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“Is It Time to Ditch Chipotle? Discover This Promising Growth Stock Worth Your Investment”

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Chipotle’s Sales Surge Amid Stock Drop: Is Cava the New Growth Opportunity?

Shares of Chipotle Mexican Grill (NYSE: CMG) have decreased by about 15% from their peak earlier this year. This decline is not uncommon for Chipotle, which has faced larger drops in the past. However, the company has evolved significantly over the past decade and now boasts more than 3,500 locations worldwide. Investors contemplating whether Chipotle’s prime growth is behind it may want to explore a smaller competitor, Cava Group (NYSE: CAVA).

Chipotle Shows Steady Performance

In the second quarter, which ended on June 30, Chipotle reported same-store sales growth of an impressive 11.1%. When considering new restaurant openings, total revenue jumped by 18.2%. These figures are remarkable for a large restaurant chain, particularly since many substantial dining establishments would celebrate modest single-digit increases in sales.

A person with their hands out as if weighing their options.

Image source: Getty Images.

Chipotle’s high valuation comes from its price-to-earnings ratio, which stands at around 55 times. In comparison, fast-food leader McDonald’s has a P/E ratio of approximately 26 times, indicating that investors are willing to pay a premium for Chipotle’s stock. This premium valuation partly explains the sharp sell-off, as stocks with high valuations often attract swift selling when issues arise.

Currently, the key issue for Chipotle is a transition in management following the departure of its CEO to coffee giant Starbucks. Investor apprehension stems from the challenges of finding a replacement for a well-regarded leader. Notably, recent sales successes have intensified scrutiny; any dip in performance could be interpreted as weakness rather than a temporary adjustment. Additionally, Chipotle has matured beyond its humble startup days, which may signal a shift in growth expectations. As a result, those seeking new investment ventures might find merit in exploring Cava Group.

Cava: The Mediterranean Version of Chipotle

Cava’s concept isn’t particularly novel, as it emulates the assembly-line dining model popularized by Chipotle and applies it to Mediterranean cuisine. This similarity is part of Cava’s appeal, as it could become the next successful growth story like Chipotle. Presently, Cava operates approximately 341 locations, a fraction of Chipotle’s extensive network. This smaller footprint suggests that Cava could have a long runway for expansion.

Due to its size, Cava isn’t in a position to rapidly open locations, as it lacks the operational capacity. In the second quarter of 2024, it successfully opened 18 new sites, resulting in a remarkable 22% growth in its store count year-over-year. This gradual yet steady progress can lead to significant changes over time.

In terms of financial performance, Cava’s revenue grew by 35% year over year in the second quarter, which concluded on July 14. This growth included same-store sales rising by 14%. While these growth rates may not be sustainable over the long term, a nearly 10% increase in store traffic indicates that Cava is resonating well with new consumers. This trend provides solid evidence of Cava’s potential for ongoing expansion.

Considering a Shift for Growth Investors

Cava is undoubtedly a smaller entity than Chipotle, and the associated risks likely heighten for investors should it face setbacks. However, if you believe that Chipotle’s most remarkable growth is in the rearview mirror, shifting some investment to this emerging restaurant may be wise. Comparisons with Chipotle suggest that Cava could experience years, if not decades, of growth potential ahead.

Is Now the Time to Invest $1,000 in Chipotle Mexican Grill?

Before making any investment in Chipotle Mexican Grill, it’s crucial to consider the following:

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Reuben Gregg Brewer owns no shares in any of the companies mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. It also recommends Cava Group and advises shorting December 2024 $54 puts on Chipotle Mexican Grill. For more detailed information, the Motley Fool has a disclosure policy.

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

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