create easy and cost-effective new Cava units. It would cost Cava half as much for updating a Zoe's Kitchen into its higher-grossing namesake concept as it does building one from scratch. Cava expects to open 65 to 70 net new restaurants this year. Its pipeline calls for the restaurant count to increase by at least 15% in 2024 and 2025, a far cry from the 43% pop over the past 12 months.
Don't let Cava's cautious tone alarm you. It's doing the right thing by offering conservative guidance. It's already one for one in beating Wall Street's quarterly forecasts. Setting the bar low will make it easier to build on that streak. It may be right about reasons to be cautious, but there aren't many chains that grew their comps in the high teens during the late spring and early summer quarter. In short, it's taking market share at the expense of other restaurant stocks. Cava has the right ingredients to continue to be appetizing on the growth investing menu.
