Shares of Mediterranean restaurant chain Cava Group (CAVA 0.95%) fell Wednesday after the company published its results for the third quarter after the bell Tuesday. Objectively speaking, those results were outstanding, and management subsequently raised its full-year outlook.
However, investors are still trying to figure out what Cava is worth -- which is a really common theme for newly public companies. And unfortunately for shareholders, the market apparently believes that Cava is worth a little less than it previously thought, despite the strong Q3 results. The stock sank by as much as 10% during morning trading, and was still down by about 7% as of 12:45 p.m. ET.
The good and the bad for Cava
Investors who buy shares of small restaurant companies are looking for certain things, including expansion, same-store sales growth, and restaurant-level profits. Cava delivered on all three counts in Q3. The company opened 11 net new locations, growing 35.5% year over year. Same-store sales increased by 14%. And its restaurant-level profit margin was 25.1%, up from 21.7% in the prior-year period.
NYSE: CAVA
Key Data Points
However, Cava just had its initial public offering (IPO) in June, and it was a huge success. It's common for high-profile IPOs to surge to high valuations before eventually finding a floor at a lower price. Cava stock was trading at roughly 8 times sales at one point earlier this year, which is an extreme valuation for a restaurant operator. After Wednesday morning's drop, it trades at closer to 4 times sales.
Cava expects good times ahead
As a result of its strong performance in Q3, Cava raised its full-year guidance in multiple areas. Perhaps most surprisingly, management now says it expects to open more new locations in 2023 than it previously thought. Last quarter, it reported plans to open 65 to 70 new restaurants this year; now it expects to open 70 to 73.
Cava's same-store sales remain strong, as do its restaurant-level profits. So everything you want to see for a long-term investment thesis is intact for this company. The subjective question of its valuation, however, will be something that investors continue to assess as they attempt to determine what price for the stock makes good sense.
