January 29, 2025
Shares of Cava Group (NYSE: CAVA) are trading hands with a price-to-earnings ratio of nearly 300. That's an important number to keep in mind as investors assess the future. If shares of this up-and-coming restaurant chain are going to set you up for life, they will have to live up to some very high expectations. The big question is whether or not it can do that right now.
The excitement around Cava involves the success that has already been achieved at Chipotle Mexican Grill (NYSE: CMG) . The reason for this is that both restaurants use the same basic food concept -- only that one, Chipotle, is focused on Mexican fare and the other, Cava, makes Mediterranean-themed food. The shared concept is that each one cooks the food being served in an open kitchen and then has an assembly line style serving system.
There is a lot to like about the shared model. Although there is a fairly limited menu of items, the ability of customers to pick and choose what they want leads to very precise customization. And since the food is prepared in front of customers, there is a sense of freshness about each order. Customers clearly find this appealing, noting that, even after well more than a decade as a public company (Chipotle went public in early 2006), the restaurant was able to post same-store sales growth of 6% in the third quarter of 2024.
Same-store sales give a look at how restaurant locations that have been open for more than a year are performing. In the restaurant industry, low single digits is considered a solid result. Hitting 6% is pretty darn good execution for an older food concept. Cava, for reference, had same-store sales of 18.1% in the third quarter of 2024. That's not likely to be sustainable, but it does clearly highlight the excitement around the Cava concept right now.
Part of the reason for this excitement among consumers is likely related to scarcity. At the end of the third quarter of 2024 Cava only operated 352 locations. Chipotle operates over 3,600. That's more than 10 times as many locations as Cava. And this is why investors are so excited about Cava.
Cava estimates that it will have opened as many as 58 new locations in fiscal 2024. If you round that up to 60 for ease of math, it would take something like half a century for Cava to open as many locations as Chipotle. That's not a realistic estimate, given that the larger Cava gets the more new locations it will likely open. However, it gets the idea across that there's a lot of growth potential if, and it's a big if, Cava is the new Chipotle.
This is the dynamic to which investors need to pay attention: Can Cava keep opening new locations at a rapid clip while maintaining the excitement around its food concept? If it doesn't manage the feat, the lofty P/E ratio will likely have to come down the hard way (a drop in the stock price). If it can maintain the excitement, the company will grow into the P/E ratio (meaning that earnings will increase and bring the P/E ratio down).
Only time will tell, but the early indications are very positive given the high same-store sales growth at Cava.
No food concept stays as hot as Cava's is right now forever. Eventually, it will saturate the market and become just a normal brand that consumers expect to see. That's basically what happened to Chipotle as it grew. However, Chipotle has remained a fast-growing company because consumers appear to like the concept enough to keep going back again and again.
Cava could set you up for life if it can pull off that same tightrope act. If it doesn't, well, shareholders could suffer material losses given the stock's lofty valuation today.
Before you buy stock in Cava Group, consider this:
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