Cava’s Rapid Growth Signals Potential for Investors

Cava (NYSE: CAVA) may not introduce groundbreaking ideas, much like Chipotle Mexican Grill (NYSE: CMG), which relies on an assembly line ordering system. However, while Chipotle serves Mexican food, Cava focuses on Mediterranean cuisine. This distinction hints at why investors might find Cava a compelling stock to purchase at this time.

1. Cava: The Smaller Cousin of Chipotle

Let’s get straight to the comparison between these two restaurant chains. By the end of the first half of 2024, Cava had 341 locations, whereas Chipotle boasted about 3,500 restaurants—significantly larger in scale.

Image source: Getty Images.

If Chipotle can successfully scale its assembly line model for Mexican fare, many believe that Cava can follow suit. This opportunity for substantial growth is a significant reason why investors are looking at Cava. Still, it’s important to note that Cava’s stock is currently highly valued, with a price-to-earnings ratio exceeding 700. This reflects investor optimism about future growth. Value investors may want to think twice before buying, but those who believe Cava could grow to more than tenfold its current size might see that high P/E ratio as manageable.

2. Rapid Expansion at Cava

During the second quarter of 2024, Chipotle opened 52 new locations, while Cava launched 18 new restaurants. When viewed in relation to their existing store counts, Cava’s growth is notable. With 341 stores, the addition of 18 locations represents about a 5% increase. In comparison, Chipotle’s 52 new openings equate to just a 1.5% increase from its 3,500 stores.

Though a 1.5% increase might not sound vastly different from 5%, Cava’s relative growth rate is three times faster. This rapid expansion bodes well for its financial growth. Year-over-year, Cava’s revenues surged by 35% in the second quarter of 2024. As long as the company continues this pace of new openings, we can anticipate strong future revenue growth.

3. Positive Performance Across Existing Locations

Investors should remain cautious, as new restaurant concepts often focus excessively on expansion at the expense of established locations. Revenue growth from new stores can mask underlying issues in older sites. This highlights the importance of monitoring same-store sales, a key metric for existing locations’ performance.

Cava achieved remarkable same-store sales growth of 14.4% in the second quarter, surpassing Chipotle, which recorded 11.1%. Both figures are impressive in an industry where competitors often settle for small gains. While sustained same-store growth at these levels may be challenging for both Cava and Chipotle, maintaining positive growth while aggressively expanding could indicate a bright outlook for Cava.

Cava: A Stock for Growth-Focused Investors

Chipotle has established itself in the market, while Cava is still in its formative stages. Given their similar business models, comparisons are inevitable, prompting speculation about Cava’s potential to mirror Chipotle’s success. As Cava continues to open new locations and optimally manage its existing operations, the prospects for growth appear promising.

However, due to its high valuation, Cava is most suited for investors who are aggressively pursuing growth opportunities.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.