Nothing ever repeats itself perfectly on Wall Street, but there are some things that rhyme. So if you are looking at Chipotle Mexican Grill(NYSE: CMG) and thinking that you missed out on the restaurant's early growth years, don't fret. Cava Group(NYSE: CAVA) looks like it might be heading on a similar trajectory, just with a slightly different food concept. Here's what you need to know.
Chipotle Mexican Grill's simple business model
One of the key strengths of Chipotle is its assembly line preparation approach. It's quite simple, actually. In the background guests see the kitchen, where food is being freshly prepared. That food is then put into containers that sit behind a glass counter. Customers then walk along the counter choosing what they want in their food. The options are limited in one way, but the variety of food outcomes is broad and determined by the customer.
Image source: Getty Images.
To suggest that this highly personalized food preparation approach is a hit with customers is an understatement. The growth of Chipotle is clear evidence of its popularity. The brand opened in 1993 with a single location. By the end of 2015 it had roughly 2,000 restaurants. And by the end of the second quarter of 2024 it had over 3,500 shops.
As for financial results, well, they've been pretty impressive. Over the past decade revenues have grown at nearly 12% a year on an annualized basis. Earnings have expanded at a 15.5% annualized clip over that same span. That's pretty incredible performance, but not shocking for a popular and fast-growing restaurant brand.
If you missed Chipotle's big rise, take a look at Cava
Given that backdrop, it shouldn't be too surprising that Chipotle's stock has risen over 6,000% since its initial public offering (IPO). But Cava Group has some important similarities to Chipotle, most notably that the restaurant applies the same assembly line food preparation approach, just with Mediterranean food and not Mexican food.
Cava only held its IPO in mid-2023, so it is still a very young company. At the end of its first quarter as a public company it operated just 279 locations. At the end of the second quarter of 2024 it operated 341 restaurants. Like Chipotle, Cava is looking to expand rapidly.
Every new location will boost revenues. And as long as management can continue to operate its existing locations at a high level, with same-store sales that stay flat or, even better, grow, new locations will fuel rapid top-line expansion. The bottom line may be a bit more trouble right now, because the company is small and investing heavily in growth.
But if the top line keeps expanding, earnings should eventually start to become more reliable. And, likely, start to head higher over time. Basically, once Cava reaches a certain scale, it will be able to self-fund its growth while generating positive earnings.
Investors aren't ignorant to the opportunity, having driven Cava's shares up 180% or so since its IPO. However, if you compare Cava to Chipotle, Cava could have years of business growth and stock growth ahead. To be fair, Cava is only going to be interesting to growth-oriented investors. Value types will think it is too expensive and income investors will be turned off by the fact that Cava doesn't pay a dividend.
Young growth stocks also tend to be volatile, so that's something else to consider before you jump aboard. However, if you are a growth investor with a strong constitution, Cava could be the perfect stock for you if you feel like you missed out on Chipotle's huge early growth years.
Cava could be the next Chipotle
You can't just look at Chipotle and extrapolate that company's performance to Cava, no matter how similar the two business concepts happen to be. But it is hard not to see those similarities and, thus, the growth potential that Cava has ahead of it. The key is to make sure that Cava lives up to the potential, which will mean tracking store openings very closely and keeping tabs on same-store sales, which will give an indication of the health of the existing store fleet.
If Cava can keep opening new stores while operating existing locations at a high level, Wall Street will likely reward the stock with a rising stock price. That's probably worth the risk if you feel like you've missed out on Chipotle, although the ride could be bumpy along the way.
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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 September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
