Investors have been gobbling up Cava Group (CAVA 10.50%) shares since its initial public offering (IPO) in June, with its stock up roughly 70% from an IPO price of $22 per share. The Mediterranean fast-casual restaurant chain has big ambitions, following in the footsteps of competitors like Chipotle Mexican Grill (NYSE: CMG).
Given the meteoric rise of Chipotle's stock over the past decade, it's worth examining whether Cava can replicate its success. So, let's look at Cava's long-term goals, recent financial metrics, and whether its stock is worth adding to your portfolio.
Cava is small but growing fast
As of its most recently reported quarter, Cava had 290 locations across 24 states and the District of Columbia, a nearly 36% year-over-year increase. Those locations generated $173.8 million in revenue, a year-over-year increase of 50%. (For comparison, Chipotle most recently reported 3,321 locations and has opened a net of 134 stores over the trailing 12 months.)
In the long term, management has set a goal to grow its locations at an annualized rate of at least 15%. If it succeeds, the company will double its store count in five years.
For any restaurant stock, one metric to focus on is same-store sales, which measures existing stores' sales growth. For its fiscal third quarter, ended Oct. 1, Cava put up same-store sales growth of 14%. For comparison, larger fast-casual competitors Chipotle and Wingstop posted same-store sales growth of 5% and 15%, respectively.
Another metric demonstrating Cava's popularity is traffic, which management defines as the number of entrees ordered. Traffic was up 7.6% year over year in the latest quarter. While Cava's fast-casual and fast-food competitors don't typically break out traffic metrics, McDonald's management noted traffic was down during its most recently reported quarter, which aligned with its assessment of the industry as a whole.
Cava is profitable and has no debt
Beyond its growing popularity, Cava is already profitable, delivering net income of nearly $6.8 million in its most recently reported quarter. That's in contrast to its $11.9 million net loss in the third quarter of 2022. Notably, the company made nearly $4 million out of its $6.8 million in interest income because of its strong balance sheet with $340 million in cash and cash equivalents and no long-term debt at the end of the quarter.
Nonetheless, Cava managed to generate $2.8 million from its operations in its most recently reported quarter, marking a significant 123% year-over-year increase. Over its first three quarters of 2023, Cava achieved a total net operating income of $11.2 million, reflecting a substantial 128% year-over-year growth.
Image source: Getty Images.
What could go wrong with Cava stock?
Like Chipotle, Cava does not have a franchise-based chain, meaning it owns and operates all its locations except for one licensed restaurant. There are many pros for a restaurant company to own and operate all its locations, like receiving 100% of each restaurant's revenue and maintaining complete control of operations.
However, there is a downside in that it's expensive to open and sustain restaurants because there is neither a standard franchise fee paid to the company with each new opening nor ongoing fees for advertising.
Cava's balance sheet is strong partly due to its initial public offering this year, which netted the company roughly $318 million. However, that cash will likely be drained over the coming years as Cava pays to open new locations. The company has spent $108 million through its first three quarters of 2023 to open restaurants, improve its technology, and invest in a new production facility. By comparison, Cava spent $72 million on investing activities through its first three quarters of 2022.
Another significant concern regarding Cava is its stock valuation. Utilizing the valuation metric forward price-to-earnings (P/E) ratio , which compares a company's anticipated earnings for the next 12 months to its current stock price, Cava stock is currently trading at an exorbitant 382 times earnings. In comparison, Chipotle and Wingstop have forward P/E ratios of 53 and 105, respectively. Chipotle and Wingstop already fall on the higher side of sector stock valuations, but Cava's stock valuation is off the charts.
CAVA PE Ratio (Forward) data by YCharts
Is Cava stock a buy?
Despite Cava's extreme valuation, history has demonstrated the high-upside opportunity among certain restaurant stocks. However, it's important to note that predecessors like Chipotle and Wingstop have established successful nationwide concepts with Mexican food and wings, respectively.
In contrast, the fast-casual Mediterranean sector lacks a precedent, adding an element of uncertainty to investing in Cava. Moreover, the stock has exhibited significant volatility since its brief tenure as a publicly traded company, with Cava shares recently jumping 17% following the expiration of its 180-day lock-up period.
So, if you're interested in investing in Cava, there's no harm in waiting until the fast-food chain proves its concept has staying power. Because if it's anything like Chipotle or Wingstop, there will be plenty of time to invest. Until then, investors should hold off on Cava as it settles into its valuation as a public company.
