Shares of Chipotle Mexican Grill(NYSE: CMG) are down around 15% from their peak earlier in the year. That's not unusual; the stock has gone through much larger drawdowns before. But this is not the same company it was a decade ago, it is now an industry giant with more than 3,500 locations globally. If you are wondering whether or not Chipotle's best growth is behind it, then you might want to trade down to a smaller company like Cava Group(NYSE: CAVA).
Chipotle is doing just fine, for what it is
In the second quarter (ended June 30), Chipotle's same-store sales rose a huge 11.1%. Add in new store openings and the top line expanded by 18.2%. These are both incredibly strong numbers for a large restaurant brand. The truth is that most sizable restaurants would be ecstatic if they could expand same-store sales in the low single digits.
Image source: Getty Images.
There's a reason why Chipotle is afforded a premium valuation, noting that its price-to-earnings ratio is 55 times or so. By comparison, fast-food giant McDonald's has a P/E ratio of around 26 times, less than half the level of Chipotle. Investors are clearly paying up for Chipotle stock, which helps explain the steep sell-off. When things go wrong at companies with pricey stocks, investors often sell first and ask questions later.
The "wrong" at Chipotle right now is a big management transition. It lost its CEO to coffee giant Starbucks. That CEO was well respected and investors are likely worried that it will be hard to fill his shoes. It doesn't help that recent sales results have been strong, either, because any pullback will probably be viewed as a sign of weakness rather than just a natural reversion to the mean. But there's a bigger issue here: Chipotle is no longer a tiny start-up with huge expansion opportunities ahead of it. If that's what you are looking for, now might be a good time for you to consider switching to Cava Group.
Cava is Chipotle for Mediterranean food lovers
Cava's food concept isn't exactly new. It is basically taking the assembly-line formula that Chipotle made popular and applying it to Mediterranean food. But that's the allure here, since Cava could potentially turn into the next Chipotle. Right now Cava only operates around 341 locations, a tiny fraction of Chipotle's total store count. But that means Cava could have years of growth ahead of it.
Since Cava is so small, meanwhile, it can't rush out and open up hundreds of locations. It just doesn't have that operational capacity. It only managed to open 18 new locations in the second quarter of 2024, bringing its year-over-year store count growth to a huge 22%! Small but steady success here can lead to massive change.
To put a number on that, Cava's top line grew 35% year over year in the second quarter (ended July 14). That included same-store sales growth of 14%. To be fair, neither of those numbers is likely to be sustainable over the very long term. But there was a nearly 10% increase in store traffic, which hints that the Cava concept continues to gain favor with new consumers. So there's good reason to think that Cava has a solid opportunity to keep expanding.
A switch might make sense for growth investors
Cava is clearly a much smaller company than Chipotle and the risks are probably higher for investors if it stumbles. But if you think Chipotle's best growth days are behind it, you might want to consider putting some money into a similar concept that's only just starting to expand. A comparison to Chipotle suggests that there are years, if not decades, of growth ahead for Cava.
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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 and Starbucks. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
