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 Cava group (NYSE:CAVA), a Mediterranean fast-casual restaurant that attracts large numbers of customers. The company is expected to grow rapidly over the next three years.
But investors need to approach with their eyes wide open and focus intently on this important industry metric.
Cava goes back to the Chipotle playbook
Cava’s restaurant concept isn’t really new. Basically it’s a rip off Chipotle Mexican Grill‘S (NYSE:CMG) Food is prepared on an assembly line basis, but with Mediterranean instead of Mexican cuisine. However, this fact makes the comparison here quite obvious. To set an important baseline, as of the end of 2023, Chipotle had 3,371 locations in the United States (and an additional 66 locations abroad). Cava only had 309 stores at the end of 2023.
Cava’s total store base would be little more than a rounding error for Chipotle. However, this points to the potential growth opportunities for Cava, even if it becomes half the size of Chipotle. Notably, the company accelerated its growth significantly in 2023, opening 72 new restaurants. That’s probably happening too quickly, so it’s fitting that management is only planning 48 to 52 new locations in 2024.
Still, at this rate, Cava will grow significantly in 2024. If it can get close to those numbers again in 2025 and 2026, which seems like a reasonable goal, the restaurant will add up to 150 new locations over the next three years. So the business could grow by up to 50%. This is huge!
The downer for fast-growing restaurants
Each new location brings new income and helps increase sales. That’s something Wall Street likes to see in young restaurant concepts. Right now, the company has a particularly compelling story to tell: Same-store sales growth was nearly 18% in 2023. That’s an insanely high number and suggests that the company’s Mediterranean concept is in high demand. For reference, Chipotle’s same-store sales were just under 8% in 2023.
Investors need to be particularly careful here. It’s 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 begin to cannibalize older ones, resulting in weak same-store sales growth even though the new locations increase overall sales.
It’s not uncommon for Wall Street to push young restaurants so hard to grow that they stop paying as much attention to the core business. They simply become new shop machines.
As Cava expands its stores and business over the next three years, investors will need to focus on same-store sales. This will help you determine whether growth is broad-based or whether new locations are benefiting at the expense of older locations. If the latter is the case, Cava is out of trouble.
The Chipotle comparison is probably a good comparison here, with a reasonable target for Cava’s same-store growth roughly similar to what its larger competitor states.
Bigger is not always better
Cava should be a larger company in three years, perhaps even materially. But that doesn’t mean it will be a better company. As an investor, you need to pay attention to sales and the number of branches. But don’t forget to monitor same-store sales too. This will be a deciding factor in whether Cava’s growth is truly sustainable or not.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
Where will the cava inventory be in three years? was originally published by The Motley Fool