Cava Group's (CAVA -1.53%) stock has been on a tear, well more than doubling in value since the company came public in June 2023. That's a huge price gain in a very short period of time, creating some concern that a bubble may have formed.
However, investors concerned that all the gains are already priced in shouldn't pass on the stock without giving it a good look. Small restaurant chains like Cava can grow quickly and be very rewarding for investors. Here are three reasons this stock is still a good buy right now.
1. Cava is a relatively small restaurant chain with room to grow
Cava manages Mediterranean-themed fast-casual restaurants. It uses an assembly-line approach that's very similar to Chipotle Mexican Grill (CMG 0.64%) and emphasizes fresh ingredients that help provide consumers with more control over the food they order. The basic business model is a winner, when you consider that Chipotle has grown its version to over 3,500 locations around the world.
Image source: Getty Images.
Indeed, the big long-term appeal here comes directly from the comparison to Chipotle. Cava has only 341 restaurants. That makes it just a fraction of the size of Chipotle and speaks to the long-term potential.
Notably, Chipotle still resonates strongly with consumers despite its much larger size. The company's same-store sales rose a massive 11% in the second quarter of 2024. That's a shockingly strong number for a restaurant and is actually up from the first quarter's 7% gain (itself a strong figure), even though other restaurant chains like McDonald's and Darden Restaurants reported sales headwinds in recent quarters.
2. Cava is opening a lot of new locations at a fast pace
Cava has been performing just as well as Chipotle. Cava's same-store sales results in the second quarter of 2024 were 14.4%, with traffic at its stores up 9.5%. It was a very good quarter, but, to be fair, first-quarter sales growth was just 2.3%, so there was a big uptick in the second quarter. However, 2.3% is actually a respectable number in the restaurant space. In fact, even if Cava only manages to keep same-store sales flat to slightly higher, there's still a lot of potential here.
The key for Cava is really balancing its efforts to open new stores against its ability to continue operating its older locations well. Same-store sales tell you about the latter. But that's just maintaining the core. The real growth driver is going to be the new stores that management opens.
In the first quarter, Cava opened 14 new locations. That may sound tiny, but it is still a relatively small chain. Those 14 locations, added to the others opened over the past year, pushed the store count up by a huge 22%. That's a lot of growth since each new location brings with it new revenue. In the second quarter, Cava opened 18 new locations, maintaining a year-over-year increase in the store count of 22%.
With a goal of around 50 new locations a year, Cava could keep growing for a decade and it still wouldn't be half the size of Chipotle.
3. Cava isn't minting money, but it is profitable
The problem here is that investors have clearly noticed the potential and the comparison to Chipotle. Cava's price-to-earnings ratio is so high (think in the hundreds) that it is virtually meaningless. However, that's not actually uncommon for small businesses that are focused on growth. Such companies tend to spend heavily on expansion and often bleed red ink for years as they build out their businesses.
What's alluring here is that Cava still turns a profit while investing so heavily in the future. In the first quarter, earnings per share tallied up to $0.12 per share. In the second quarter, the company earned $0.17 per share. This suggests that Cava's business model, including its material growth plans, is inherently sustainable. Yes, it needs to keep resonating with consumers, but so long as management doesn't lose sight of the core -- same-store sales -- steady growth seems highly probable.
Cava stock isn't for everyone
Cava is most appropriate for investors focused on growth. Value investors and income investors won't likely be interested. And even growth investors will need to keep a close eye on the company's performance, since it's common for small restaurant chains to push so hard on the accelerator that they oversaturate the market and hurt their brand -- which is why same-store sales are so important to track. However, at this point, Cava appears to be executing well, and the comparison to Chipotle suggests there's still huge growth potential ahead.
