Cava (CAVA 4.90%) just reported revenue of $175.5 million (up 52.5% year over year) and diluted earnings per share of $0.02 (compared to a $13.72 year-ago loss) for the 13-week period that ended Dec. 31. Both figures exceeded Wall Street estimates. It's not a surprise, then, that the stock is up 34% year to date (as of Feb. 29); investors are enthusiastic about the business.
This restaurant stock has now surged 72% in just the last three months. But some bullish shareholders likely have their sights set on bigger gains as we look out over the long term.
Can Cava become the next Chipotle Mexican Grill (CMG 0.93%)?
Hungry for huge returns
Cava owns and operates a chain of fast-casual Mediterranean-inspired restaurants across the country. After opening 72 new stores last year, as of Dec. 31, there were 309 locations in total.
As an up-and-coming and successful restaurant concept, Cava's management team is fully focused on implementing its huge growth ambitions. Executives believe that by 2032, it can have 1,000 locations, translating into a more-than-threefold expansion from the current footprint.
Even in uncertain economic times, the business is posting strong financial results. Same-store sales were up 17.9% in 2023 versus the year before, which is a solid clip. This is a key metric to watch for any retail-based enterprise, because it measures the success of existing locations. As the restaurant chain grows, investors will want to see this figure remain high.
There's no doubt that investors have high hopes for Cava. The business is benefiting from the popularity of the fast-casual format, consumer interest in convenience and accessibility, and the general public's increased focus on healthy eating options.
Should the leadership team achieve its 1,000-store target, revenue and earnings would be astronomically higher than they are currently. And shareholders would reap the rewards of that success story.
Watch your appetite
Chipotle essentially invented the fast-casual category, which inspired other entrepreneurs to copy the format with different cuisines. With a stock price that has skyrocketed 346% in the last five years, the company has been a major winner for investors thanks to phenomenal revenue and profit growth.
The Mexican Grill's success comes from its powerful brand presence, which has developed into a valuable asset for the business over the past several years after its health scare nearly a decade ago. In 2023, despite menu price increases, transaction counts were up 5%. The company has had no issues dealing with inflationary pressures.
Chipotle's popular digital platform also provides an important channel to direct marketing efforts and collect data that can be used to drive menu introductions. And by engaging with its customers there, it only raises awareness of the brand.
At its size, I don't believe that Cava possesses an economic moat. Therefore, it's anyone's guess as to whether it can get to 1,000 stores in the foreseeable future. The restaurant industry is incredibly competitive, so it won't be easy to reach to that lofty target. There's a lot of uncertainty about this outcome.
Consequently, this means that there's almost a very slim chance that Cava will ever get to Chipotle's level. From today's vantage point, that's 3,437 stores (as of Dec. 31) and 2023 revenue of $9.9 billion.
And over the long term, the larger Tex-Mex chain could have 7,000 locations that generate annual sales of $28 billion, which is CEO Brian Niccol's stated objective. Even in the most optimistic scenario for Cava, it might make as much revenue in one year as Chipotle did last quarter. In fact, Cava has about as many stores open today as Chipotle plans to open during the 2024 calendar year.
Chipotle currently carries a market cap of $74 billion. That's 11 times more valuable than its smaller industry peer. If you're an investor who thinks that Cava can quickly close the gap with its bigger rival, you'll likely be disappointed.
