CAVA: Should You Invest in CAVA Group Today?

CAVA Group (NYSE: CAVA) went public via an IPO in June 2023. Its shares were priced at $22 and are currently trading at $42.44, almost doubling investor wealth. CAVA stock touched a record high of $53.5 earlier this month and is currently valued at a market cap of $4.8 billion.

Let’s see if you should invest in Cava Group right now.

Is CAVA stock a good buy today?

CAVA is a fast-casual restaurant brand that operates in the Mediterranean food category. It reported sales of $500 million in 2021 and $564 million in 2022. In the last two years, the company’s operating losses totaled around $70 million.

However, in Q2 of 2023, Cava reported revenue of $172.9 million and a net income of $6.5 million or $0.21 per share. Comparatively, analysts forecast CAVA to report revenue of $163 million and a loss of $0.02 per share in the June quarter. CAVA reported a loss of $8.2 million or $6.23 per share in the year-ago period.

Due to its earnings and revenue beat, CAVA stock surged over 12% in extending trading soon after it released Q2 results.

Net sales soared 62% year over year due to new restaurant openings. It opened 16 new Cava restaurants in Q2, bringing the total to 279 outlets. The company’s same-store sales were up 18.2% in Q2 as customer traffic was up 10.3%, suggesting Cava is an outlier in the restaurant industry as footfalls have generally shrunk in recent months.

According to its CFO, Tricia Tolivar, the chain’s strong customer traffic trends can be attributed to increased brand awareness following its blockbuster IPO. Alternatively, Tolivar emphasized that same-store sales growth has moderated in recent weeks, suggesting customer spending has pulled back in line with broader market trends.

What impacted Cava’s results in Q2 of 2023?

To offset elevated inflation levels, Cava increased menu prices by 8% year over year. Cava also stated it has no plans to raise prices in the near future. Around 33% of its sales in Q2 originated from digital orders, which further boosted profit margins.

The rise in customer footfall allowed Cava to report robust restaurant-level profitability. In Q2, this metric improved to 26.1%, up from 25.4% in Q1.

Restaurants have certain fixed expenses, such as rent, utilities, and employee wages which need to be paid each month. In case the restaurant is busy, it benefits from higher operating leverage, further boosting the bottom line.

This is what happened to Cava in Q2. While sales grew significantly, Cava reported record profits in the quarter.

What next for Cava stock price and investors?

Cava expects same-store sales to grow between 13% and 15% in 2023, which means this metric will decelerate in the second half of this year. Analysts expect Cava sales to surge to $720 million in 2023 and to $843 million in 2024.

So, Cava stock is priced at 6.7 times forward sales, which is not too steep for a growth stock with widening profit margins.

But Cava remains vulnerable to rising interest rates, gas prices, and other broader economic pressures resulting in a cautious sales forecast.

The company plans to open between 65 to 70 new locations in 2023 and forecasts adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) between $62 million and $67 million this year.

Analysts remain bullish on CAVA stock and expect it to gain 20% in the next 12 months.

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