With 279 locations at the end of the second quarter, Cava Group (CAVA -1.67%) is a relatively small restaurant chain. There's a potentially big opportunity in that, but there are also notable risks to consider. For investors wondering where Cava will be in three years, the answer is simple -- bigger. But the path from the present to the future matters a great deal.
Cava is a hot new brand
Consumers love new things, especially when it comes to food. Cava's Mediterranean-themed fast-casual concept has seemingly struck a chord everywhere its restaurants have opened. To put a figure on that, same-store sales, which measures sales at locations opened for more than a year, grew 18.2% in the second quarter of 2023. That's a huge number and suggests that consumers are coming back again and again.
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To take advantage of the hype around the brand, Cava is opening restaurants at a very rapid clip. In the second quarter, it had 102 more locations than it did a year ago. That said, the target for new openings in 2023 is between 65 and 70. Each new restaurant adds materially to the top line as they open for business. This will be a huge driver of growth for the still relatively small restaurant chain.
Looking further out, the company stated during its second-quarter conference call that it is targeting 15% store-count growth over the next few years. That's a lofty goal, but it shouldn't be too hard to achieve given the small base off of which it is growing.
Fast-growing restaurants sometimes trip up
There's no question that Cava's story is exciting today. And there is a pretty clear path to the future, assuming it can live up to its store-count growth plans. But even if that comes to pass, investors need to make sure that rapid growth doesn't end up hurting the company over the long term. This is a common occurrence in the restaurant space.
Basically, a hot new brand attracts the attention of Wall Street (like Cava). Investors expect rapid growth, which is most easily achieved with new locations (like Cava). But in an effort to appease investors, the new restaurant brand oversaturates the market and financial results suffer. When that happens, Wall Street dumps the stock.
Oversaturation can happen in a couple of ways, including the brand losing its "new" appeal and new locations cannibalizing older ones. There's also the simple fact that growing the top line gets harder as a company gets larger.
Cava is still in the early stages of growth, so the story is all about upside potential. However, investors should watch some key metrics to make sure that the rapid growth management is planning doesn't end up hurting the company. One important number to keep an eye on is same-store sales. The 18.2% figure in the second quarter is huge, and it would be shocking if that didn't come down. Still, a dip into negative territory would be a huge red flag that the brand is no longer resonating with consumers in the same way.
Another figure to keep an eye on is the restaurant-level operating margin. Management is targeting 23%, but is actually above that at around 26% right now. So this number will also fall. But if it falls through 23% and keeps moving lower, then management may not be handling its growth plans very well. Doing too much too soon is not a good look, and investors will probably react negatively.
Then there's the actual store count growth itself. The 15% expansion target is aggressive. If management falls short of it, you will want to know why. Pulling back from the plan may be the right move for the company, but it might also be a sign that Cava's restaurant concept isn't as strong as investors think right now.
Expect Cava to be bigger, but watch the growth carefully
If you own Cava stock, the story is most definitely growth-oriented. That said, you can't just take that for granted. Growing a restaurant chain involves a lot of moving parts. If Cava doesn't handle the process well, all of the growth now expected could actually turn out to be bad news. Watch same-store sales, restaurant-level margins, and the company's ability to meet its own internal goals closely as you assess the company's progress.
