Shares of Cava Group (CAVA 0.25%) have risen by more than 150% over the past year. That’s great if you own the stock, but you can’t expect that performance to continue indefinitely. And that is why you need to step back, as a new investor or an existing one, and think about the company’s growth potential and the best way to track its ongoing success or failure.
Here’s what you need to know to guide your thinking about Cava Group if you want to maximize returns and minimize risk.
What does Cava do?
From a big-picture perspective, there’s nothing particularly special about Cava, which is just a fast-casual restaurant chain. A lot of restaurants fall into this category. However, it is pretty clear that investors are enamored with Cava right now, given the rapid stock price advance. There are likely two reasons for this phenomenon.
Image source: Cava Group.
First, Cava is doing quite well right now, financially speaking. Revenue, for example, increased a heady 39% year over year in the third quarter of 2024. Earnings rose to $0.15 per share from $0.06 in the year-earlier period. You can see why investors would be enthusiastic about the stock, but what is really going on here?
The growth opportunity at Cava
Essentially, the big story at Cava is that it is opening new locations at a rapid clip. This is the second reason to be enthusiastic about the company’s prospects. In the third quarter of 2024, the company opened 11 new stores. That doesn’t sound like a big number, but the company operated only 352 locations at the end of the quarter (up a massive 21% year over year). It expects to end 2024 with a total new-store count of up to 58 locations.
New locations add materially to the top line, so this is a very effective way to grow the company’s business and enhance financial results. But how much can Cava Grow? That’s the exciting part, since its business model is very similar to that of Chipotle Mexican Grill, the fast-casual chain that operates over 3,600 locations worldwide. This is more than 10 times as many as Cava, suggesting that Cava has years’ worth of growth potential.
Make sure Cava is growing without sacrifice
The ultimate issue for investors here, however, is whether Cava can grow without compromising its business performance. Wall Street is littered with the husks of restaurant concepts that pushed so hard to grow that they lost sight of their existing stores. This is why same-store sales is the second number you’ll want to track like a hawk. Basically, same-store sales data tells you how well stores that have been open for at least a year have been performing.
Right now, Cava’s same-store sales are flying high, with the third quarter’s figure coming in at a lofty 18.1%. This suggests that the Cava concept is resonating well with customers. However, 18.1% isn’t sustainable over the long term in an industry where low single digits is usually considered pretty good. So look for the figure to fall off at some point. But if Cava can keep opening new locations while keeping same-store sales in positive territory, there is likely to be a lot more growth ahead for this still-small restaurant chain.
Cava has to perform a balancing act
Cava’s stock is expensive right now, with a price-to-earnings ratio of a somewhat outlandish 280. A lot of good news is priced into the stock at this point. Now, it has to maintain both new-store growth and same-store sales growth. If you want to maximize your returns, you’ll want to be laser-focused on both metrics.
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 and recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
