Shares of Cava Group (NYSE: CAVA) were soaring last year as the fast-casual Mediterranean chain posted quarter after quarter of blowout results in its first full year as a publicly traded company.
The numbers helped convince investors that Cava is the heir apparent to Chipotle Mexican Grill, the leading fast-casual restaurant, which has jumped more than 5,000% from its 2006 initial public offering.
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According to data from S&P Global Market Intelligence, Cava stock finished the year up 162%, making it one of the top performers in the consumer discretionary sector, though it is down substantially in recent weeks.
Cava went public in June 2023, and the company initially struggled to win over investors, but momentum in the business picked up last year as it posted double-digit comparable-store sales growth and a rapidly improving profit margin. Cava also breezed past estimates in each one of its quarterly reports, lifting the stock each time.
As the chart above shows, the stock rose steadily over much of the year as investors were impressed with the growth story and its earnings multiple expanded.
Through the first three quarters of 2024, revenue jumped 33.5% to $736.3 million, and comparable sales jumped 18.1% in the third quarter, including a 12.9% increase in guest traffic.
Its profit margin has also soared — the company reported a restaurant-level profit margin of 25.6% in the third quarter, approaching Chipotle-like levels.
Cava seems to have a long growth path ahead of it. The company currently has 352 restaurants, and is targeting 1,000 or more by the end of the decade. If it follows in the footsteps of Chipotle, that would mean growing to 3,000 locations or more. Its average unit volume, or average sales per restaurant, of $2.8 million is also similar to Chipotle’s.
Image source: Cava.
Cava initially jumped on its third-quarter earnings report, but the stock fell soon after that, and is now down 24% from that peak.
Cava’s business remains strong, but the valuation seems to be undergoing a correction as even after the pullback, it trades at a price-to-sales ratio of 15 and a price-to-earnings ratio near 300.
That valuation assumes aggressive growth ahead for Cava. While the company’s recent results show the business is fully capable of that, the correction seems warranted as consumer-driven businesses like restaurants can only grow so fast and it may be difficult for the company to maintain its double-digit comparable sales growth, an excellent level for any consumer-facing business.
Looking ahead to 2025, Cava looks poised for more growth, but the bar to impress investors will be much higher than it was a year ago.
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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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