Investors have long been looking for the next thing Chipotle Mexican Grill(NYSE: CMG) in the restaurant sector, as it has been one of the best-performing restaurant stocks over the past nearly two decades. An early investment in the stock could have helped lifelong investors.
One restaurant operator that appears to have the potential to become the next Chipotle is the Mediterranean restaurant operator Cava group(NYSE: CAVA). Let’s see how the companies compare, and whether an investment in Cava can help you enjoy a lifetime of fun.
Cava shares some key characteristics with Chipotle. The first comes down to the food itself. Both use a limited number of high-quality ingredients that people can use to customize their meals with a wide variety of options. The meals are then prepared via a conveyor belt.
This method has many advantages for restaurant operators. A limited number of ingredients helps create efficiencies in the supply chain, allowing a restaurant to purchase from fewer suppliers and ultimately giving it some pricing power with its suppliers as it scales. It can also require less preparatory work, saving labor hours. Most importantly, it enables the assembly line process, where orders are assembled quickly, which speeds up throughput.
Combined, all this often leads to strong restaurant-level margins (RLMs), the operating income a restaurant generates before taking into account operating expenses. Last quarter, Cava had an RLM of 25.6%, compared to 25.5% for Chipotle. Considering Cava has less scale (with a lower number of restaurants and sales), that’s pretty impressive. If you go back to the third quarter of 2018 and 2019, which is a strong period for Chipotle between the foodborne illness and COVID, the RLMs were 18.7% and 20.8%, so Cava is very well situated by this metric .
All in all, customers quickly receive customized, high-quality meals, which benefits the popularity of the restaurant chain. This leads to Cava seeing very strong same-store sales growth, driven by large increases in traffic and higher prices. This combination shows a restaurant concept that is not only popular and attracts new customers, but also has a concept with pricing power.
For the fiscal third quarter, Cava’s same-store sales rose 18.1%, while traffic increased 12.9%. Impressively, this was on top of a 14.1% increase the year before, for what is being called a two-year comparable growth rate of 32.2%. That is a huge number and shows the success that Cava has enjoyed.
Cava’s strong same-restaurant sales over the past two years have boosted the company’s average unit volumes (AUVs) – the average amount of sales its restaurants generate in a year – to $2.8 million. That’s not far from Chipotle’s AUV of $3.2 million reported every quarter. Looking back again at the 2018 and 2019 Q3 periods for Chipotle, AUVs increased from $2 million to $2.15 million, so Cava is once again looking ahead of the game. Even when adjusting for inflation, Cava’s current AUVs are higher than Chipotle’s in Q3 2019; the inflation-adjusted AUV would be $2.65 million in today’s dollars.
Like Chipotle, Cava sees success through culinary innovation, such as the introduction of the popular grilled steak and the introduction of limited-time offerings such as the garlic pita chips. The company also relies on marketing and technology. It launched a new loyalty program in October and plans to embrace AI with its connected kitchen to improve order accuracy and ingredient management.
While Cava appears to have all the ingredients to become the next big restaurant stock, its biggest opportunity lies in expansion. The company ended last quarter with just 352 locations, compared to 3,615 for Chipotle. Currently, the restaurant base is looking to grow at least 17% next year and has in the past talked about annual unit growth of 15%. This gives the country a long path to future expansion growth.
Importantly, the company has positive free cash flow, allowing it to finance its expansion plans without having to tap the debt market. This is important, just as expansion into new markets is happening at a measured pace. The company is using what it calls a “coastal smile expansion strategy” and has now slowly branched out into the Midwest.
With comparable RLMs and with AUVs on track to be comparable to Chipotle, it’s pretty easy to imagine the company growing over the next 10 to 15 years to match Chipotle’s current market cap when it has a comparable number of restaurants will reach. That would equate to a sixfold increase in the stock price if the number of shares remained the same.
While this kind of return probably won’t earn you for life, it’s still an excellent potential return for the next decade. That makes the stock a solid option to consider buying.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: Short December 2024 Put $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Can buying Cava shares today be a lifetime guarantee? was originally published by The Motley Fool
