Cava Group (NYSE: CAVA) may be the biggest surprise in the restaurant industry in decades.
The company, which has fashioned itself as a Mediterranean version of Chipotle complete with a fast-casual concept, bowls, pita sandwiches that resemble burritos, and a minimalist industrial decor, has blown away expectations.
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Cava stock has nearly tripled since its initial public offering (IPO) in June 2023 as the company has delivered blowout growth in nearly every quarter since it went public. In its last update, in the third quarter of 2024, Cava reported an 18.1% increase in same-store sales, which drove overall revenue up 39% to $241.5 million.
Cava continues to expand its brick-and-mortar footprint, adding 11 locations in the quarter to bring its grand total to 352 locations. Its bottom-line results also soared thanks to the jump in same-store sales as adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 69% to $33.5 million. Its generally accepted accounting principles (GAAP) net income also jumped 165% to $18 million, or $0.15 per share.
It’s clear the business is on fire, but can investors expect the company to keep delivering blowout results over the next five years? Let’s take a look at where Cava is headed.
Image source: Cava.
Cava has yet to give guidance for next year, but we can make a reasonable estimate of where the company is headed.
The company is on track to open 56 to 58 locations this year, meaning it will finish 2024 with 365 to 367 locations. Over the next five years, the company should add at least that many restaurants annually as fast-casual chains like Cava tend to accelerate as they get bigger. Cava had said in its prospectus last year that it saw potential to open more than 1,000 Cava restaurants in the U.S. by 2032. However, based on its current trajectory, the company looks well on its way to exceeding that.
By comparison, Chipotle now has more than 3,500 restaurants and expects to have at least 7,000 locations in the U.S. by the end of the decade.
Cava is already putting up similar numbers to Chipotle, so it’s not unrealistic for the company to reach thousands of restaurants or even 7,000, assuming the concept maintains its current popularity. Cava already has average unit volumes (AUV) of $2.8 million in Q3, which compares to Chipotle’s at $3.2 million. Cava’s restaurant-level profit margin was even better than Chipotle’s in Q3, at 25.6% versus the burrito roller at 25.5%.
In other words, Cava looks to be well on its way to earning Chipotle-like profits on the bottom line as it scales up. Chipotle has earned an 18% operating margin over the last four quarters, which is an impressive percentage for any restaurant business.
It’s difficult to forecast several years in the future for any company, especially for one that has a relatively short publicly traded history.
However, if Cava remains on its current trajectory, it’s possible to get a sense of how the company might be doing in five years. If it opens an average of 73 restaurants over the next five years, its store count will double over that time, reaching roughly 730.
The company also seems likely to continue to grow its same-store sales. Based on its recent performance and the likelihood of moderating comp-sales growth, a compound annual growth rate of 8% seems like a fair estimate over the next five years.
Based on its current AUV of $2.7 million over the last four quarters, Cava could get that up to $3.5 million with same-store sales growth, which is likely to include price hikes over the next few years.
With $3.5 million from 730 restaurants, the company would have $2.56 billion in revenue by 2029, up 166% over the five-year span, or a compound annual growth rate of about 22%. If its operating margin expanded from about 5% today to 10% then, the company would have $256 million in operating income. Currently, the company earns more on interest than it pays in taxes, so we can use operating income as net income. A net income of $256 million would lead to about $2.17 in earnings per share (EPS), which would give the company a price-to-earnings (P/E) ratio of 58, similar to where Chipotle is today.
Cava could have more upside potential if the company exceeds those forecasts or continues to earn a valuation premium from investors, but the company’s current valuation is likely to put pressure on further gains.
If you’re interested in buying the stock, you may be rewarded with some patience. Cava has a lot of promise as a business, but the current valuation will pressure future returns. Waiting for a lower entry point to buy the stock looks like the best move here.
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Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
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