Move Over, Chipotle — Cava Sees Revenue Surge. Time to Buy the Stock?

Move Over, Chipotle — Cava Sees Revenue Surge. Time to Buy the Stock?

In the restaurant areainvestors are constantly looking for which company could become next Chipotle Mexican Grill (NYSE:CMG). And for good reason: Chipotle shares have risen more than 7,000% since their IPO in 2006.

The last competitor is Cava Group (NYSE:CAVA), a fast-casual Mediterranean restaurant concept that has quickly grown its restaurant base. The company recorded strong revenue growth in the first quarter.

Let’s take a close look at Cava’s most recent earnings report and see if the stock now makes sense for investors.

An increase in income

Cava saw revenue for its fiscal first quarter, which ended April 21, climb 30% to $256.3 million. The growth was helped by the company having 323 locations at the end of the period, up from 263 at the end of its fiscal first quarter a year ago. Sales at the same restaurants increased 2.3%, although the company said that taking into account holiday periods it would have seen growth of 4.3%. Cava benefited 3.5% from price increases and menu mix, while customer traffic declined 1.2%.

The company notably faced difficult comparisons, since a year ago its sales in the same restaurants had increased by 28.4%. Its restaurant-level margins (RLMs) decreased slightly, from 25.4% to 25.2%. This metric makes it possible to measure the profitability of its restaurants before the costs of the business. Food costs as a percentage of revenue have decreased, but labor costs have increased.

The company turned a profit, with earnings per share of $0.12 compared to a loss of $1.30 a year earlier. Adjusted EBITDA, meanwhile, nearly doubled to $33.3 million. Cava also generated $38.4 million in operating cash flow in the quarter and free cash flow of $4.7 million. This is important because it shows that the company can self-fund its restaurant expansion plans, which is one of the stock’s key long-term drivers.

Move Over, Chipotle — Cava Sees Revenue Surge. Time to Buy the Stock?

Image source: Getty Images.

Following its strong start to the year, Cava also raised its guidance for the full year. It now expects same-restaurant sales growth of between 4.5% and 6.5%, compared to a previous range of 3% to 5%, and adjusted EBITDA of between $100 million and $105 million. of dollars, up from an earlier outlook of $86 million to $92 million. million. Cava also increased the number of restaurant openings planned for this fiscal year to between 50 and 54, up from 48 to 52 new locations previously planned.

The company said it sees potential unfavorable traffic as excitement over its IPO last year begins to fade. However, he expects the launch of a new grilled steak offering to help boost revenue, given the positive reception the dish has received in the Boston and Dallas test markets. Cava also plans to roll out a loyalty program by the end of the year, although its potential positive impact is not factored into its current forecast. The steak rollout, however, will be a slight headwind for restaurant margins.

At the same time, its expansion plans remain on track, with locations now in 25 states and the District of Columbia. He said its recent entry into the Midwest with an opening in Chicago has produced good results.

Is it time to buy the stocks?

Despite a strong first quarter, Cava shares were down following its latest report. One reason could be the stock’s valuation which, with a forward price-to-earnings (P/E) ratio of 230 times and price-to-sales of 9.6 times, is not cheap. Even on an enterprise value to EBITDA basis, the stock trades at a multiple of 87. Compared to other growing fast casual concepts such as Chipotle and Shake Shackstock is expensive.

CAVA PE Ratio Chart (Forward)CAVA PE Ratio Chart (Forward)

CAVA PE Ratio Chart (Forward)

However, Cava currently has less than a tenth of the number of restaurants Chipotle has in the United States. If the concept can remain popular and generate the same appeal across the United States, Cava could potentially grow to Chipotle’s current size (nearly an $87 billion market cap) within the next 15 to 20 years. Note that Chipotle had fewer than 500 locations in 20 states at the time of its 2006 IPO.

That would mean plenty of upside potential for Cava stock, which currently has a market cap of around $9 billion. It’s not easy to predict the success of a restaurant chain over the next two decades because tastes change. But the ingredients are there for Cava to potentially be a big winner despite its expensive current stock.

Should you invest $1,000 in Cava Group right now?

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Geoffrey Seiler has positions in Shake Shack. The Motley Fool posts and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.

Move over, Chipotle – Cava sees revenue increase. Is it time to buy the stocks? was originally published by The Motley Fool

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