Cava Group (CAVA 0.39%) stock has pulled back sharply since its successful initial public offering (IPO) in June. After quickly surging to more than double the original IPO price of $22 per share, the stock has lost more than 45% of its value in under two months -- leaving the stock at just over $30 a share.
That lower price has altered the value proposition of Cava Group stock. With a lower valuation and its expansion likely to continue, the stock deserves more serious consideration today.
Cava's (comparatively) modest vision
As Cava is a fast-casual restaurant chain in rapid expansion mode, investors may want to compare it to Chipotle (CMG 0.66%), which has taken this concept to nearly every corner of the U.S. However, investors need to understand some key differences. First, Chipotle offers fast, healthy Mexican dishes, one of the most popular food types in the U.S.
In contrast, Cava bills itself as a Mediterranean restaurant. Organizations like the Mayo Clinic have praised the Mediterranean diet for its health benefits, a trend that should play into Cava's hands. Despite that, according to Google Trends, Mediterranean is a less popular food type than Mexican, which means its addressable market is smaller than Chipotle's from that standpoint alone.
That smaller market may have contributed to Cava's more modest vision. Cava wants to grow to 1,000 locations by 2032. As of the end of its latest fiscal quarter (ended July 9), Cava had 279 restaurants.
In comparison, Chipotle operates more than 3,200 locations and plans to grow to 7,000 in the U.S. Chipotle has also begun to expand in Canada and Europe, while Cava has not communicated an intention to expand internationally. Without such a vision, long-term investors cannot consider foreign countries part of an addressable market.
The case for Cava shares now
However, Cava's size may work to its advantage. Despite the more modest store-count goal, Cava's plan would increase its size by nearly fourfold. This is a much greater percentage than Chipotle, whose U.S. expansion plan increases its size by just more than double.
Moreover, in-store sales have begun to outpace Chipotle. In fiscal Q2, same-restaurant sales surged 18% higher, significantly more than the 7% reported by Chipotle.
Overall revenue for the first 28 weeks of the fiscal year (ended July 9) was $376 million, 27% higher than last year. Hence, between store openings and more visitors to its restaurants, it is growing revenue at a robust pace.
Additionally, its ability to limit cost growth allowed Cava to earn a net income of $4.4 million during the 28-week period. The company lost $28 million in the same period last year, significantly reducing the need for outside capital.
Furthermore, its price-to-sales (P/S) ratio has fallen to 4, less than Chipotle's sales multiple of 5. Since smaller companies can more easily grow at a rapid rate, this differential dramatically strengthens the investment case for Cava, at least when compared to Chipotle.
CAVA PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Making sense of Cava Group stock
Amid a considerable discount, the case for buying Cava Group stock has dramatically improved. Admittedly, Mediterranean food is less popular than Mexican food, and the fact that Chipotle plans more restaurants despite its much larger footprint could dampen enthusiasm for Cava's more "modest" plan of 1,000 locations.
Nonetheless, in percentage terms, the restaurant stock will probably grow more, which should bode well for the stock. Finally, with same-restaurant sales growing faster than Chipotle's, Cava's lower sales multiple places its value proposition in a more positive light.
