On initial public offering day, Cava Group Inc. (CAVA, Financial) had a higher valuation than Wendy's (WEN, Financial), Shake Shack (SHAK, Financial), Papa John's (PZZA, Financial), Cracker Barrel Old Country Store (CBRL, Financial) and Jack in the Box (JACK, Financial), and for good reason. People want to eat there and investors see more growth ahead.
Cava operates a Mediterranean style fast-casual chain. Think Chipotle Mexican Grill Inc. (CMG, Financial) style ordering, but with spicy lamb and fresh tomatoes and pita and lentils. As Steve Jobs once said, "Picasso had a saying. He said, ‘Good artists copy, great artists steal.’ And we have always been shameless about stealing great ideas.”
This seems to be the case with Cava.
Brand overview
The first Cava Mezze was established in Rockville, Maryland by childhood friends Ted Xenohristos, Ike Grigoropoulos and chef Dimitri Moshovitis. The second location was in my neighborhood on Capitol Hill. The friends wanted to provide a casual and modern dining experience that blended traditional Greek and Mediterranean cooking. In other words, there was no food like this in DC and an opportunity to capitalize on the new foodie trend hitting the area.
After the success of Cava Mezze, the founders decided to venture into a fast-casual version of their brand, which is now one of the fastest-growing, fast-casual restaurant brands out there.
Business model and customer base
The company uses only 38 ingredients, 80% of guests customize their meals and through its mobile app makes pick up or delivery super easy. About 65% of its business is dine-in, with 19% takeout and 16% delivery. Guest tend to be more affluent as the average bowl (at least in DC) is around $15 after tax. The company says that 37% of its guests have household income of $150,000 or more and 59% make $100,000 or more. More than 55% of its business is lunch, with the rest dinner.
Expansion and acquisition
In 2017, Cava raised $30 million in funding from Swan & Legend Venture Partners, bringing their total funding to $79 million. This allowed them to expand their footprint nationwide. In 2018, Cava acquired Zoës Kitchen in a $300 million deal. This added over 200 Zoës locations to Cava's portfolio and strengthened their position in the Mediterranean fast-casual space.
Restaurant risks
Overall, Cava has to focus on staying relevant, controlling costs, and seamlessly executing its growth plans to mitigate these risks. As long as the food and service remain consistent, this should be fine. The fast-casual segment is very saturated with competitors like Chipotle Mexican Grill Inc (CMG, Financial), Sweetgreen, Panera Bread, Nando’s, et al all competing for real estate tied to neighborhoods where the customers are located.
Inflation is another big factor. Despite current locations being in wealthier areas, the prices it can charge do have a cap. Like most restaurants, Cava also faces pressures on labor costs from minimum wage hikes and a tight labor market. Higher wages could compress profit margins.
Food supply is perhaps its biggest risk. Remember Chipotle Mexican Grill Inc (CMG, Financial) has survived big obstacles with its supply chain in this regards. Obtaining high-quality ingredients at reasonable costs could be difficult given supply chain disruptions, food inflation, etc. This may impact their goal of fresh, customizable food.
Current report
On Tuesday, Cava Group reported its second-quarter numbers that were really good. Revenue was up by 62.5% year over year, beating by nearly $8 million. GAAP earnings per share came in at 21 cents, beating by 24 cents. The quarterly results demonstrated the effectiveness of the company’s restaurant operating model with 16 net new Cava restaurants opened, which includes new openings and restaurants converted from a Zoe's Kitchen location during a specific period.
In other words, the company is profitable and growing.
Future potential
Cava plans to expand from its current 263 locations to over 1,000 by 2032. The company just raised over $300 million in its IPO. From its recent quarter, it took $3.4 million to open 16 net new stores. That equates to $212,500 per store. That figure is slightly higher than Chipotle Mexican Grill, which spends around $160,000 to open a new restaurant.
The company has $352 million in cash on hand. With the same metrics, Cava could open more than 1,600 new stores if the cash is managed appropriately, especially if that growth were to remain profitable. For fiscal 2023, the comapny expects to have between 65 and 70 net new openings. If it does get to that 1,000 store number, and there is no reason it should not, it would likely garner a $16 billion market value. That is based on Chipotle’s market capitalization per store. Cava has copied the Chipotle model in most other areas, adding what I feel is better technology and better customers.
Market value
That said, the stock just debuted and could very likely have another pullback in price with longtime shareholder's taking profits. And do not forget about recessions. Long term, the prospects for Cava Group are very good. While the lines are not out the door like they used to be at Chipotle, the company does not sell $5 bowls either. The more affluent customer base is a two-for-one advantage, which means it does not have to worry about servicing long lines in as quickly and efficient manner as Chipotle.
Cava has 279 restaurants, up 43% year over year, and looking to add around 100 a year. From an apples to apples perspective, that means Cava is actually undervalued compared to Chipotle, priced at just $12.6 million per 2023 location count versus $15.6 million for Chipotle. That is just one metric, but what actually matters is whether the company will be able to scale up to 1,000 stores and beyond. All signs point to yes.
