In a year where the spotlight has been firmly on artificial intelligence (AI), CAVA Group (0.29%) has emerged quietly as one of the market’s top-performing stocks. As of August 23, the fast-casual restaurant chain’s shares have surged 184% since the start of the year. This impressive rise is largely attributed to the company’s outstanding earnings reports, prompting comparisons to Chipotle Mexican Grill as a potential successor.
For investors who jumped in following CAVA’s initial public offering last June, this bullish trend is certainly rewarding. However, those who have observed from the sidelines may be wondering whether it’s too late to invest in CAVA stock. Let’s delve into the company’s current status and its long-term potential.
Explosive Growth at CAVA
CAVA’s second-quarter performance sheds light on why its stock has seen such a dramatic rise this year. The company reported exceptional results across nearly all key metrics during this period.
Comparable sales increased by 14.4%, driven by a 9.5% rise in customer traffic, indicating an expanding customer base and more frequent visits. Furthermore, CAVA is on a rapid expansion trajectory, having added 18 new locations in the second quarter, boosting its total by 22%, and pushing revenue up by 35% to $231 million.
The average unit volume at CAVA restaurants has reached $2.7 million, approaching Chipotle’s $3.1 million, underscoring the popularity of its locations. Additionally, profitability is on an upward trajectory. The restaurant-level profit margin improved slightly from 26.1% in the previous year’s quarter to 26.5%, compared to Chipotle’s industry-leading 28.9%.
CAVA’s net income tripled during the quarter, reaching $19.7 million and achieving a profit margin of 8%. This is particularly impressive for a relatively young restaurant chain, as such margins typically grow with scale. The company has also built a robust digital platform, with digital sales comprising 36% of quarterly revenue.
Future Prospects for CAVA
CAVA concluded the quarter with 341 locations and appears to have ample room for expansion, considering the strong demand for its offerings. Drawing a parallel to Chipotle once more, the burrito chain currently operates approximately 3,500 locations and aims to double that to 7,000.
Earlier this year, CAVA CEO Brett Schulman stated that the company aims to reach 1,000 locations by 2032. This target might prove conservative if CAVA sustains its existing momentum, partly fueled by the introduction of a new grilled steak entree, which management noted “exceeded expectations significantly.”
The company has increased its store opening guidance for the year to 54-57, indicating accelerated progress toward the 1,000-location goal. It has also raised expectations for same-store sales and restaurant-level profit margins.
Is Investing in CAVA Still Viable?
CAVA’s significant gains are justified, though the stock is currently expensive, trading at a forward price-to-earnings (P/E) ratio exceeding 300, although these estimates are likely to rise following the recent report. On a price-to-sales (P/S) basis, CAVA is also considered expensive, with a ratio of 14.
When compared to Chipotle, CAVA’s market capitalization is now $14 billion, roughly a fifth of Chipotle’s $73.6 billion, despite having only 10% of Chipotle’s number of locations. This suggests that investors anticipate substantial profit growth from CAVA, a sentiment largely reflected in the stock price.
Nevertheless, CAVA possesses several attributes that could position it as the next major fast-casual chain. With the support of Ron Shaich, Panera Bread’s founder and now CAVA’s chairman, the stock is well-positioned for long-term success.
Given the premium valuation, a prudent strategy might be to acquire a small stake in CAVA stock now and consider additional purchases during market pullbacks. While high expectations are factored into the stock, sustained double-digit growth in comparable sales could continue driving profitability upward.
