The cava stock continues to shine. Is it too late to buy it?

Actions of Cava Group (COFFEE 3.12%) rose after the Mediterranean-themed fast-casual restaurant operator saw its same-store sales rise when it reported its fiscal second-quarter 2024 results. The stock price has now tripled this year.

Let’s dive into Cava’s latest earnings report and see if the stock still makes a good investment after its huge run this year.

An increase in income

Cava saw revenue for its fiscal second quarter, which ended July 14, rise 35 percent to $231.4 million. The increase came from a combination of more locations and strong same-store sales growth. Same-restaurant sales rose 14.4% in Q2. Guest traffic was up 9.5% year-over-year, and traffic was a huge improvement over the 1.2% decline seen last quarter. The company’s comparable restaurant sales also saw a 4.9% benefit from higher pricing and menu mix. Even more impressively, Cava was running against tough comparisons as it posted same-restaurant sales growth of 18.8% a year ago.

The company credited the introduction of grilled steak as a big factor in increasing its traffic and sales. It also noted that sales from lower-income households were strong. Cava, meanwhile, ended the quarter with 341 locations, up from 279 at the end of the fiscal first quarter a year ago. He opened 18 new restaurants in the neighborhood.

Its restaurant-level margins (RLM) improved slightly to 26.4% from 26.1% a year ago. This metric helps measure the profitability of its restaurants before corporate costs.

The company posted a Q2 profit of $19.7 million, up from $6.5 million a year ago. Adjusted EBITDA, meanwhile, rose 59% year-over-year to $34.3 million. Cava also generated operating cash flow of $48.9 million in the quarter and $22.7 million in free cash flow. This shows that the company is now able to fund its restaurant expansion plans with the cash it generates.

Once again, Cava raised its guidance for the full year. It now estimates same-restaurant sales growth to be between 8.5% and 9.5%. This is an increase from previous projections of 4.5% to 6.5% and initial guidance of 3% to 5%.

For full-year adjusted EBITDA, Cava management now expects the figure to be between $109 million and $114 million. That’s up from its previous forecast of $100 million to $105 million and its initial guidance of $86 million to $92 million. Cava also raised its estimated restaurant openings for this fiscal year to 50 to 57, up from previous guidance of 50 to 54 and an initial outlook of 48 to 52 new locations.

Is it too late to buy Cava shares?

From a traditional valuation point of view, Cava shares look expensive. It trades at a forward-to-earnings (P/E) ratio of 271 times and a price-to-sales of 13 times analysts’ estimates for the next fiscal year.

Data on CAVA PE ratio (forward 1y) by YCharts

Investors in the restaurant space generally look for companies that are growing strong same-store sales with a tremendous amount of opportunity for expansion. In other words, they are trying to find the next one Chipotle Mexican Grill (CMG 1.94%). Because if a restaurant operator’s concept is strong enough to support and finance a huge expansion, the sky really is the limit.

With double-digit same-store sales growth and solid free cash flow, Cava looks to be in the running to be the next Chipotle-style growth story. With about a tenth of the locations (341) as Chipotle (3,530), you can see the kind of growth that’s possible for the company. Cava still needs to grow its average unit volume (AUV), which was nearly $2.7 million, to match Chipotle’s $3.1 billion, but its restaurant-level operating margins are quite similar (Chipotle guided Q3 RLMs to be 25% higher than Cava which led at a high level). of 24.7% for the year), and the company should continue to benefit from scale as well as a new labor efficiency improvement tool that will be launched next year.

With a current market cap of $14.3 billion, compared to Chipotle’s $70.2 billion, it’s not hard to see where Cava stock could be headed in the next 10 to 15 years if it can continue to deliver strong same-store sales, fund their store expansion through cash flow, increase their AUV, and greatly expand their number of locations.