Burrito chain Chipotle Mexican Grill (CMG -5.24%) and Mediterranean concept Cava Group (CAVA -0.24%) are undeniably stock market darlings in the restaurant industry. Over the past year, Chipotle's shares are up 70%, and Cava's are up by a whopping 150%. Investors are simply enthused with what they see.
There's good reason for that enthusiasm. Their businesses are both doing remarkably well, and investors can measure the success from multiple angles.
It's hard to earn hefty profits in the restaurant space, but this duo does it better than most. At the restaurant level, Chipotle had an operating margin of almost 28% in the first quarter of 2024, and Cava's margin was 25%.
Moreover, both are consistently growing in popularity, as measured by same-store sales (comps) growth. In the first quarter, Chipotle's comps grew 7%, and Cava's grew 2%, continuing the long-term trends for both businesses.
Chipotle and Cava are also somewhat differentiated in the restaurant space -- burritos and falafel aren't your typical burgers and fries. And perhaps this differentiation has helped these chains open up new locations at rapid paces. In 2023 alone, Chipotle opened 271 new locations, and Cava opened 72.
However, if there's any legitimate argument against buying these two stocks now, it's that they trade at expensive valuations. Both are at all-time-high price-to-sales (P/S) ratios -- 9 for Chipotle and 13 for Cava, both of which are quite lofty for restaurant stocks.
CMG PS ratio data by YCharts.
If you appreciate the growth and profits that those two companies deliver, but wish you could invest in them at more attractive valuations, then you should take a look at Kura Sushi (KRUS -1.71%) and Gen Restaurant Group (GENK 0.21%). These restaurant chains share the attractive qualities of Chipotle and Cava but are far more reasonably priced today.
1. Kura Sushi
There are over 500 Kura Sushi locations in Japan owned by its parent company, making it one of the largest sushi chains in that country. But in the U.S., Kura Sushi is quite small, with only 59 locations as of Feb. 29 (the end of its fiscal 2024 second quarter). However, it plans to open 13 to 14 new U.S. locations this year, and management has set a goal of 400 locations over the long term. Relative to its size today, those are huge plans.
Kura Sushi uses tech such as food-carrying conveyor belts, robots that bring diners their drinks, and toy-dispensing machines at the tables. Management calls this model "eater-tainment," and believes this draws people to discover the brand. It seems to be working considering that fiscal Q2 comps grew by 3%, and fiscal 2023 comps grew by almost 10%.
During its fiscal 2023, Kura Sushi's locations did nearly $4.3 million in sales volume on average -- higher than either Chipotle or Cava. And thanks to this high sales volume, its restaurant-level operating profit margin was 20% as of the second quarter.
Therefore, it seems like Kura Sushi is growing in popularity, has good restaurant financials, and has enough differentiation to stand out and grow substantially. And trading at a P/S ratio of 4.5, its valuation is half that of Chipotle and far cheaper than Cava.
2. Gen Restaurant Group
If Kura Sushi is small at 59 locations, then Gen Restaurant Group is really small -- its Gen Korean BBQ chain has only 40 locations. But again, this California-based company believes it can quickly expand. It expects to open at least eight locations this year, at least 10 next year, and around 15 in 2026.
In other words, the chain expects to nearly double in size over the next three years. And it thinks it can have more than 250 locations long term.
With Korean barbecue, diners cook their food themselves at the table. Gen Korean BBQ offers unlimited food at set prices, which can contribute to guest satisfaction.
Another interesting thing about this company is that it designs and installs its own ventilation systems for its tabletop grills. This keeps costs lower and increases the speed at which it can grow: It's not waiting on specialized third-party providers to build out a restaurant.
Gen Korean BBQ's first-quarter comps were down almost 2%, but I don't believe this is reason for concern. The restaurants do close to $6 million in annual sales volume on average, which is really high. There are natural limits on how a location's high sales volume can be, and since sales are so high already, it's logical for comps to look weak even though its restaurants are still packed full of diners.
But Gen Korean BBQ might be able to boost its sales volume a little more. The company just launched a new premium menu that includes items such as Wagyu beef at a higher price point. Perhaps some of its customers might be enticed to pay more for the higher quality.
Perhaps the most impressive feat for a company this small is that Gen Korean BBQ is already profitable. Investors can expect profits to ebb and flow at this stage of its business, but in 2023, the company had $11 million in net income for a profit margin that was greater than 6% -- and that's before making any helpful accounting adjustments.
Including both classes of Gen Restaurant Group stock, it has a market capitalization of just over $300 million. This means that it trades at less than 2 times sales -- even cheaper than Kura Sushi.
The stocks of Gen Restaurant Group and Kura Sushi both have cheaper valuations than Chipotle or Cava. But they share many of the same attractive traits that allowed those better-known chains to grow, and have strong upside potential. That combination of qualities might make the sushi chain and the Korean BBQ concept better buys right now.
