Is Outperforming Cava Stock a Buy Before Its Q3 Earnings Report?

Cava Group (CAVA) is a fast-casual Mediterranean restaurant chain that went public in June 2023. Since its initial public offering (IPO) price of $22, CAVA stock has surged over 531%, valuing the company at a market cap of $15.8 billion. 

Cava reported positive net income in its first quarterly report, and has beaten consensus earnings estimates in three of the last four quarters. Ahead of its upcoming earnings release, let’s see what analysts expect from Cava in Q3 of 2024, and if the growth stock is a good investment at the current valuation. 

Cava Sales Are Forecast to Rise By 32.8% YoY

Cava is forecast to report its quarterly results next Tuesday, Nov. 12, after the market closes. Analysts expect sales to rise by 32.8% year over year to $233 million, while adjusted earnings are forecast to rise by 83.3% to $0.11 per share. 

Alongside its Q2 earnings release, Cava raised its full-year outlook based on strong traffic and better-than-expected performance in the first half of 2024. For 2024, it forecast same-store sales growth of 9%, up from an earlier estimate of 5.5%. 

In the September quarter, Cava opened 18 net new locations, bringing its total restaurant count to 341. It aims to open between 54 and 57 new locations this year, higher than its previous forecast of 50 to 54 restaurants.

The company said it expects to end the year with an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of between $109 million and $114 million, compared to its previous estimates of between $100 million and $105 million. 

A Strong Performance in Q2

In Q2 of 2024, Cava reported revenue of $233 million with adjusted earnings of $0.17 per share, compared to estimates of $220 million and $0.13 per share, respectively. Its net sales rose by 35% year over year as same-store sales growth stood at 14.4%, higher than estimates of 7.9%. Moreover, its net income rose to $19.7 million, up from $6.5 million in the year-ago period. 

Notably, several other fast-food chains are reporting slowing traffic due to lower consumer spending. According to Cava, one primary reason for higher traffic is its recently launched grilled steak option, which has gained popularity. 

Another area where Cava may have an edge over its competitors is pricing. It raised prices by 3% in January and emphasized that it hasn’t planned any further hikes in 2024. In the last five years, menu prices have increased by just 15%, much lower than McDonald’s (MCD), which has raised prices by 40% since 2019. 

Is CAVA Stock Overvalued?

Analysts tracking Cava expect its sales to increase from $728.7 million in 2023 to $1.14 billion in 2025. Its adjusted earnings are forecast to grow from $0.21 per share in 2023 to $0.52 per share in 2025. So, priced at 12.5x forward sales and 266x forward earnings, CAVA stock trades at a premium. 

That said, CAVA stock continues to grow steadily, and commands a lofty valuation due to an improving bottom line. For instance, its gross margins have improved to 37.5% in the last 12 months, up from just 30.6% in 2022. Its operating margins in the previous 12 months have improved to 3.9% from -6% in 2022. 

Analysts remain bullish on CAVA stock, but the stock trades at a premium to its average price target of $124.25. Of the 15 analysts covering CAVA, seven recommend a “strong buy” and eight recommend a “hold.”

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.