Chipotle Mexican Grill(NYSE: CMG) is dealing with some large issues right now, including the surprise departure of its well-respected CEO. So investors are, likely, a bit downbeat on the fast casual restaurant. It didn't help that the company's same-store sales came in lighter than Wall Street had hoped in the third quarter of 2024.
Given the business model similarities between Chipotle and Cava Group(NYSE: CAVA), investors should be thinking about what might happen to the same-store sales trends at the Mediterranean-themed upstart.
Cava vs. Chipotle: The same but different
The big similarity between Cava and Chipotle is the way they prepare and deliver food to customers. Both restaurants have an open kitchen in the background that makes food for an assembly line-style ordering system. Essentially, customers can see that the food is freshly made, and they can customize their orders as they walk down the line.
Image source: Cava Group.
The big difference between Cava and Chipotle is in the type of food they offer. Chipotle makes Mexican-themed fare. Cava's theme is Mediterranean. Other than that, the business models are very, very similar. That said, there's also a size difference. Chipotle is much further along in its development, with about 3,600 locations around the world. Cava's footprint is much smaller, with only around 350 or so stores.
That size difference is why the two stocks are so interesting to compare. If Cava can grow the way Chipotle has grown, well, there's a huge, long-term investment opportunity here. That brings up the same-store sales comparison that has Wall Street upset with Chipotle.
Chipotle: It was good, just not as good
There are two important numbers to monitor with restaurants: Sales and same-store sales. Sales is the top line, which includes revenues from existing and new restaurants. Same-store sales just look at revenue from existing locations. When a restaurant is opening a lot of new locations, the revenue from new openings can materially inflate sales even if the company's existing locations are performing poorly. That happens pretty frequently, particularly with smaller restaurant brands, as they focus so much on expansion that they start to pay less attention to their existing fleet of stores.
In the second quarter of 2024, Chipotle's same-store sales rose 11.1%, which is a huge number. For comparison, McDonald's(NYSE: MCD) same-store sales fell 1% in the same quarter. Investors were excited by Chipotle's strong results, which is fair. But 11.1% same-store sales growth isn't sustainable. So when Chipotle's third-quarter same-store sales growth fell to "just" 6%, investors were disappointed. For comparison, McDonald's same-store sales in the third quarter dropped 1.5%.
Simply put, Chipotle is doing very well but it isn't doing as well as it was with regard to same-store sales. If it can keep same-store sales positive while continuing to expand its store count, it should continue to grow its business without any troubles. That's the important theme to keep in mind as you prepare for a read of the same-store sales results at Cava.
In Q2, Cava's same-store sales were even better than Chipotle's, rising 14.4%. That's a shockingly strong result, likely helped along by the novelty of Cava's food concept. It won't stay that strong forever, with Chipotle's same-store sales decline highlighting the downside risk. But as long as Cava can keep its same-store sales positive, or even flat, opening new locations will still result in huge revenue growth.
So prepare for less robust same-store sales figures when Cava reports Q3 results, but long-term growth investors should make sure to keep some perspective. Anything above the low single digits is still quite good in the restaurant sector.
When to get worried about Cava
As highlighted, there's a big risk with small restaurant brands. Wall Street wants to see top-line growth, and companies try to live up to that expectation. The easiest way for a small restaurant to do that is to open new locations, which can sometimes lead management to miss the mark with existing stores. If Cava's same-store sales figures drop from lofty levels to just good (or even middling) levels, there's nothing to worry about. If same-store sales turn negative, however, investors need to start paying much more attention -- because it could be an indication that management isn't paying enough attention.
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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. 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.
