Since it first came to the public markets with a 100% gain in its 2006 debut, Chipotle Mexican Grill (CMG +1.61%) has been a stock market darling. It routinely trades north of 50 times earnings -- nearly double of most other restaurant stocks, or more. Shares have climbed 45-fold since that initial public offering (IPO) and 375% since the beginning of 2019. So it's no surprise that many chains have launched trying to copy its model: a protein, a base of starch or greens, and a combination of cuisine-specific add-ons.
The latest imitator landed in the headlines after it, too, doubled on its first day of trading. Cava Grill (CAVA 0.64%) is the Mediterranean yin to Chipotle's yang. Three friends of Greek descent opened the first Cava restaurant in 2011. And more than a decade later there are 263 of them in 24 states. After comparing it to other Chipotle knockoffs, it's obvious why Wall Street is excited.
The restaurants are very profitable
In the documents it filed to go public, Chipotle had about 450 restaurants. By 2007, it had more than 600 locations. That's more than double what Cava has now. At the time, founder Steve Ells bragged about restaurant-level margins of 23.2%. In its initial filings, Cava reported restaurant-level margins of 20% at the end of last year. It's not Chipotle, but it's much better than Noodles & Co. (NDLS 3.62%) and Sweetgreen (SG 0.37%), whose concepts are the salad and Asian versions of the business model.
Data source: Chipotle, Cava Grill, Sweetgreen, Noodles & Co.; chart by author.
Chipotle and Cava reported restaurant-level profit margins for the first quarter of 2023 at 26% and 25%, respectively. Even though the two eateries are similar at a restaurant level, there is one substantial difference. When Chipotle filed to go public, it had been profitable for two consecutive years. In fact, it reported five consecutive years of positive operating cash flow leading up to the IPO. Although Cava did produce a sliver of cash the past two years, the company as a whole was unprofitable, with 2022 being worse than 2021.
Who needs profit when you're growing like this?
Since Cava has fewer locations than Chipotle did when it went public, it makes sense that it's growing faster. But the pace is converging. And it looks as if the growth won't be as impressive when it reaches the same number of locations. Another difference: Chipotle's restaurant growth was consistently above 30%, while Cava's has been lumpy. It grew much slower in 2019 -- two years before the following chart -- and, understandably, in 2020.
It's also important to note that Cava purchased 261 locations from Zoe's Kitchen in 2018. It's been able to shutter underperformers and convert the 145 most desirable sites. That's a lot easier than securing sites and building new restaurants. It's a perfectly acceptable practice, but it does distort the growth picture. The rapid jump in restaurants in the two years before the IPO isn't quite as impressive after factoring that in. Management said the 100 new sites it has currently identified is "well in excess" of what it expects to add before the end of 2024. That means year-over-year restaurant growth is likely to fall closer to 20% without the cherry-picked Zoe's locations to flip.
Data source: Chipotle, Cava Grill, Sweetgreen, Noodles & Co., Sweetgreen. Chart by author.
With a similar concept and restaurant-level profitability, along with eye-popping growth, it's no surprise Wall Street jumped on the Cava Grill bandwagon. Eerily, both had initial offering prices of $22 and closed at roughly $44 on their first day. But the similarities may end there. At a corporate level, Cava is still deeply in the red. And its 2018 acquisition of Zoe's provided a tailwind that is about to run out. As appetizing as it is to dream of owning the next Chipotle, I'm waiting to see if Cava can live up to the hype before digging in.
