Fast-casual chains continue to outpace the broader food industry in growth as value-conscious diners demand affordable prices and experiences.
Mediterranean chain Cava (CAVA) beat Wall Street estimates on Tuesday afternoon, with same-store sales rising 18.1%, compared with 12.39% expected. The stock rose more than $172 per share on Wednesday — an all-time high — before giving up gains to close around $147. Cava shares are up 261% in 2024.
‘That value proposition [is] really above price,” CEO Brett Schulman told Yahoo Finance. Schulman pointed to Cava’s investments in digital and in-store experiences, people’s changing preferences for healthier eating and the company’s efforts to keep the average bowl in the $13 to $15 range as factors driving the price to influence. his success.
TD Cowen analyst Andrew Charles wrote in a client note that Cava’s price increase, of about 15% compared to 2019, “significantly lags” the 25% to 30% increases by most fast-casual peers. In the quarter, the chain’s footfall rose 10.3% year-on-year, while the steak option helped drive order prices up 7.9%.
Fellow fast-casual player and burger chain Shake Shack (SHAK) posted 4.4% same-store sales growth in the latest quarter, while salad chain Sweetgreen (SG) saw a 6% increase.
As the cost of dining rises, fast food players are struggling to compete on value. In the latest quarter, McDonald’s (MCD) same-store sales grew 0.3% year-over-year in the US.
Restaurant Brands International’s (QSR) U.S. operations posted a decline in same-store sales across the board, with Burger King down 1.5%, Popeyes down 0.8% and Firehouse Subs down 3.7%.
Yum Brands’ (YUM) three brands were a mixed bag in the US, with Taco Bell same-store sales up 4%, while KFC sales fell 7% and Pizza Hut fell 1%.
Charles said Cava “continues to benefit from the shift in consumer preference from quick service to fast casual, as middle-income consumers increasingly view fast casual as better value for money.”
“CAVA is at a clear tipping point as the leader of the fast-casual Mediterranean,” William Blair analyst Sharon Zackfia wrote in a note.
In the third quarter, Shake Shack beat Wall Street estimates with its same-store sales, led by an increase in foot traffic, up 30 basis points year over year, while the average check rose 4%.
“We’ve actually seen growth across all cohorts… we’re one of the few brands whose value perception has actually improved over the past year,” Rob Lynch, CEO of Shake Shack, told Yahoo Finance.
The fast food giants have aggressively promoted promotions to win on price, but Shake Shack is competing by leaning on premium products like the return of the black truffle menu.
Lynch plans to avoid price increases through 2025 as consumers grow weary of persistent inflation.
“We don’t want to take the price unless we have to. We don’t predict inflation will be that high in 2025,” Lynch said.
Shares of Shake Shack are up more than 72% year to date.
For Sweetgreen, same-store sales growth came from a 4% increase in menu prices and a 2% increase in traffic and mix.
“We are laser-focused on menu relevance and reinforcing our culinary and supply chain ethos to build and control traffic over the long term,” Sweetgreen CEO Jonathan Neman said during his earnings call.
Shares are up 238% year to date and there is more room to run, according to Zackfia. The chain relies on the Infinite Kitchen concept, which uses a row of automated dispensers to create the salad bowls. There are currently ten locations and the pilot has shown an improvement in speed and product quality, Neman said.
The company’s co-founder Nicolas Jammet struck an optimistic tone about the rollout of the automation technology on Yahoo Finance’s Opening Bid podcast (listen below).
“While Sweetgreen shares have more than tripled year to date to an enterprise value of 5.2 times our 2025 revenue estimate, we remain optimistic about the company’s growing appeal and the game-changing momentum of the Infinite Kitchen,” Zackfia wrote to customers.
However, not everyone is equally optimistic after the enormous run-up. Citi analyst Jon Tower cited a neutral, risk-on rating for Sweetgreen and Cava.
Customers arrive at a cava restaurant in New York City, USA on June 22, 2023. REUTERS/Brendan McDermid ·REUTERS/Reuters
For Cava, downside risks include the difficulty in expanding its footprint as commercial real estate faces challenges in an environment of higher interest rates or a potential downturn in the economy. The chain could also “have a hiccup with new sales tools” such as its steak and loyalty system.
Sweetgreen’s risks include potential “disruptions to sales” in urban markets such as New York City, supply chain disruptions that could lead to new store openings, and “an increased risk to sales related to an outbreak of foodborne illness compared to other brands in the restaurant space, given the size of the brand’. excessive exposure to manufacturing.”
JPMorgan analyst Rahul Krotthapalli pointed to Shake Shack’s ‘premium/specialty burger’ category [that] inherently carries the risk of limiting frequency based on price points,” meaning consumers may get less of it because it costs more.
He added: “The brand believes it has achieved success in changing this perspective for the casual consumer through the popular but risky (as it trains customers to wait for promotions often) Hi-Low pricing strategy.”
—
Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
Click here for all the latest retail stock news and events to help you better inform your investment strategy
