Cava (CAVA 0.92%) is doing what you want from an early-stage national brand. It's adding units at a healthy pace, posting solid restaurant-level margins, and building awareness in markets where Mediterranean fast-casual wasn't previously top of mind. That combination has fueled impressive returns for shareholders since its initial public offering (IPO) in the summer of 2023.
But even though shares have risen sharply from their IPO price of $22, the stock has been taking a beating as of late. With the stock down 40% year to date and even more from its 52-week high of $172.43, some investors may be hoping the stock goes on an "Nvidia-level run," climbing back to its past highs. But unfortunately, a rapid move of this extent is extremely unlikely. Investors will likely need to exercise patience while they wait for shares to regain this level.
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Rapid but slowing growth
Cava's latest quarter was solid, but captures a continued slowdown in the company's growth story.
Second-quarter revenue grew about 20%, driven by new openings and modest same-restaurant sales growth. Importantly, restaurant-level profit margin came in at a meaty 26.3%, showing that the concept travels well. Spotlighting the company's most important catalyst, Cava ended the period with just under 400 locations -- rising at a rate in the high teens year over year.
However, some areas of caution suggest that Cava shares won't likely be catapulting higher in an Nvidia-like run anytime soon. First, management's guidance was revised lower to acknowledge expectations for softer comparable sales trends this year. Specifically, management now expects full-year 2025 same-store sales to increase at a rate between 4% and 6%, down from previous guidance for 6% to 8% growth. Additionally, the company's total revenue growth rate for Q2 slowed to 20.3%, down from 28.2% in Q1 and 35.1% for the full year of 2024.
Macroeconomic pressures are weighing on restaurants. Fast-casual peers, specifically, have been noting traffic headwinds. Chipotle (CMG +1.33%), for instance, saw same-restaurant sales decline 4% year over year in Q2, with management attributing the decline to volatility in both sales trends and the consumer environment. A market like this could put pressure on Cava's premium pricing compared to some more aggressively priced fast-food alternatives.
NYSE: CAVA
Key Data Points
The right way to think about the upside
Investors should zoom out and have patience. The odds of shares rebounding back to recent 52-week highs anytime soon are almost zero.
The better way to think about things is this: Can Cava grow units by 15% or more annually, sustain healthy same-store margins, and, ultimately, steadily expand its geographic footprint while keeping the brand fresh? If yes, earnings power rises for years, and the growth stock may be able to steadily climb higher. The path looks credible -- especially if management can really grow its locations to "at least 1,000" by 2032, like it plans to. But given the stock's premium valuation of 57 times earnings as of this writing, shareholder returns may only be modest -- not life-changing.
One key risk is that the same-store sales trends get even worse. This would mean new store openings could be less profitable than anticipated, and it could ultimately derail the company's plans to grow its store footprint so rapidly. The stock's current valuation doesn't leave much margin of safety for a scenario like this.
Bottom line: Cava shares could perform well over the long haul if management finds a way to reaccelerate same-store sales growth. But expecting shares to soar is unrealistic. Investors should embrace patience and closely monitor restaurant expansion, restaurant traffic and transaction trends, and restaurant-level margins. If these key performance indicators perform well over the long term, the stock is likely to perform well, too.
