Chipotle Mexican Grill (CMG 0.51%) has been a huge success. The stock is up over 4x in the last five years and over 130x from its initial public offering (IPO) price of $22 back in 2006. Not surprisingly, investors have long been hunting to find the next Chipotle.
One of the newest contenders is Mediterranean fast-casual restaurant operator Cava Group (CAVA 0.75%). How does the company stack up to Chipotle, and should investors consider buying the stock?
Similar characteristics
Chipotle has several characteristics that helped its stock climb to its current heights. One of the biggest drivers behind its stock has been its ability to expand and add more locations over the years. Expansion also represents a big opportunity for Cava.
Cava ended 2023 with 309 locations in 24 states but has set its sights on having 1,000 sites by 2032. The company employs what it refers to as a "coastal smile" strategy, focusing its development on coastal states and the Sun Belt.
However, it has started entering the Midwest and other areas, recently opening restaurants in Colorado, Oklahoma, and Missouri. With only 16 restaurants in California and 27 in the Northeast, the company has plenty of in-fill opportunities. Cava expects to add about 50 new restaurant locations this year.
A second similarity that Cava shares with Chipotle is that it uses relatively few ingredients -- just 38. This helps create restaurant efficiencies, such as speeding up customer wait times and eliminating food waste. This leads to higher restaurant-level margins, which are the operating margins a restaurant generates before factoring in corporate costs.
Cava had 24.8% restaurant-level margins in 2023, compared to 26.2% for Chipotle. Cava still has some room to catch up, but for a young company, that's a solid number.
A third way Cava is similar to Chipotle is in a metric known as average unit volume (AUV), which is the average sales each restaurant generates. Last year, Chipotle surpassed $3 million in AUVs. By comparison, Cava had 2023 AUVs of $2.6 million. That's about 13% less than Chipotle, but this is very solid for such a young brand, and in certain markets such as California and the Northeast, Cava has AUVs above $3 million.
The company has also been growing its same-restaurant sales more quickly than Chipotle. It saw growth of 17.9% in 2023 and 11.4% year over year in Q4, compared to 7.9% same-restaurant sales at Chipotle last year and 8.4% in Q4.
Image source: Getty Images.
Cava is an expensive stock
Cava is showing a lot of similar characteristics to Chipotle. Perhaps not surprisingly, its stock price isn't cheap, given the early potential the restaurant concept is seeing. The stock trades at a forward price-to-earnings ratio (P/E) of nearly 275x and a price-to-sales multiple of over 8x. Looking at it another way, the company trades at over $22.5 million for each of its restaurants.
CAVA PE Ratio (Forward) data by YCharts.
If Cava can continue on its path for the next few years, this restaurant stock could have a lot more upside ahead. However, its valuation doesn't leave much room for error.
It's also notable that the company's concept is similar to Zoe's Kitchen, which at one point was a hot stock before it lost its luster and was sold to Cava. Many of Cava's locations are old Zoe's locations. It acquired the company and its 268 restaurants for only about $300 million back in 2018. Zoe's had expanded too quickly and began struggling with declining sales at the time of the acquisition.
By converting Zoe's Mediterranean concept to the Cava Mediterranean concept, the company has seen its value increase more than 20-fold. While Cava has a lot of potential, its valuation is keeping me on the sidelines at current levels.
