Cava Group (CAVA 10.50%) was one of this year's hottest initial public offerings (IPO), but shares of the Mediterranean-style restaurant chain are down 11% from its first-day closing price. Starbucks (SBUX 0.47%) is the established leader in coffee chains, but it's growing at a slow pace.
It's a case of the new and hot vs. the old and secure. Which one of these restaurant stocks is the better buy today? Lets take a look.
The case for Cava: A no-brainer route toward growth
The strong investor interest in Cava stock comes from a desire to get in on something before growth surges. Cava has momentum as it opens new stores and sales soar. In the 2023 second quarter, Cava's first as a public company, sales increased 62% over last year, the kind of growth that only a new and popular company can demonstrate.
It opened 16 new stores, and with only 279, it has a massive and simple path to keeping up that kind of revenue growth for many years. Management is eyeing at least 1,000 stores by 2032.
Cava is also posting excellent comparable-store sales (comps) growth, which means that it's not only the new stores bringing in the higher revenue. Existing stores are servicing more customers and higher traffic, which means it's getting more out of each store. This indicates customer loyalty and engagement, which are important signs of a viable company with a lot of potential.
Comps increased 18% in the second quarter although management said the IPO hype contributed to the strength. It's guiding for about 14% growth for full-year comps, which is still impressive.
Cava also posted a $6.5 million profit in the second quarter, up from an $8.2 million loss last year. Average unit volume increased from $2.4 million last year to $2.6 million this year, and restaurant-level profit margin was 26.1%, up four percentage points from last year. Management is guiding for full-year restaurant-level margins of 23%. If it can sustain profitability as it scales, its stock will reflect the increases.
The case for Starbucks: Steady, reliable, and still full of opportunity
The case for Starbucks can be easily stated as "Don't mess with a good thing." Starbucks has demonstrated time and time again that it's in touch with what its customers are looking for and can change to meet it, no matter that it's a huge company. Maintaining that kind of agility and willingness to change has led to incredible success over its many decades of operation.
Starbucks illustrated this once again after sales massively declined when stores were closed early in the pandemic. Although it made a valiant effort to generate sales through initiatives like curbside delivery, the declines were strong for several quarters. As it rebounded, management realized that it needed to rework its strategy to compete in the new age of a digital focus.
CEO Howard Schultz came back again to lead the company as it revamped its strategy to reflect changing demand, with a focus on digital ordering and faster beverage creation. So far, it's meeting with tremendous success, including double-digit sales growth and robust profit increases. Sales increased 12% year over year in its fiscal 2023's third quarter (ended July 2), and the operating margin widened from 15.9% to 17.3%.
As it continues to identify new ordering trends, Starbucks is building stores with features such as pickup-only and more drive-thrus. The smaller-store formats also lend themselves to capturing more market share in different markets and greater profitability.
Finally, Starbucks pays a solid and growing dividend that yields 2.2% at the current stock price -- something investors will appreciate
One of these restaurant stocks is the better buy today
Of course, I gave the bull case for each stock. Here's what to consider for each one's bear case.
For Cava, as much as it looks popular right now, it's still largely untested, especially at scale. It's not clear that it can sustain profits, and it's highly valued. These are some of the reasons the stock has started to decline.
For Starbucks, the concerns are that it's getting closer to saturation and that as it gets bigger, it's harder to steer. For example, it has a large presence in China, and when lockdowns were ongoing in that region, Starbucks felt the impact.
Looking at all the considerations, I see Starbucks as the winner in this contest, at least today. It has a proven path toward continued growth, and the concerns look weak. It also pays an excellent dividend. However, keep Cava on your radar as it could become a great stock sometime in the near future.
