Cava Group (CAVA 10.50%) is a relatively new and fast-growing fast-casual restaurant chain. Given the nature of the business model, it reminds a lot of investors of Chipotle Mexican Grill (CMG 2.41%), which has been a huge success business-wise and for shareholders. However, there was a notable issue hanging over Cava's stock, which is still new to the market. It is less of an issue now, which may increase the attractiveness of the company to a lot of investors.
Cava has been described as the Mediterranean version of Chipotle
The similarities between Cava and Chipotle are pretty obvious. They both focus on a single style of food, and they both use an assembly line format when customers order. The food offered is fresh and made to order right in front of you. If you eat in one of these two restaurant concepts, you will understand how the other one works. It's part of the reason why long-term investors might want to buy Cava.
Image source: Cava Group.
A quick look at the chart below, comparing the stock price advance of Chipotle and the S&P 500 index shows the potential that investors think could exist at Cava. Notably, Cava only had 290 restaurants at the end of the third quarter compared to over 3,300 for Chipotle. Even if Cava only grows to half the size of Chipotle, there's still massive potential growth ahead for the Mediterranean restaurant chain.
And, at least for now, the concept appears to be resonating well with customers. The key figure here is same-store sales, which measures results at locations that have been open for at least a year. In the third quarter, Cava's same-store sales grew 14.1%, which is massive and likely to be unsustainable over time. But it helps to compare that to Chipotle, which saw same-store sales of 5%. Customers clearly like both concepts, as they keep coming back for more, but Cava is the hotter brand at the moment based on this key industry metric.
Cava passes a milestone
This is where the story gets a little more interesting and perhaps nuanced. Chipotle has been public for years. Cava only held its initial public offering (IPO) in June 2023. When a company goes public, there are usually a number of early investors and insiders that have shares in the company that they aren't allowed to sell for a set period of time, which is known as the lock-up period. Often, there's a deluge of selling once that lock-up period ends that pushes a company's shares lower.
Cava's lock-up period ended, but the stock rose dramatically. In other words, it seems likely that early investors and insiders didn't all try to dump their shares en masse. And that suggests, perhaps, that insiders believe strongly in the future growth opportunity here -- strongly enough that they want to stick around. Investors should probably interpret this as a positive, adding to the list of reasons for buying the stock.
Cava stock is not for everyone
If you are looking for a long-term growth story, Cava will likely be appealing to you. The keys to this growth will be new restaurant openings and same-store sales, so keep an eye on both if you do buy the stock. That said, if you own it, the seemingly positive end to the lock-up period is a sign that you should, perhaps, stay invested along with the company insiders. But growth isn't going to be everyone's cup of tea and never takes place in a straight line (opening lots of restaurants increases execution risk dramatically). So, conservative investors and those seeking income (the stock doesn't pay a dividend and likely won't for a very long time, if ever) wouldn't be a good fit for the stock.
