Cava Group: Could This Mediterranean Chain Be the Next Chipotle?
For years, investors have kept an eye out for a restaurant stock that could match the success of Chipotle Mexican Grill (NYSE: CMG). With nearly two decades of remarkable performance, investing early in Chipotle proved lucrative for many. Now, Cava Group (NYSE: CAVA), a Mediterranean food restaurant operator, is emerging as a potential successor. Let’s explore their similarities and the prospects of investing in Cava.
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Can Cava Match Chipotle’s Success?
Cava shares several key features with Chipotle, notably in their food offerings. Both brands focus on high-quality, customizable meals that are prepared using a streamlined assembly line method.
This approach offers many advantages for restaurant operators. By limiting the ingredient list, Cava reduces the number of suppliers needed, which can lead to better pricing power as they grow. It also minimizes prep work, thereby cutting down on labor costs. Most importantly, the assembly line process enables the rapid fulfillment of orders, increasing overall efficiency.
This operational strategy contributes to strong restaurant-level margins (RLMs), indicating profitability before corporate expenses are factored in. In the last quarter, Cava reported RLMs of 25.6%, compared to 25.5% for Chipotle. Notably, Cava’s performance outshines Chipotle’s numbers from the third quarters of 2018 and 2019, which saw RLMs of 18.7% and 20.8%, respectively.
Customers appreciate receiving high-quality meals swiftly, a factor that fuels Cava’s growing popularity. This popularity is reflected in Cava’s impressive same-store sales growth, spurred by increased foot traffic and effective pricing strategies.
During fiscal Q3, Cava’s same-store sales surged by 18.1%, with traffic rising by 12.9%. This follows a 14.1% growth last year, yielding a two-year stacked comparable-store growth rate of 32.2%—a remarkable achievement that signifies robust business health.
The consistent sales increases over the past two years have elevated Cava’s average unit volumes (AUVs) to $2.8 million, approaching Chipotle’s $3.2 million AUV per quarter. Looking back at Chipotle’s performance in Q3 2018 and 2019, AUVs only increased from $2 million to $2.15 million. In today’s terms, Cava’s AUVs are already outperforming Chipotle’s inflation-adjusted AUV from Q3 2019, which would equate to $2.65 million.
Innovation is crucial for Cava’s success, similar to Chipotle’s approach. By introducing popular items like grilled steak and limited-time offerings such as garlic pita chips, Cava is staying relevant. The company is also investing in marketing and technology. A new loyalty program was launched in October, and the restaurant is exploring the use of AI to enhance order accuracy and ingredient tracking.
Image source: Getty Images.
Should You Consider Buying Cava Stock?
Despite Cava’s promising attributes, its greatest opportunity lies in expansion. Currently, Cava operates only 352 locations compared to Chipotle’s 3,615. The company aims to grow its restaurant count by at least 17% next year and has previously mentioned a goal of 15% growth annually. This indicates a significant potential for future expansion.
Moreover, being free cash flow positive grants Cava the flexibility to fund its growth plans without relying on debt. Carefully expanding into new markets, Cava has adopted a “coastal smile” strategy, steadily branching into the Midwest.
With RLMs similar to Chipotle’s and AUVs on track to reach comparable levels, it’s plausible to envision Cava achieving the same market cap as Chipotle within the next 10 to 15 years. If share counts remain stable, this could lead to a six-fold increase in stock price.
While such returns may not ensure financial security, they still promise considerable gains over the next decade, making Cava an intriguing investment option.
Is Now the Right Time to Invest in Cava Group?
Before investing in Cava Group, you might want to take note:
The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks to buy now, and Cava Group did not make the list. The stocks that did could yield substantial returns in the years ahead.
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Geoffrey Seiler has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and suggests 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.
