Shares of Cava Group (NYSE: CAVA) are buying and selling palms with a price-to-earnings ratio of practically 300. That is an necessary quantity to remember as traders assess the long run. If shares of this up-and-coming restaurant chain are going to set you up for all times, they should stay as much as some very excessive expectations. The large query is whether or not or not it may possibly try this proper now.
What does Cava Group do?
The thrill round Cava includes the success that has already been achieved at Chipotle Mexican Grill (NYSE: CMG). The rationale for that is that each restaurants use the identical fundamental meals idea — solely that one, Chipotle, is targeted on Mexican fare and the opposite, Cava, makes Mediterranean-themed meals. The shared idea is that every one cooks the meals being served in an open kitchen after which has an meeting line model serving system.
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Picture supply: Getty Photographs.
There’s a lot to love in regards to the shared mannequin. Though there’s a pretty restricted menu of things, the flexibility of shoppers to choose and select what they need results in very exact customization. And for the reason that meals is ready in entrance of shoppers, there’s a sense of freshness about every order. Prospects clearly discover this interesting, noting that, even after properly greater than a decade as a public firm (Chipotle went public in early 2006), the restaurant was in a position to put up same-store gross sales development of 6% within the third quarter of 2024.
Identical-store gross sales give a take a look at how restaurant places which have been open for greater than a 12 months are performing. Within the restaurant trade, low single digits is taken into account a stable consequence. Hitting 6% is fairly darn good execution for an older meals idea. Cava, for reference, had same-store sales of 18.1% within the third quarter of 2024. That is not more likely to be sustainable, but it surely does clearly spotlight the thrill across the Cava idea proper now.
New places are the important thing
A part of the rationale for this pleasure amongst shoppers is probably going associated to shortage. On the finish of the third quarter of 2024 Cava solely operated 352 places. Chipotle operates over 3,600. That is greater than 10 occasions as many places as Cava. And that is why traders are so enthusiastic about Cava.
Cava estimates that it’ll have opened as many as 58 new places in fiscal 2024. If you happen to spherical that as much as 60 for ease of math, it could take one thing like half a century for Cava to open as many places as Chipotle. That is not a sensible estimate, on condition that the bigger Cava will get the extra new places it’s going to seemingly open. Nevertheless, it will get the concept throughout that there is plenty of development potential if, and it is a massive if, Cava is the brand new Chipotle.
That is the dynamic to which traders want to concentrate: Can Cava preserve opening new places at a fast clip whereas sustaining the thrill round its meals idea? If it does not handle the feat, the lofty P/E ratio will seemingly have to return down the arduous method (a drop within the inventory value). If it may possibly preserve the thrill, the corporate will develop into the P/E ratio (which means that earnings will improve and convey the P/E ratio down).
Solely time will inform, however the early indications are very optimistic given the excessive same-store gross sales development at Cava.
Possibly have a security internet
No meals idea stays as scorching as Cava’s is true now perpetually. Finally, it’s going to saturate the market and turn into only a regular model that buyers count on to see. That is mainly what occurred to Chipotle because it grew. Nevertheless, Chipotle has remained a fast-growing firm as a result of shoppers seem to love the idea sufficient to maintain going again many times.
Cava might set you up for all times if it may possibly pull off that very same tightrope act. If it does not, properly, shareholders might undergo materials losses given the inventory’s lofty valuation at the moment.
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Reuben Gregg Brewer has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Chipotle Mexican Grill. The Motley Idiot recommends Cava Group and recommends the next choices: brief March 2025 $58 calls on Chipotle Mexican Grill. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.
