CAVA Group Stock: Attractive Despite High Valuation (NYSE:CAVA)

Following its IPO in June, CAVA Group’s (NYSE:CAVA) share costs have soared virtually 90% above the preliminary providing worth of $22, and I consider there’s nonetheless room for additional progress. CAVA demonstrates sturdy unit economics alongside its speedy enlargement. The corporate’s framework and operational experience underpin assured enlargement into new and present markets.

CAVA is primed to profit from shifting shopper tendencies favoring well being, wellness, and ethnic range and an elevated give attention to high quality and comfort. CAVA’s well-crafted working platform and broad shopper attraction place it to progress from its 263 places right into a nationwide model of high-ROI, company-operated eating places.

Firm Overview

CAVA, a fast-casual Mediterranean restaurant chain, has distinguished itself within the meals business by way of its “Countless Customization” technique, providing clients an intensive collection of 38 elements, leading to over 17 billion combos. CAVA’s meeting line system permits clients to select from numerous combos, offering a balanced mix of healthful and indulgent choices catering to a various shopper base.

As of April 2023, CAVA’s footprint spans 263 items unfold throughout 22 states and Washington, D.C., with essentially the most materials presence within the south and suburban places. Notably, the model primarily attracts higher-income clients, with about 60% of its clients from the $100k+ revenue bracket. Its consumer base is evenly distributed throughout genders and age teams. CAVA’s clients present no particular desire for both mealtime, with a near-equal distribution between those that order lunch (55%) and people who go for dinner (45%).

The model operates underneath a multi-channel framework, incorporating In-Restaurant Eating, Digital Pickup, Drive-Through Pickup, Supply, Catering, and Shopper Packaged Items (CPG). With 35% of its 2022 gross sales generated from off-premise eating choices (supply and pickup), CAVA caters successfully to a multi-channel market, balancing its service between in-store and distant buyer experiences.

In 2018, CAVA acquired Zoe’s Kitchen, which enabled them to shortly enter new markets and strengthen their presence in present ones by reworking Zoe’s Kitchen shops into CAVA eating places. This strategic shift has propelled CAVA’s progress, heightened model visibility, and facilitated economies of scale. From the acquisition to 2022, CAVA has efficiently transitioned 125 Zoe’s Kitchen places into CAVA-branded institutions.

CAVA model merchandise, akin to its proprietary dips and spreads, are bought domestically in over 650 grocery shops, with about 50% of these in Complete Meals. Moreover, CAVA is exploring new methods, akin to digital and hybrid kitchen codecs, to cater to evolving market calls for. The corporate anticipates having 34 to 44 new restaurant openings within the the rest of the fiscal 12 months 2023.

Key Efficiency Metrics

Key efficiency indicators akin to common unit volumes (AUV) and restaurant-level revenue margins sign a strong progress technique for CAVA. The corporate constantly exceeds $2.0m in AUV and operates eating places with a 22% restaurant-level revenue margin.

CAVA’s progress technique consists of enhancing AUV and restaurant-level revenue margins as model consciousness rises. Components impacting AUV embody visitor visitors, menu costs, and product combine. The corporate makes use of day by day gross sales knowledge, common visitors, and product combine evaluation to information pricing, meals choices, and promotions.

Digital orderings are pivotal to CAVA’s success, with about 35% of orders being digital and 80% being custom-made throughout 2022. On account of extra pricing, digital orders generate 27% greater income than in-restaurant orders. CAVA noticed a 63% enhance in customers on its app. Throughout the first half of 2022, it turned the third fastest-growing quick-service restaurant app by way of month-to-month energetic customers. Moreover, CAVA has a powerful loyalty program, with 3.7 million members contributing 25% of Q1 2023 gross sales and rising 56% 12 months over 12 months.

Dangers

Investing in CAVA Group additionally comes with sure dangers. The corporate’s progress technique closely depends on enhancing its present ~35% digital combine and boosting the drive-thru pickup format. If these channels fail to carry out as anticipated, the corporate’s AUV)and margin targets could also be jeopardized, doubtlessly impacting inventory efficiency.

The pricing of CAVA’s choices, which presently command a 15-20%+ premium over related choices from rivals like Chipotle, possibly a priority as the corporate transitions from a multi-regional to a nationwide model. As CAVA’s buyer base normalizes to incorporate mid-higher revenue brackets over time, the upper pricing may restrict its competitiveness and impede transaction and frequency progress.

CAVA’s progress targets contain a >15% annual enhance in new retailer openings. Following the acquisition of Zoe’s Kitchen, conversions have accelerated growth, accounting for >75% of openings from 2019 by way of Q1 2023. As CAVA completes these conversions in 2H23, sustaining this tempo of growth can be essential to reaching its goal of 1,000 items by 2032. Any decline in new unit volumes or detrimental shifts in comps may obscure future growth visibility, resulting in inventory underperformance, provided that the corporate’s valuation largely hinges on delivering promised progress.

Ultimate Ideas

CAVA presently trades at 8.64x Ahead Income and 122.98x Ahead EBITDA multiples, which is dear in comparison with its peer median of two.72x and 18.50x ahead income and EBITDA, respectively. And when in comparison with a peer with a observe report of success, like Chipotle (CMG), which trades at 6.03x Ahead Income and 30.53x Ahead EBITDA, CAVA’s multiples seem much more elevated. This implies that the market is pricing significantly greater progress expectations for CAVA.

Regardless of the comparatively greater valuation metrics, CAVA’s distinctive place as a quickly increasing, high-growth participant within the fast-casual eating phase offers a promising funding case. The corporate’s modern enterprise mannequin, specializing in digital progress, distinctive ‘infinite customization’ meals choices, and increasing market presence, signifies a stable basis for future progress.

Traders with greater threat tolerance and a long-term view may see a possibility in CAVA’s formidable progress technique and powerful operational metrics. The market’s present valuation means that it acknowledges and is keen to pay for CAVA’s potential to scale right into a nationwide model and create a brand new market phase within the fast-casual eating sector. Subsequently, regardless of a seemingly wealthy valuation right this moment, CAVA presents an optimistic funding case for forward-looking buyers banking on the corporate’s progress narrative and the evolution of shopper eating tendencies.