Cava Group (CAVA 10.50%) went public this summer to much fanfare. The Mediterranean restaurant that modeled itself after Chipotle saw its stock soar more than 100% on its first trading day to a market cap of close to $5 billion. With Chipotle up close to 5,000% since going public around 20 years ago, investors were ecstatic to see what they believe could be the next great fast-casual chain to take over the country.
Since then, the excitement has waned. Shares of Cava stock are off 40% from highs reached earlier this summer. The stock now sits at a market cap of $3.9 billion. But looking at its underlying business operations, it's clear that Cava Group continues to crush it. Does that make the stock a buy?
Double-digit comp-sales growth
Cava reported its third-quarter earnings in early November. Through the first nine months of 2023, Cava generated $551 million in revenue, up from $434 million in 2022. More importantly, as the company winds down its Zoe's Kitchen acquisition and converts them to the Cava brand, sales at Cava restaurants hit $174 million last quarter, up close to 50% versus 2022.
Management continues to open new locations, with 290 locations in 2023's Q3, up from 214 in the year-ago Q3. But perhaps more impressive is Cava's ability to drive growth at its existing locations. Cava's same-store sales growth was 14.1% in Q3, which was on top of 9.2% growth in 2022.
This same-store growth is important because it shows that the more Cava's locations grow, the more people in a certain geographical area learn about its fresh, Mediterranean-style menu, which leads to revenue growth at locations even multiple years after opening.
Profitability looks solid, with restaurant-level margins of 25% in the quarter. The company is investing in a lot of overhead expenses to prepare for a nationwide expansion, which has kept consolidated profits low.
Free cash flow is also negative at a $173.4 million burn over the past 12 months. Don't be concerned by this, as the company is investing a ton in building new stores around the country. As long as restaurant-level profit margins and same-store sales growth remain high, Cava will eventually hit positive free cash flow.
CAVA Free Cash Flow data by YCharts.
How many restaurants can they build?
The key to a restaurant concept is whether it can scale across the United States (and eventually, the world). Cava seems to be well on its way to doing just that, with restaurant locations performing strongly in California, Texas, the Southeast, and New England. All regions have an average unit volume (AUV) of at least $2.3 million, with California and the Northeast leading the way at more than $3 million in AUV.
In its pre-IPO documents, Cava management said it believes there is room for more than 1,000 Cava locations in the United States. For reference, Chipotle has over 3,000 locations globally; most of them are in the United States.
Mediterranean food may have a smaller customer base than Mexican food, but it is hard to argue that Cava does not have a long runway to grow its locations seeing how successful the concept is around the country.
The stock is still not cheap
If Cava is able to hit 1,000 locations and eventually hits an AUV of approximately $2.5 million, the company will be generating $2.5 billion in annual revenue. With 25% restaurant-level profit margins, that is $625 million in store-level profits or just 6 times Cava's current market cap of $3.9 billion. Looks cheap, right?
Well, you should consider that the company will still have a lot of overhead costs, which hit $134 million through the first nine months of this year.
It will also take Cava many years to hit 1,000 locations, perhaps not until after 2030. The company plans to open at least 70 stores this year. At this pace, it will not be until 2033 that the company surpasses 1,000 restaurant units.
There is a lot that can happen in 10 years, adding some risk to a Cava investment if you base it on 2033 numbers. Don't forget the time value of money, either.
Assuming a 10% consolidated net margin -- a fair assumption for a restaurant concept with store-level margins of 25% -- Cava would have generated $62 million in net income over the past 12 months. That would give the stock a trailing price-to-earnings ratio (P/E) of 63, or around triple the S&P 500 average.
Even though Cava is off 40% from its highs, the stock still looks expensive. This is a promising restaurant concept, but the stock needs to remain on the watchlist for now.
