Mediterranean-style restaurant chain Cava Group (CAVA -0.05%) went public earlier this year and reported quarterly financial results for the first time as a public company on Aug. 15. As is the norm, management held a conference call that afternoon to talk about those results and field questions from professional analysts as well.

Eight analysts had questions for the management team at Cava. Normally, questions keep moving into new territory, but in Cava's case, half of the analysts had questions on the same topic: the company's stellar same-store sales growth. Growth in same-store sales is very important for Cava.

Here's what the Wall Streeters were trying to get to the bottom of in their questions.

First, why this metric is key

Companies vary in their definitions of same-store sales. In Cava's case, it's looking at stores that have been open for at least one year. It takes the stores open one year or longer and compares sales results to that same base of stores last year. It's a good way to track growth while excluding the impact of new locations.

Cava just reported financial results for the second quarter of 2023. During the quarter, same-store sales grew 18.2% -- really good for a restaurant stock.

To understand why this is important, let's imagine a restaurant that requires three workers: a cashier, a cook, and a manager. Those three people will be on the clock regardless of how many diners show up. If this team serves one person, 10 people, or 20 people in an hour, the restaurant will incur the same labor expense. Therefore, the goal is to increase sales as much as the team can handle to gain operating leverage.

Cava just reported record profitability in the second quarter because its same-store sales smashed expectations. Therefore, everyone on Wall Street wants to determine the sustainability of the quarter's success.

What's driving Cava's success?

You have to read between the lines for some of the questions. But four analysts asked questions to Cava's management that related to same-store sales.

  • John Ivankoe of J.P. Morgan asked if the company was properly prepared for the sales surge it had. In other words, this is a question on traffic expectations.
  • David Tarantino of Baird noticed that Cava's full-year guidance implies a slowdown in same-store sales growth later this year. He wanted to know if this was already playing out or if management was simply being conservative.
  • Jon Tower of Citi wanted management to break down the same-store sales growth month by month, to understand how quickly the trend is improving or deteriorating. 
  • Brian Harbour of Morgan Stanley tried to ascertain other factors driving the strong sales. Perhaps older locations were getting better brand awareness in time? Or maybe recently remodeled locations did the trick?

I'd summarize the questions like this: Why are things so good for Cava, and can the good times keep going? The company did increase menu prices during the past year, something it doesn't plan to do again in 2023. This is one component of its growth. But even adjusting for this one-time benefit, the company still had a 10.3% increase year over year in guest traffic.

Chief Financial Officer Tricia Tolivar conceded that Cava is in the public eye right now thanks to its initial public offering (IPO). "There was an amplification of our brand awareness in Q2 that we wouldn't necessarily expect as we go into the back half of the year," Tolivar said. Therefore, some of its increase in traffic could also be temporary.

What to watch now

Circling back to Tarantino's question, Cava's management is expecting full-year same-store sales growth of 13% to 15% -- a material slowdown from its 18.2% growth in the second quarter and its 28.4% growth in the period prior to its IPO. In other words, growth in the third and fourth quarters will likely be much lower than 13%.

That's a concern. It also sounds problematic that temporary factors boosted Cava's growth earlier this year. However, I don't believe investors should view this pessimistically. The reality is that many people are discovering Cava for the first time thanks to heightened publicity. That's OK. If the dining experience is good enough, they'll be back in future quarters to eat again.

Moreover, Cava's average sales volume per restaurant has reached a high-enough level to support profitability very early in its long-term journey. Therefore, even just maintaining current sales is good as the brand expands from 279 locations today to over 1,000 locations by 2032.

What investors don't want to see is a sharp decline in guest traffic. Slowing growth doesn't undermine Cava's long-term potential -- it's still growth. But if guest traffic suddenly goes backwards, it would suggest that many newcomers to the brand weren't compelled enough to stick around, which would cause me to doubt its ability to reach 1,000 locations.