Restaurant brands come and go, but when a concept is new and attractive it can lead to exciting stories on Wall Street. That's basically what's going on today with Cava Group (CAVA -0.11%), a Mediterranean fast-casual restaurant that's drawing in customers in huge numbers. The next three years are likely to see the company grow at a rapid clip.
But investors need to go in with their eyes wide open, and keenly focused on this key industry metric.
Cava is tapping the Chipotle playbook
Cava's restaurant concept isn't really new. It basically rips off Chipotle Mexican Grill's (CMG -0.33%) assembly line approach to food preparation, but it does it with Mediterranean food instead of Mexican fare. However, this fact makes the comparison here pretty obvious. To lay some important groundwork, at the end of 2023 Chipotle had 3,371 locations in the United States (and another 66 foreign locations). Cava's store count at the end of 2023 was just 309.
Cava's entire store base would be little more than a rounding error for Chipotle. But this hints at the potential growth opportunity ahead for Cava, even if it only manages to grow to half the size of Chipotle. Notably, in 2023 the company pushed hard on the growth front, opening 72 new restaurants. That's probably too fast, so it is appropriate that management is only planning on 48 to 52 new locations in 2024.
Still, at that pace, Cava is set for material growth in 2024. If it can come close to those numbers again in 2025 and 2026, which seems like a reasonable goal, the restaurant will add as many as 150 new locations over the next three years. So the business could grow by as much as 50%. That's huge!
The fly in the ointment for fast-growing restaurants
Each new location will bring with it new revenue, helping to boost the top line. This is something that Wall Street likes to see with young restaurant concepts. Right now, the company has a particularly compelling story to tell, noting that same-store sales growth came in at nearly 18% in 2023. That's an insanely high number and suggests the company's Mediterranean concept is in high demand. For reference, Chipotle's same-store sales totaled just under 8% in 2023.
This is where investors need to pay extra close attention. It is unlikely that Cava can sustain such rapid same-store sales growth, which effectively measures the performance of stores that have been open for at least a year. The risk of a rapid expansion plan is that new locations start to cannibalize older ones, leading to weak same-store sales growth even as the new locations boost the overall top line.
It isn't uncommon for Wall Street to push young restaurants so hard for growth that they stop paying as much attention to the core business. They just become new store machines.
So, as Cava grows its stores and business over the next three years, investors need to focus on same-store sales. This will help you determine if the growth is broad based or if new locations are benefiting at the expense of older ones. If the latter is the case Cava is destined for trouble.
The Chipotle comparison is probably a good one here, with a reasonable target for Cava's same-store growth being something similar to what its larger peer puts up.
Bigger isn't always better
Cava is likely to be a bigger company in three years, perhaps materially so. But that doesn't mean it will be a better company. As an investor, you need to watch the top line and the store count. But don't forget to monitor same-store sales, as well. That's going to be a key determinant of whether or not Cava's growth is truly sustainable.
