When a stock is compared to an already established high-growth stock, expectations tend to also be set high. While growth investors can sometimes buy up a stock based on that hype, there's the risk that reality doesn't quite align with those expectations. If that happens, it can set up a stock for a sell-off in the future.
Cava Group (CAVA 0.24%) has often been compared to Chipotle Mexican Grill (CMG +1.33%), which has been a terrific business to invest in. In five years, investors have collected massive 340% returns from Chipotle, so it's easy to see why Cava investors may be optimistic about the much smaller stock's potential upside.
But based on its latest earnings numbers, there could be some cause for concern, as Cava may not be living up to those high expectations.
NYSE: CMG
Key Data Points
Cava reported comparable sales growth of just 2.3%
Last month, Cava released its most recent earnings numbers for the three-month period that ended April 21. Cava's revenue rose by more than 30% to $256.3 million. That's decent top-line growth, but it can be a bit misleading as the company relies heavily on new store openings.
A key metric for restaurants is the comparable sales growth number. This looks at how much more revenue an existing restaurant is generating compared to a year ago. This effectively excludes the impact of new restaurant openings. And Cava's same-restaurant sales growth was just 2.3%. That's far lower than the 11.4% same-restaurant growth it generated in the previous three-month period. And for 2023, the growth rate was even higher at 17.9%. Even the more established Chipotle reported comparable restaurant sales growth of 7% for the first three months of 2024.
For Cava, this is a problem when you consider its high valuation.
NYSE: CAVA
Key Data Points
The stock has doubled in value this year
Investors have been bullish on Cava stock so far in 2024 as its 104% returns dwarfed Chipotle's 35% gains. Cava is still very modest in comparison -- its near-$10 billion market cap is about 11% of Chipotle's $87 billion valuation. But it's also a riskier investment, given that Cava struggles with profitability.
In its most recent quarter, Cava's operating income totaled $14.2 million and was just 5.5% of revenue. Chipotle, by comparison, posted an operating margin of 16.8% in its most recent results. Cava's business may continue to improve over time, but there could be challenges ahead if the company relies heavily on expansion, which is costlier than if the company were simply growing organically through stronger same-restaurant sales numbers.
Cava's Mediterranean-style restaurants looked like they may have been more resistant to the effects of inflation by targeting a different customer base than your typical fast-food chain. However, the recent numbers don't appear to suggest that the business is in any better shape than other restaurant stocks. If that isn't the case, it's hard to justify paying 17 times book value and more than 340 times estimated future profits for the stock.
Should investors consider selling Cava stock?
Cava's stock has been doing well this year, but the risk is that with business slowing down significantly, the excitement surrounding the company may soon taper off. For a stock trading at such high premiums as Cava, there could be a lot of downside risk for investors who continue hanging on.
While the business is still growing, investors may want to consider scaling back some of their optimism behind the stock as Cava has a long way to go in proving that it can live up to the hype of being the next Chipotle, both in terms of growth and profitability.
