Restaurateur Cava Group (CAVA 4.89%) operates a new food concept with a Mediterranean theme. Same-store sales growth of 18.2% in the second quarter suggest that consumers like what the company is offering. And, over the next five years, that's likely to mean an aggressive push for growth at Cava. Here's what that might look like and what investors need to watch to make sure the company is executing well.
Cava is a small fry with big ambitions
Given the assembly line style of Cava's fast casual restaurants, many on Wall Street are comparing it to Chipotle Mexican Grill. There are very obvious similarities, noting the also obvious difference that one serves Hispanic-themed food and the other Mediterranean.
But there's another big difference here. At the end of this year's second quarter -- Cava's first as a public company -- it had 279 restaurants. Chipotle ended the same quarter with more than 3,250 restaurants. The difference between those two numbers serves to show how small Cava is, but also why investors are so excited.
If the Cava concept can grow to be the same size as Chipotle, there's huge growth potential ahead.
Image source: Getty Images.
There are some caveats, however. For example, the year-over-year store count growth in the second quarter for Cava was a shockingly high 43%. That's not sustainable and the company isn't suggesting it can keep growing at that level. In fact, the swift growth was probably a function of the company's small size and its push to go public, with the initial public offering (IPO) held in late June, 2023.
Simply put, it likely wanted to come public with great sales growth numbers and the best way to do that was to open a lot of stores in a very short period of time. Growth will probably slow from here, with management explaining during the second quarter earnings call:
We opened 16 net new CAVA restaurants during the second quarter, including two new states, Missouri and Rhode Island, along with continued expansion in Massachusetts, Texas, Georgia, and Colorado. We now expect 65 to 70 net new CAVA restaurant openings this year and have built our 2024 and 2025 pipeline to support annual unit count growth of at least 15%.
Where do things go from here?
The quote above provides a number of important points for investors. For starters, the company is continuing to expand its geographic reach by entering new states. Second, by the end of the year it will have opened as many as 70 new locations in 2023. That means another 28 or so through the rest of the year. That suggests the store count will be around 307 as the company starts 2024.
With the 15% new store opening expectation, that puts the store count at roughly 350 by the end of 2024 and a touch over 400 by the end of 2025. That's where the company's forecast on store growth ends. Assuming that it can grow the store count by at least 10% after that, by the end of 5 years the store count might be as high as 540. If the pace of 15% is maintained, which would be a tall order, the company might have nearly 620 stores open. This is all back-of-theenvelope math, but that's a huge number of new store openings in a very short period of time.
If Cava can get anywhere near those numbers, revenue growth should be very robust and investors are likely to reward the stock for it. But growth costs money, so it is important to keep in mind that earnings growth may not be quite as exciting. That said, the store count outlook above assumes that everything goes well. It may not.
One key for investors to monitor on that front is same-store sales. As noted above, the same-store sales growth of 18.2% in the second quarter was impressive and indicates that customers are enjoying Cava's concept. But a good same-store sales figure for most restaurants would be something in the mid- to high-single digits. So investors shouldn't go in expecting same-store sales to remain in the high teens.
However, if same store sales turns negative, it could be an indication that Cava is pushing too hard on the new openings front. That could mean new locations are cannibalizing older ones or that consumers are growing bored with the food concept. Neither would be good.
There's also the performance of each of the company's stores to consider. This is reported as restaurant-level profit, and it was fairly strong in the second quarter with restaurant-level profit margins of 26.1%. That number will probably wax and wane over the next five years. But if it starts to materially decline, perhaps below the 20% mark, it could be a sign that management is taking its eye off the ball with regard to existing restaurants as it pushes the accelerator on new store openings. That would not be a good thing, either.
Cava will be bigger, but you'll need to monitor its progress
It seems highly likely, given the company's small size and expansion plans, that Cava will be a larger company in five years than it is today. Perhaps materially larger, based on the store count estimates above. But investors shouldn't just assume it can achieve this without hitting speed bumps along the way. Two vital figures to monitor will be same-store sales and restaurant-level profit margins. If either of those metrics start to show material weakness, Cava's growth plans could be on shaky ground.
Investors will likely reward successful expansion, but they are just as likely to punish missteps management makes if it falls short on its goals. Bare that in mind if you buy this still-young public company.
