Company profile
Founding of the company
In 2006, first-generation Greek Americans Ted Xenohristos, Ike Grigoropoulos and Dimitri Moshovitis opened the full-service Cava Mezze restaurant in Rockville, Maryland, with Moshovitis serving as executive chef. In 2009, Brett Schulman joined as CEO and co-founder of fast-casual chain Cava.
Introduction
Cava Group (ticker: CAVA) is a Mediterranean-style fast food restaurant chain with branches across the United States. Cava also produces a line of Mediterranean dips, spreads and dressings sold in grocery stores across the United States.
Business scale
Acquisition of Zoës Kitchen
In August 2018, it acquired Zoës Kitchen for $300 million. In 2020, Cava converted seven of its Zoës Kitchen stores into Cava-branded restaurants, and plans to convert 50 more in 2021 specifically to prepare food for online orders.
Number of stores and plans
As of the third quarter of 2024, Cava Group has 352 restaurants, an annual increase of 21.4%. The Greek-style fast-casual chain plans to open 50-54 new stores in 2024, with a long-term goal of opening 1,000 stores by 2032.
Operation
Q3 2024 Result
The company released its third quarter financial report on November 12, 2024:
- Earnings per share were US$0.15, double last year’s level and better than market expectations of US$0.11.
- Revenue reached US$241.5 million, an annual growth rate of 39%, and rapid growth for two consecutive quarters; compared with revenue in the same quarter of 2023, it was US$173.8 million.
- Same-store sales increased by 18.1%, of which customer traffic increased by 12.9%.
- AUV was $2.8 million compared to $2.6 million in the year-ago quarter.
- Restaurant profit was $61.8 million, up 41.9% from the year-ago period, and restaurant margin was 25.6%.
- Digital revenue accounted for 35.8%.
- Net profit was $18 million, compared with $6.8 million in the same period last year.
- Adjusted EBITDA was $33.5 million, compared with $19.8 million in the year-ago period.
- Net cash provided by operating activities was $43.9 million and free cash flow was $23.4 million.
- General and administrative expenses: $29.8 million, or 12.2% of revenue, compared to $24.5 million, or 13.9% of revenue, in the third quarter of 2023
In addition, the company also raised its profit forecast for 2024, which stimulated the stock price to surge by 16%, attracting great attention from the market.
2023 review
Cava is scaling efficiently and reporting increasing profits. After a loss of $2 million in 2023, net profit will be $14 million in the first quarter of 2024 and full-year profit in 2023 will be $13 million.
Success factors
Healthy trends
Cava’s business model is similar to Chipotle (ticker: CMG), providing healthy, fast and casual food. Plus the food comes with a variety of toppings, such as harissa, tzatziki sauce and lamb meatballs, making it easy to replicate across locations.
Rising health awareness and changes in Americans’ dietary choices have stimulated the growth of Cava. Competitor Brassica has received financing from the Mexican restaurant chain Chipotle Mexican Grill and has the ability to open more branches in the future, although market expectations are short. The probability of time being a threat is not high, and it may still cause Cava’s stock price to fluctuate at a high point.
Inflation and prices
Recently, affected by high interest rates and high inflation, people’s willingness to consume has decreased, causing the retail industry to face severe challenges. The catering industry has also experienced manpower shortages, and large-scale chain stores have frequently experienced bankruptcies or closures.
However, the company still reported positive same-store sales during a rather difficult time, which is impressive, even though it’s slowing down. Same-store sales are likely to accelerate amid improving operating conditions.
The price of Cava is not too expensive and is a price level acceptable to the public. The recent US casual restaurant chain TGI Friday’s filed for bankruptcy protection, which further shows that Cava’s success is not easy.
Business model can be easily expanded
So far it has only entered the southern part of the United States. With a total of just 352 locations, the company believes it can succeed across the U.S. as it continues to expand, which seems like a no-brainer to increase revenue and scale.
Capital market performance
First day of listing
The American Mediterranean-style restaurant chain Cava surged 99% on its first day of listing on the New York Stock Exchange on June 16, 2023, with its total market value reaching approximately US$4.9 billion. This performance is even more amazing than that of popular technology stocks. It is simply jaw-dropping.
Please note that when it went public, the company was still losing money, but now it is making a profit.
Tripled in 1.5 years after listing
As of November 26, 2024, one and a half years after it was listed, the stock price has increased by 276.2%. From the beginning of 2024 to November 26, the stock price has increased by 251.16%, with the total market value reaching approximately US$16.73 billion.
Valuation
Cava stock is currently valued at a price-to-earnings ratio of 318 times, which is simply an astronomical figure, and it will take some time to reach this level even if everything goes well for the business. Stocks that fail to achieve premium valuations will eventually fall.
Pros, Cons and Risks of Investing in Cava
Strong balance sheet
Cava currently is debt free, which is rare for small businesses, recently listed companies, or growing companies.
Amazing share price returns
In 2024 alone, Cava stock delivered stronger returns for investors, with its shares up more than 227%, while Chipotle stock rose just 32%.
Impressive growth rate
The key metric for evaluating growth stocks is inevitably the year-over-year revenue growth generated by the business. Cava has been reporting much stronger results in recent quarters, with sales generally growing sharply by more than 20%.
However, it’s worth noting that while Cava is certainly growing much faster, it’s also much smaller than Chipore Mexican Grill. The latter generated $2.8 billion in revenue in the third quarter (ending September 30). That’s more than 11 times Cava’s sales of $244 million last quarter (during the same time frame).
Due to its smaller numbers, Cava is more likely to produce a higher growth rate than Chipotle Mexican Grill. Additionally, because Cava has a smaller footprint (352 restaurants compared to Chipore Mexican Grill’s more than 3,600 restaurants), Cava has a greater opportunity to expand its global presence than Chipore Mexican Grill, especially in Fast growing market.
Profit margins has room to improve
Although Cava Group’s sales are growing faster than Chipore Mexican Grill’s, one important metric where it still lags behind is profitability: Chipore Mexican Grill’s is 18.37%, while Cava’s is 7.37%.
Having strong profit margins is key to ensuring that as your business scales and grows, your revenue grows too. As profit numbers rise, the company’s valuation can be increased. Its price-to-earnings ratio will decline, which will attract not only growth investors but also value investors.
Valuation is too high
Chipotle Mexican Grill, a more profitable company, trades at 56 times trailing earnings, while Cava’s P/E is over 340 times.
Long-term observation is required
My concern is that Cava is too young. Buying in at current valuations may give investors the best chance of maximizing long-term gains, but there is no substantial long-term track record that would allow investors to have full confidence that Cava can achieve its ambitious expansion plans and be profitable. With its high valuation, it cannot afford any missteps!
My suggestion is to keep it on the watch list. If you are also optimistic about it, you can look for a better price entry point to buy it, which is safer.
The next Chipotle Mexican Grill?
What they have in common
There are many important common traits between Cava and Chipore Mexican Grill. First, the food itself. Both use a limited number of high-quality ingredients, and people can customize a wide variety of meals to their liking. Then, the meals are prepared through a pipeline process.
This approach has many benefits for restaurant operators. A limited number of ingredients helps improve supply chain efficiency, allowing restaurants to buy from fewer suppliers and ultimately helping them gain pricing power over suppliers as they scale. It also reduces preparation work and saves man-hours. But most importantly, it allows the pipeline to combine orders quickly, thereby speeding up throughput.
Strong Restaurant Level Margins (RLM)
Combined, all of these factors tend to result in strong restaurant-level profit margins (RLM), which is the operating income a restaurant generates before company costs are taken into account. That is, in the third quarter of 2024, Cava’s RLM is 25.6%, while Chipotle Mexican Grill’s RLM is 25.5%.
Considering Cava’s smaller size (fewer restaurants and fewer sales), this is pretty impressive. If you look back to Q3 2018 and Q3 2019, which was a strong period for Chipotle Mexican Grill between the foodborne illness issues and COVID, their RLM was 18.7% and 20.8%, respectively, so Cava was strong in that period. The indicators are in a very favorable position.
Easy to customize
All in all, customers can get high-quality, customized meals quickly, which helps to increase the popularity of the restaurant chain. Cava’s same-store sales growth was very strong, driven by a significant increase in customer traffic and price increases. This combination shows that the restaurant concept is not only popular and attracts new customers, but also has pricing power.
Reflected in business performance
In the third quarter of 2024, Cava’s same-store sales soared 18.1% and customer traffic increased 12.9%. Impressively, this figure is higher than the 14.1% increase in the previous year and equates to a two-year cumulative same-store growth rate of 32.2%.
Cava’s strong same-store sales performance over the past two years has increased the company’s average unit sales (AUV, or the average sales its restaurants generate in a year) to $2.8 million. That’s not far off the $3.2 million in AUV that Chipore Mexican Grill reports each quarter. Looking back at Chipore Mexican Grill’s performance in the third quarter of 2018 and 2019, its average operating income (AUV) rose from $2 million to $2.15 million, so Cava once again took the lead. Even after adjusting for inflation, Cava’s current AUV is higher than Chipore Mexican Grill’s AUV in the third quarter of 2019 — its inflation-adjusted AUV was $2.65 million in today’s dollars.
Expansion plans
As of the third quarter of 2024, Cava has only 352 stores, while Chipotle Mexican Grill has 3,615 stores. The company currently plans to increase its restaurant count by at least 17% by 2025, and the company has discussed a 15% annual restaurant unit growth rate. This provides long-term support for its future expansion and growth. (The long-term goal is to open 1,000 stores by 2032)
Looking forward to it
Since RLM and AUV are similar to Chipolet Mexican Grill, it is easy to imagine that in the next 10 to 15 years, when the company reaches a similar level of restaurant volume as Chipolet Mexican Grill, its market cap will be similar to Chipolet Mexican Grill. BBQ’s current market value is comparable.
I am the author of the original text, the essence of this story was originally featured on Smart Magazine, Issue of March 2025
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