Most people know the restaurant business is a tough one, with a relatively high failure rate. Only about half of newly opened restaurants are still up and running just a few years later, in fact. That's daunting, to say the least.
So what separates the industry's winners from the losers? Obviously, details like pricing, location, and quality of service matter. Perhaps more than anything, though, it's the concept itself that makes a restaurant reliably marketable. Finding an idea that strikes a chord with consumers clears one of the business' chief hurdles.
To this end, investors on the hunt for a new, off-the-radar growth pick might want to consider a stake in Cava Group(NYSE: CAVA). This growing chain of Mediterranean restaurants has already proven rewarding to its earliest shareholders -- but there's plenty more upside left to dish out.
What is Cava all about?
If you've never heard of Cava, you're not alone. It's only been around since 2010, and most of its expansion has taken shape within the past few years.
Indeed, of its 341 locations up and running as of mid-July, 62 were opened in just the previous four quarters. One of the key reasons the company went public back in 2023, in fact, is to facilitate new store openings.
But what is it? Simply put, Mediterranean fare. Cava's pita lineup includes the obviously Americanized options like chicken or steak, while feta cheese, lamb, and avocado distinguish its menu from most of domestic competitors. It offers meal-sized salads too, heavy on ingredients like olives, tomatoes, and hummus.
Although these are all technically "sit-down" meals, they're also handy for people in a hurry and/or on the go. Cava's menu items are affordably priced as well, in the same ballpark as more traditional fast-food offerings these days.
Whatever it is, it works. Same-store sales grew by 14.4% during the second quarter of the year, driving overall revenue up 35.2% year over year. Both figures extend long-term trends that are expected to persist into the foreseeable future.
Why should you invest in Cava?
It's not just this growth, however, that makes Cava stock such a compelling investment prospect. There are three far more specific reasons investors should consider stepping into this ticker sooner than later.
1. Profitable growth
One of these reasons is the simple fact that this growth also happens to be profitable growth.
Unlike many other start-ups and young restaurant chains of its ilk, Cava has been operating in the black for some time -- and increasingly so. Its second-quarter net income of $19.7 million tripled the year-earlier comparison of $6.5 million, extending a well-established trend.
CAVA Revenue (Quarterly) data by YCharts
2. Lack of debt
Even more impressive is that the company's expanding without taking on debt. In fact, it's free of any long-term debt. This is the second of the three reasons to step into Cava stock here and now.
It's a reason that requires an important footnote. That is, while the restaurant chain might remain debt-free, it's still raising money. It's just doing it via the sale of stock that ultimately dilutes existing shareholders' stakes. Its 118.3 million issued and outstanding shares (assuming full dilution) as of the middle of this year is well above the year-ago figure of 31.3 million.
On balance, though, this approach to fundraising works better than borrowing.
See, debt is a slippery slope that often ends up haunting companies that spent too aggressively in the name of growth. Taking on debt chips away at net income by incurring interest that must be paid every quarter without actually reducing any principal. By using its ever-rising stock as currency is cheaper; however, Cava Group remains fiscally flexible.
3. A successful concept
Last but not least, the third reason to buy Cava stock like there's no tomorrow is simply that the concept clearly works.
No, Mediterranean fare isn't everyone's favorite. Plenty of consumers do love it, though, and more and more are getting on board. The typical Mediterranean diet is also increasingly popular for health reasons, since it's high in protein and fiber, but low in the wrong kinds of fats. It doesn't hurt that many consumers are also simply looking for something new beyond the predictable burgers, fries, and Tex-Mex.
And if you doubt this interest is strong, as a reminder, Cava's second-quarter same-store sales improved 14.4%, following last year's full-year improvement of nearly 18%. That's enormous growth for any name in the restaurant business.
Understand and embrace the evolving premise
Don't misunderstand what a trade in Cava Group is right now. It's still more speculative than rooted in current results.
Although profitable, Cava shares are still very expensive, priced at more than 300 times this year's expected per-share earnings of $0.42 and just under 300 times next year's expected $0.50. The stock's also priced above analysts' consensus price target of $124.25. That doesn't leave much mathematical room for upside.
This is one of those story stocks, however, that's apt to continue performing well while it grows into a more appropriate valuation -- as the story evolves and the restaurant chain becomes increasingly profitable.
This won't prevent the occasional stumble, to be clear. In fact, you can probably count on continued volatility. It's worth it in the long run, though, even if the analyst community is hesitant in the near term. It's pretty rare to find a restaurant -- and restaurant stock -- already doing so well at this point in its existence.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
