As a fast-casual concept, one that focuses on Mediterranean-inspired food, investors might view Cava Group (CAVA 5.96%) as the next Chipotle Mexican Grill. Shares of Cava have soared 66% in the past 12 months (as of July 18), crushing the 25% total return of the S&P 500.
Growth-minded investors are probably eyeing Cava right now, even though it has cooled down and dropped 17% off its peak. But is it too late to buy this restaurant stock?
Promise of huge growth
In the grand scheme of the restaurant sector, Cava is still tiny. As of April 21, it had 323 stores across the U.S. However, the business added 72 net new locations in fiscal 2023, and management plans to open 52 this year. The growth potential is certainly exciting.
Cava is hitting on some key trends that are working in its favor. For starters, the fast-casual food setup is a hit with consumers, thanks to its relative affordability and greater convenience when compared to fine dining. Moreover, Cava's focus on healthy menu items is likely drawing more interest thanks to heightened focus from customers on their wellness.
The company's most bullish supporters won't hesitate to compare Cava to Chipotle. According to the leadership team, the overarching objective is to have 1,000 stores open by 2032, translating to a roughly three-fold expansion from the current footprint. Based on the stock's performance, investors might assume that this target is a foregone conclusion.
NYSE: CAVA
Key Data Points
Not a sure thing
I'm a bit more skeptical about Cava's long-term potential. That's because the restaurant sector is incredibly competitive. There are no barriers to entry, and customers have zero switching costs. So, Cava's ultimate success is far from certain. A lot of things need to go right on the path to 1,000 stores, but a lot of things can also go wrong.
In the latest quarter (first-quarter 2024 ended April 21), Cava reported year-over-year revenue growth of 30.3%. That's very impressive. But it's worth pointing out that the vast majority of this gain came from new restaurant locations. Same-store sales, which is a key performance metric for retail-based enterprises, were up only 2.3% during the quarter. Chipotle, on the other hand, posted a 7% increase in the first three months of 2024.
Some could argue that Cava is simply dealing with the uncertain macro environment, with inflationary pressures pinching consumer spending. However, if Cava ever wants to come close to Chipotle's level of success, it needs to produce better results. The business can't rely on new store openings forever. In fact, investors shouldn't want this, either.
Unrealistic expectations
In the first few months following its initial public offering in June 2023, Cava was a money-losing investment. Things have clearly turned around for the better. But now I believe prospective investors have missed the boat. This is a stock I'm not buying right now.
The valuation is extreme. Cava shares trade at a forward price-to-earnings (P/E) ratio of 225. For comparison's sake, Chipotle goes for a forward P/E multiple of 47, which I also believe is expensive.
The Tex-Mex chain, which currently operates 3,479 stores, has plans to double its footprint in North America over the long run. Despite its dominance and sizable growth prospects, the market cap per location is $20.8 million.
Each Cava location, on the other hand, commands a market cap of $27.7 million. That's lofty, in my opinion, as the average Chipotle restaurant has higher annual sales and a higher operating margin.
It clearly indicates the illogical exuberance investors have for Cava. Its shares have been on a huge tear in the past year, but I'll gladly pass. Those investors who appreciate the business, though, should wait to buy the stock until the valuation becomes much more attractive.
