Predicting the future position of Cavavinestock in the next five years.
Cava Brand Group (CAVA gaining 1.15%) could end up being the biggest shocker in the dining industry in many years.
This company has managed to carve out a niche for itself as a Mediterranean spin-off of Chipotle, incorporating a fast-casual concept, bowls, pita sandwiches that are akin to burritos, and a minimalist industrial aesthetic. The results have surpassed expectations, and CAVA's stock has nearly tripled since its IPO in 2023, thanks to its impressive growth in virtually every quarter after going public. In its latest update, for Q3 2024, CAVA reported a 18.1% surge in same-store sales, leading to a 39% boost in overall revenue to $241.5 million.
Cava's expansion continues apace, with 11 new brick-and-mortar locations in Q3, bringing their total to 352 establishments. Furthermore, their bottom line also saw a significant uptick, with adjusted EBITDA climbing 69% to $33.5 million, and GAAP net income jumping 165% to $18 million, or $0.15 per share.
The business is certainly on fire, but can it maintain this momentum over the next five years? Let's take a closer look at what lies ahead for Cava.
Cava's Future Prospects
Thus far, Cava hasn't released any predictions for the next year. However, based on existing data, we can make a educated guess about its future trajectory.
They are on track to open 56-58 locations by year's end, bringing the total to 365-367 locations. Over the next five years, it's reasonable to assume that Cava will ramp up its brick-and-mortar expansion and add a similar number of restaurants annually. As fast-casual chains like Cava tend to accelerate as they grow, they had previously targeted opening more than 1,000 CAVA restaurants in the U.S. by 2032 in their prospectus. However, their current growth pace suggests they'll likely surpass that number.
By comparison, Chipotle has over 3,500 restaurants and aims to have at least 7,000 locations in the U.S. by the end of the decade. Given CAVA's current performance, achieving this level of growth – or even surpassing it – isn't unrealistic. CAVA currently has Q3 AUV of $2.8 million, which rivals Chipotle's $3.2 million. Moreover, CAVA boasted a restaurant-level profit margin of 25.6% in Q3, slightly exceeding Chipotle's 25.5%.
In essence, CAVA seems poised to replicate Chipotle's bottom-line profits as it grows, provided the concept's popularity continues. Chipotle has averaged an 18% operating margin over the past four quarters, an impressive figure for any restaurant business.
Cava in 2029
Predicting a company's future is a challenging task, especially for one as young and dynamic as CAVA.
However, if CAVA continues along this path, a few scenarios can be inferred. If they manage to average 73 new locations per year for the next five years, their store count will double to around 730.
The company might also sustain its same-store sales growth at around 8% per year over the next five years, which would be reasonable given their recent performance and a potential slowdown in comp-sales growth.
Assuming an AUV of $3.5 million with same-store sales growth, CAVA could generate $2.56 billion in revenue by 2029, a 166% increase over five years, or an annual compound growth rate of roughly 22%. If their operating margin rises from the current 5% to 10% over this period, they'd see an operating income of $256 million. At present, they earn more on interest than taxes, so operating income can serve as a proxy for net income. A net income of $256 million would translate to approximately $2.17 in EPS, leading to a P/E ratio of 58, similar to Chipotle's current level.
Cava's future earnings potential could be even greater if they exceed these projections or continue to attract a premium valuation from investors. However, their current valuation may curb any additional gains.
If you're interested in investing, patience could prove rewarding, as waiting for a smaller entry point might be the preferred strategy here.
Given Cava's ambitious expansion plans, they might need to secure significant investments in finance to fund their growth. With a potential increase in revenue and operating income, CAVA could attract more investors interested in the finance sector, seeing it as an opportunity for profitable returns from their investing activities.
As Cava continues to expand its footprint and surpass competitors like Chipotle in terms of AUV and restaurant-level profit margin, their financial performance could make them an attractive option for investors seeking opportunities in the fast-casual dining sector.
