In the restaurant space, investors are constantly on the lookout for what company could become the next Chipotle Mexican Grill (CMG 0.39%). And for good reason -- Chipotle's stock is up over 7,000% since it IPO'd back in 2006.
The latest contender is Cava Group (CAVA 1.29%), a Mediterranean restaurant fast-casual concept that has been growing its restaurant base quickly. The company reported strong revenue growth in the first quarter.
Let's take a close look at Cava's most recent earnings report and see whether the stock makes good sense for investors now.
A surge in revenue
Cava saw revenue for its fiscal Q1, which ended April 21, soar 30% to $256.3 million. The growth was aided by the company having 323 locations at period end versus 263 at the end of its fiscal Q1 a year ago. Same restaurant sales grew 2.3%, although the company said that adjusting for holiday shifts, it would have seen 4.3% growth. Cava saw a 3.5% benefit from menu price increases and mix, while guest traffic was down -1.2%.
Notably, the company was facing difficult comparisons, as a year ago it saw same restaurant sales growth of 28.4%. Its restaurant level margins (RLM) ticked down slightly to 25.2% from 25.4%. This metric helps measure the profitability of its restaurants before corporate costs. Food costs as a percentage of revenue went down, but labor costs rose.
The company flipped to a profit, with earnings per share of $0.12 versus 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 on the quarter and free cash flow of $4.7 million. This is important, as it shows the company can self-fund its restaurant expansion plans, which is one of the long-term key drivers for the stock.
Image source: Getty Images.
As a result of its solid start to the year, Cava also raised its full-year guidance. It now expects same restaurant sales growth to come in between 4.5% to 6.5%, from an earlier range of 3% to 5%, and for adjusted EBITDA of between $100 million to $105 million, up from a prior outlook of $86 million to $92 million. Cava also increased its expected restaurant openings for this fiscal year to between 50 to 54, up from an earlier view of 48 to 52 new locations.
The company said it does see a potential traffic headwind as the excitement that came with its IPO last year starts to fade. However, it is expecting the launch of a new grilled steak offering to help boost comps, given the favorable reception the dish has had in test markets in Boston and Dallas. Cava will also look to roll out a loyalty program by year-end, although its potential positive effect is not contemplated in its current guidance. The steak rollout will, however, be a slight headwind to its restaurant level margins.
Meanwhile, its expansion plans continue to remain on track, with locations now in 25 states and the District of Columbia. It said its recent entry into the Midwest with an opening in Chicago was met with strong results.
Time to buy the stock?
Despite a solid first quarter, Cava shares were falling following its latest report. One reason could be the stock's valuation which, at a forward price-to-earnings (P/E) of 230 times and a price-to-sales of 9.6 times, is not cheap. Even at an enterprise value to EBITDA basis, the stock trades at a hefty 87 multiple. Compared to other growing fast casual concepts such as Chipotle and Shake Shack, the stock is expensive.
CAVA PE Ratio (Forward) data by YCharts
However, Cava has less than a tenth of the number of restaurants that Chipotle has in the U.S. currently. If the concept can remain popular and garner the same appeal throughout the U.S., Cava could potentially grow to become the size that Chipotle is today (nearly an $87 billion market cap) over the next 15 to 20 years. Note that Chipotle had under 500 locations in 20 states at the time of its IPO in 2006.
That would mean a lot of upside for Cava stock, which currently has about a $9 billion market capitalization. It's not easy projecting out a restaurant chain's success over the next two decades, as tastes do evolve. But the ingredients are in place for Cava to potentially be a huge winner despite its current expensive stock.
