Mediterranean fast-casual restaurant chain Cava Group (CAVA 3.54%) is a rapidly growing business. It's often compared to Chipotle Mexican Grill, with investors seeing it as the next big growth stock in the restaurant industry. Last year was a stellar one for Cava as its shares skyrocketed 162%.
This year, however, has been a far different story. The restaurant's stock has slumped 30% and is now down more than 50% from its 52-week high of $172.43. Is this just a bump in the road for the restaurant stock, and is now the time to buy, or should investors hold off on shares of Cava Group today?
Cava's growth is slowing drastically
For a top growth stock like Cava, how quickly the business is growing is inevitably going to be a huge part of the outlook for investors. While the company is continuing to open new restaurants, the key metric for investors to watch is the growth in same-restaurant sales (comps), which effectively is the organic growth rate since it factors in only the restaurants that were open a year ago.
During the last three months of 2024, comps have grown 21.2%. And for the full year, it was 13.4%. That's impressive since restaurants are normally happy with even single-digit growth. Chipotle, for example, achieved comps growth of just 7.4% this past year.
NYSE: CAVA
Key Data Points
But the problem is that Cava's growth is slowing even further, with management expecting it to come within a range of 6% to 8% for the current year. Wall Street was expecting a slightly higher rate of around 8.2%. It may be a conservative forecast, but the risk is that it may come in even lower, given the impact that tariffs and trade wars may have on global economies.
That could make it more difficult for this already expensive stock to win over investors in the near term.
Cava isn't a cheap stock, even with the sell-off
Investors have often been willing to pay a high premium for Cava stock. And its valuation has come down over time as the company has grown its earnings. Unfortunately, even with the stock's heavy decline this year, it's still trading at more than 70 times its trailing profits. And that's even as the company's bottom line got a boost from tax-related adjustments this past quarter.
CAVA PE Ratio data by YCharts.
And based on its forward price-to-earnings multiple (P/E) of more than 130, this isn't going to be a cheap stock anytime soon. Forward earnings numbers are based on what the company's profitability will be in the coming year, based on analysts' expectations.
Cava Group could be an underrated stock
Cava's valuation is undoubtedly expensive, but the company is still growing at a fairly fast rate, and it may be a while before the business' bottom line shows significant improvement.
What may be more important is for it to show investors this year that it's still generating good growth and that its customers are loyal, as they have been, even amid a challenging economy. Cava's growth may be slowing and look a bit underwhelming for the year, but continually generating double-digit comps growth would be difficult for any business.
With a much more modest footprint than some other restaurant chains (Cava has 367 stores as of its most recent quarter) and a more resilient customer base, I think this has the potential be a good long-term buy if you're willing to be patient. The stock is trading at levels it hasn't been at in months, and it may generate fantastic returns for investors who buy it today.
