In the past five years Chipotle has crushed it for shareholders, up 340%. The Tex-Mex fast-casual concept continues to expand rapidly while achieving incredible profitability. It makes sense that investors looking for the sector’s next big winner are now taking a closer look at these developments Cava (NYSE: CAVA)a much smaller chain.
This increase restaurant inventory has already increased by almost 90% so far. Does this powerful momentum make Cava a once-in-a-generation investment opportunity?
Big growth plans
Cava focuses on Mediterranean dishes and uses a similar model to Chipotle, allowing hungry customers to make their own salads, grain bowls or pitas. It is clear that this resonates with consumers. Management points to a growing interest among the general public in making healthy food choices as a key boost, and Cava’s fast-casual approach only increases accessibility and convenience for its customers.
Despite inflationary pressures and general economic uncertainty, Cava continues to post strong growth figures. In 2023, sales increased 59.8%, driven by 72 new store openings and 17.9% same-store sales growth. Last year’s revenue figure of $729 million was 518% higher than five years ago in 2018.
Companies that invest aggressively in growth initiatives are typically unprofitable, so it may be surprising to hear that Cava is bucking this trend. It posted a net profit of $13.3 million last year, following a net loss of $59 million in 2022. The hope for shareholders is that consistent and rising profits will become the norm.
The management team believes it can have 1,000 U.S. locations open by 2032, up from 309 (as of December 31, 2023). This growth potential is probably what investors are most excited about.
High expectations
It should come as no surprise that investors are hoping Cava can mirror Chipotle’s long-term success. Even with 3,500 existing locations, the fast-casual leader is expanding at a blistering pace with 271 store openings last year. Stocks are a big winner for investors, thanks to strong sales and earnings growth that shows no signs of slowing down.
Resulting expectations for Cava are high, with shares trading at around 1.5% price-sales ratio of 11.1, a 30% premium for Chipotle. I’m not sure this steep multiple is justified.
Cava’s valuation implies that management’s long-term goal of opening 1,000 stores is a virtual certainty, perhaps even at a faster pace than the leadership team’s 2032 deadline. But I’m not that confident.
Growth is already forecast to slow dramatically. The company plans to open a net 50 new locations in 2024 (halfway through expectations), a meaningful decline from last year. Worse still, same-store sales are expected to grow only 3% to 5%, an extremely disappointing forecast considering the company’s double-digit growth last year. By comparison, Chipotle expects mid- to high-single-digit comparable sales growth this year, even though it is already a much larger company that has made further inroads into the US.
Competition is a crucial factor that investors cannot ignore. The restaurant industry is perhaps the most competitive in the world and finding lasting success is extremely difficult. Cava must continually convince guests who are overwhelmed by the options; even the Mediterranean category is full of many choices. Without an economic moat, I have concerns about the company’s success over the next decade and beyond.
To its credit, Cava is developing brand awareness that people are excited about, but that’s not enough to save it currently a one-time investment opportunity.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
1 Stunning 89% stock increase by 2024: is this a once-in-a-generation investment opportunity? was originally published by The Motley Fool
