Investors starved for new market opportunities cheered Cava Group's (CAVA 10.50%) initial public offering (IPO) in June, and the company came through in a fabulous second-quarter report. It's been compared to fast-casual superstar Chipotle Mexican Grill (CMG 2.41%), but Chipotle outdid even itself with an outstanding showing in the third quarter.
Can Cava ever catch up to its massive industry peer?
What's so great about Chipotle?
Chipotle was one of the first restaurant chains to operate in the fast-casual space, which is an upscale version of fast food. It has expanded to 3,300 locations, mostly in the U.S., but with a growing international presence.
This space targets a more affluent customer who can still afford takeout, especially in the lower range of expensive, even as prices rise. This provides Chipotle with some resilience in this tight economy. It successfully raised prices to meet rising costs, and performance continues to be powerful.
In the third quarter, sales increased 11% over last year, with comparable-restaurant sales (comps) up 5%. That means a lot of sales growth is coming from new stores, and the comps increase was at least partly due to price increases.
Those might be worrisome trends if it were a new chain like Cava. You would have to question whether a new company can become viable if it has to rely on new stores or price increases to generate growth, because at that stage, it should be generating loyalty and comps increases. But these are positive trends for a company of Chipotle's size. It means it has the brand power to command higher prices and can still generate growth through new stores.
Chipotle is also demonstrating robust profitability. Earnings per share rose 23% over last year to $11.32, and restaurant-level operating margin increased by a full percentage point to 26.3%.
Meanwhile, Chipotle opened 62 new stores in the quarter and is on its way toward doubling its store count to 7,000. Of those new stores, 54 have a Chipotlane, or drive-thru, which complement new demand in digital and add to margin expansion.
The Tex-Mex food chain recently even began to cover new ground in smaller cities as well as Canada, and it's set to open its first stores in Dubai and Kuwait.
How Cava can catch up
Chipotle is a tough act to follow. Investors see a similar concept in Cava, which operates a similar model of quality, mid-price fast food, but with a Mediterranean flair.
So far, Cava's one report as a public company was phenomenal. Sales increased 62% over last year, and comps increased 18%. The worries I mentioned above don't apply here; Cava's comps were strong, and it posted a profit of $6.2 million, turning positive after a loss last year. Restaurant-level profit margin was 26.1%, so it's off to a strong start.
But it will take many years for Cava to come anywhere close to where Chipotle is today. It took Chipotle many years to reach this place as well, and investors are banking on that being where there's a growth opportunity for Cava.
Chipotle was profitable when it went public in 2006. Cava wasn't at its IPO, but it's getting there. It's also aiming for 1,000 stores by 2032, up from 279 at the end of the second quarter. Ten years after its IPO, Chipotle had more than 2,200 stores and $3.9 billion in annual sales. It isn't likely that Cava will reach those numbers on the same timeline that Chipotle did.
Chipotle has been an incredible stock over its lifetime, soundly outperforming the market with a gain of more than 4,000% since becoming a public company.
Cava stock is down 28% from its first-day closing price. Could it gain 4,000% someday? Even if it can, it would likely take a lot longer than the 17 years it has taken Chipotle. It doesn't need those kinds of gains to be a market-beating stock, but investors shouldn't necessarily expect Cava to deliver the same gains as Chipotle.
Right now, Chipotle still looks like it has a long growth runway with proven deliverables and could still add high value to a portfolio. Cava is still risky at this stage and remains a stock to watch.
