Cava(NYSE: CAVA) doesn't really do anything particularly new. Just like Chipotle Mexican Grill(NYSE: CMG), Cava uses an assembly line-style ordering process. The difference is that Cava serves Mediterranean-themed food, while Chipotle makes Mexican fare. However, there is still a big difference between these two companies, and it speaks to the reason why investors may want to buy Cava like there's no tomorrow right now.
1. Cava is like Chipotle, but smaller
It makes sense to get into the meat and potatoes of this restaurant comparison right away. Cava ended the first half of 2024 with 341 locations. At the midpoint of the year, Chipotle had around 3,500 restaurants. It is an order of magnitude larger than Cava.
Image source: Getty Images.
If Chipotle can use the assembly line-approach for Mexican food and grow to that size, there's no particular reason to believe that Cava can't do the same thing. This is the opportunity that investors looking at Cava have to consider. And it is the No. 1 reason to buy the stock. That remains true even though the valuation of Cava's stock is extreme, with the price-to-earnings ratio sitting above 700 times!
Clearly, investors are pricing in a lot of good news. If you have a value bias, you won't want to buy Cava's stock. But if you believe Cava can expand to more than 10 times its current size, maybe that lofty P/E ratio won't be such a bother.
2. Cava is expanding quickly
In the second quarter of 2024, Chipotle opened 52 new locations. Cava opened just 18 new restaurants. But when you compare those numbers to the store bases of each of these companies, you start to see a notable difference. At 341 stores, 18 locations is a roughly 5% change. With 3,500 locations, 52 new openings is a 1.5% change.
On an absolute basis, a 1.5% change isn't that different from 5%. But on a relative level, Cava is expanding three times more quickly. And that's likely to lead to rapid top-line growth.
In fact, year over year, Cava's second quarter of 2024 revenues rose a huge 35%. As long as it keeps opening new locations at a rapid pace, top line growth should continue to impress.
3. Cava's core is performing well
There's one problem here that investors need to be careful with. Very often, hot new food concepts focus so much effort on opening new locations that they neglect old locations. The revenue from the new locations can hide this problem for a long time, which is why investors need to keep a close watch on same-store sales. This metric measures how well existing locations are performing.
Cava's same-store sales in the second quarter were a very strong 14.4%. That beat even Chipotle, which had same-store sales of 11.1%. Both numbers are incredibly strong in an industry where most competitors would be happy with a low-single-digit increase.
To be fair, it is unlikely that Cava or Chipotle can maintain same-store growth at such lofty levels for very long. But as long as Cava can keep this figure slightly positive while opening so many new stores, the future is likely to be very bright.
Cava is for aggressive growth investors
Chipotle Mexican Grill is well along in its journey as a company, and Cava is basically just starting. Given the similar business models, investors are comparing Cava to Chipotle and thinking that there is a big future ahead of the now-small Mediterranean food concept. If it can continue to open lots of new stores while operating its existing locations at a high level, that will likely end up being true.
That said, given the lofty valuation of the stock, Cava is really most appropriate for those with an aggressive growth investing mindset.
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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.
