The market has been closely monitoring Cava Group (CAVA) stock since it became a public entity in early 2023. The stock price has increased by 122% over the past year; however, its momentum may be slowing. Investors are closely scrutinizing its upcoming earnings report on February 25, given the significant growth already incorporated into its stock price. With the price declining as the report date approaches, there is a question of whether purchasing before the release would be advisable.
Market Affection for Cava
Cava is among the newer entrants in the fast-casual restaurant industry that have gained market attention in recent years, seeking to emulate the success of Chipotle Mexican Grill, one of the pioneers in the fast-casual sector that has provided substantial returns for investors. Like Chipotle, Cava’s business model emphasizes fresh, premium food offerings with a limited selection of ingredients. These can be combined to create a variety of dishes, centering around a Mediterranean menu. Cava’s pricing is above standard fast-food options like McDonald’s yet below fine dining, attracting an affluent customer base even amid inflationary pressures.
The chain’s growth trajectory is significant, with 352 operational stores as of the third quarter’s end and plans to add approximately 57 new stores in 2024. Cava projects reaching around 1,000 stores by 2030, which could ensure steady growth over the next five years and potential continued expansion beyond that, although its current count lags behind Chipotle’s 3,700 outlets.
Cava has not only experienced store and sales growth but has also reported increases in comparable sales, indicating customer retention. It has achieved positive net income since its first quarter as a public company, with growth noted. In the third quarter, total revenue saw a 39% year-over-year increase, while comparable sales rose by 18%. The restaurant-level profit margin improved from 25.1% to 25.6%, and net income grew from $6.8 million to $18 million. Consequently, management has adjusted its fourth-quarter outlook to anticipate around 12.5% growth in comparable sales and a restaurant-level profit margin between 24.5% and 25%.
Potential Risks
Cava’s stock has been declining over the last two weeks, a common occurrence before an earnings release, particularly after sustained momentum. Other influencing factors might include concerns regarding economic policy. This scenario underscores the risks of investing in a relatively young company with a high valuation. Despite Cava’s current success, it remains a small company, and any investment is a bet on its future potential. Scaling the company to triple its size demands specific expertise, and Cava faces competition from numerous emerging fast-casual chains, as well as Chipotle itself.
In terms of valuation, Cava is trading at a forward one-year price-to-earnings (P/E) ratio of 134, which is notably high for a non-technology company. Despite the market’s occasional irrationality, this valuation suggests limited immediate upside potential.
Considerations for Investment
If Cava provides another excellent earnings report on February 25, the stock might surge; conversely, any disappointment, such as an earnings shortfall or lackluster outlook, could result in a decline. Considerable confidence is embedded in the high valuation.
Cava is perceived to have a promising future and is expected to sustain robust growth over the next five to ten years. For those with a long-term investment horizon, the timing of the purchase—either before or after the earnings report—may be less critical, acknowledging the unpredictability of market timing. Nonetheless, some caution is advisable when buying at the current price, due to high expectations already reflected in the stock. Waiting for a more favorable entry point is recommended. Additionally, employing a dollar-cost averaging strategy could be a viable approach to gradually build a position when faced with an attractive prospect but elevated price.
Disclosure
Jennifer Saibil does not hold any positions in the mentioned stocks. The Motley Fool holds positions in and advocates for Chipotle Mexican Grill, while recommending Cava Group. Additionally, The Motley Fool suggests the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool’s disclosure policy provides further information.
