You only need a single word to explain why investors are talking about Cava (CAVA 10.50%): growth. The potential is huge for this fast-casual restaurant that only came public in late June. Early business results are very encouraging as well. But you need to pay close attention to the details here if you buy Cava because the restaurant sector is littered with great ideas that flamed out. Here are some key factors to consider.
Cava is small and getting bigger fast
At the end of the second quarter of 2023, Cava had 279 locations. That's tiny. By comparison, Chipotle has around 3,250 restaurants. McDonald's has about 40,000.
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While it probably isn't appropriate at this stage to compare Cava to McDonald's, it does show just how small the former really is. That said, having a few thousand restaurants, like Chipotle, isn't an unrealistic expectation. In fact, Cava increased its store count by a huge 43.1% over the past year. That's unsustainable and may be in part related to the company wishing to look good for its initial public offering (IPO). That said, the near-term goal is for the store count to grow around 15% a year.
While not 43.1%, 15% is still a very rapid pace of expansion. Starting from such a small base will make achieving that easier, of course. But there's another important factor here. Each new store that opens will have a material and positive impact on the top line. Once again, that's a function of the restaurant chain's still-modest size. If management can get anywhere near its target, revenue growth should be quite compelling at Cava.
The question, of course, is how much growth is possible. On that front, it is important to recognize that Cava's food concept is very similar to that of Chipotle. The main difference is that Chipotle's food is Tex-Mex while Cava has a Mediterranean influence. So comparing Cava's growth potential to the growth achieved by Chipotle isn't outlandish at all.
Making sure Cava doesn't stumble
So far, so good. The real challenge for Cava is going to come down to execution. If management does a good job, the growth that investors are talking about could easily come to fruition. If the leadership team gets ahead of itself, well, Cava could end up flaming out, like so many other restaurant chains have before -- which is why investors need to pay close attention to this stock.
One key metric to monitor will be same-store sales. This figure tracks results at restaurants that have been open for at least a year. If same-store sales are strong, it means that the concept is resonating with consumers because they are coming back to eat at Cava. If same-store sales are weak, it could mean that the fast-casual chain is expanding too rapidly.
This can take two forms. First, if Cava isn't careful with its store locations, it may end up cannibalizing older restaurants as it opens new ones. That's not a good approach because it weakens the overall company even as those new stores bolster the top line.
Second, new locations could lead to consumer fatigue with the Cava concept. Part of the reason for the company's early success is likely tied to the novelty of the restaurant idea. If it becomes too commonplace too quickly, the excitement will die down and consumers will start looking elsewhere.
Given the rapid growth over the past year, the company's future same-store sales results are going to be more important than historical numbers that harken back to a time when it was much smaller.
Cava could be a great growth stock
The big takeaway here is really that Cava has real potential, especially given its similarities to the already successful Chipotle. But simply expecting it to achieve the same level of success doesn't mean you can buy Cava and forget about it. You need to make sure management executes well as it looks to grow. As new stores open up, the top line should continue to rise higher, but if same-store sales aren't growing, too, there could be risks brewing under the surface that will eventually show themselves.
