3 Reasons to Buy Cava Shares Like There’s No Tomorrow

Cava Grouphis (COFFEE 3.12%) The stock has been on a roll, more than doubling in value since the company went public in June 2023. That’s a huge price gain in a very short period of time, creating some concern that it could have formed a bubble

However, investors concerned that all the earnings are already priced in should not pass on the stock without giving it a good look. Small restaurant chains like Cava can grow quickly and be very rewarding for investors. Here are three reasons why this stock is still a good buy right now.

1. Cava is a relatively small restaurant chain with room to grow

Cava manages fast-casual restaurants with a Mediterranean theme. It uses an assembly line approach that is very similar to Chipotle Mexican Grill (CMG 1.94%) and emphasizes fresh ingredients that help give consumers more control over the food they order. The basic business model is a winner when you consider that Chipotle has grown its version to more than 3,500 locations worldwide.

Image source: Getty Images.

Indeed, the big long-term appeal here comes directly from the Chipotle comparison. Cava has only 341 restaurants. That makes it just a fraction of Chipotle’s size and speaks to long-term potential.

Remarkably, Chipotle still resonates strongly with consumers despite its much larger size. The company’s same-store sales rose 11% in the second quarter of 2024. That’s a shockingly strong number for a restaurant, and is actually up from the 7% gain in the first quarter (itself a strong number), even though other restaurant chains such as McDonald’s and Darden Restaurants have reported negative sales in recent quarters.

2. Cava is opening a lot of new locations at a rapid pace

Cava performed as well as Chipotle. Cava’s same-store sales results for the second quarter of 2024 were 14.4%, with traffic in its stores up 9.5%. It was a very good quarter, but to be fair, sales growth in the first quarter was only 2.3%, so there was a lot of growth in the second quarter. However, 2.3% is actually a respectable number in the restaurant space. In fact, even if Cava only manages to keep same-store sales slightly higher, there’s still a lot of potential here.

The key for Cava really lies in balancing its efforts to open new stores with its ability to continue to operate its older locations well. Same-store sales tell you about the latter. But that’s just maintaining the core. The real growth driver will be the new stores management opens.

In the first quarter, Cava opened 14 new locations. It may sound small, but it’s still a relatively small chain. These 14 locations, added to the others opened in the past year, increased the number of stores by 22%. That’s a lot of growth because each new location brings with it new revenue. In the second quarter, Cava opened 18 new locations, maintaining year-over-year store growth of 22%.

With a goal of about 50 new locations a year, Cava could continue to grow for a decade and still not be half the size of Chipotle.

3. Cava does not make money, but it is profitable

The problem here is that investors clearly saw the potential and the comparison to Chipotle. Cava’s price-to-earnings ratio is so high (think hundreds) that it’s practically meaningless. However, this is actually not uncommon for small businesses focused on growth. Such companies tend to spend heavily on expansion and often run red ink for years as they build their businesses.

What’s appealing here is that Cava is still making a profit while investing so heavily in the future. In the first quarter, earnings per share were up to $0.12 per share. In the second quarter, the company earned $0.17 per share. This suggests that Cava’s business model, including its material growth plans, is inherently sustainable. Yes, it needs to continue to resonate with consumers, but as long as management doesn’t lose sight of the bottom line — same-store sales — steady growth seems highly likely.

Cava stock is not for everyone

Cava is best suited for growth-focused investors. Value investors and income investors probably won’t be interested. And even growth investors will need to keep a close eye on the company’s performance, because it’s common for small restaurant chains to push the accelerator so hard that they oversaturate the market and hurt their brand — which is why same-store sales are so weak. increase. important to follow. However, at the moment, Cava seems to be doing well, and the comparison to Chipotle suggests that there is still huge potential for growth ahead.