Cava Group (CAVA 0.14%) has been one of the best restaurant stocks to own this year. The fast-casual Mediterranean-style restaurant chain has been winning over not just customers, but investors as well. Through expansion and new menu offerings, it has been able to continually report solid numbers, propelling its share price to new heights.
Recently, the company reported its latest earnings numbers, and one metric stood out to me. It highlights the business’s impressive growth, and it’s a great sign that the company is going in the right direction.
Cava’s same-restaurant sales came in at 18.1%
For a restaurant chain, generating single-digit comparable sales growth is a good goal, especially amid today’s economic conditions as consumers are cutting back on spending.
But you wouldn’t know the economy is facing those challenges if you looked at Cava’s numbers. That’s because for the most recent period, which ended on Oct. 6, the company reported its comparable restaurant sales growth was an impressive 18.1%. By comparison, Chipotle Mexican Grill reported comparable restaurant sales growth of 6% for its most recent quarter (ended on Sept. 30). And the numbers look even better for Cava if you compare its results to the global beast that is McDonald’s — for its September quarter, global comparable sales declined by 1.5%.
Comparable restaurant sales are a key metric for restaurants as they tell investors how well the business is doing when factoring in locations that were open a year ago. This excludes the positive impact new restaurant openings would have on the top line.
But this also works to the advantage of companies with smaller footprints such as Cava, which may target high-growth areas first and as they become larger and spread out, their growth rate may begin to gradually come down. Nonetheless, it’s a good indicator of Cava’s growth and the potential it has to continue generating strong numbers as demand looks solid.
A fast growth rate has made Cava a stellar investment to own
A big reason Cava is a hot stock to own this year is because of its growth potential. The company continually opens more stores. At the end of the most recent quarter, the company had 352 restaurants, up from 290 a year ago. Its goal is to have 1,000 locations by 2032.
Cava’s growth rate has been impressive in comparison to other restaurant chains, and with such ambitious targets ahead, that trend is likely to continue in the years ahead.
CAVA Operating Revenue (Quarterly YoY Growth) data by YCharts
Is Cava’s high valuation a problem?
As of Monday’s close, Cava’s stock was up a staggering 219% as there has been no shortage of bullishness around the business of late. While that’s great for shareholders, people who are looking at buying the stock for the first time may feel as though they’ve missed the boat.
Cava Group’s sales grew by nearly 40% last quarter to $243.8 million. Its net income rose at an even faster rate of 163%, coming in at just under $18 million. While that is impressive, it still results in a fairly modest per-share profit of just $0.16. Cava’s stock closed at $137.24 on Monday, putting its price-to-earnings multiple at more than 330. Even based on analyst projections, it’s trading at over 277 times next year’s profits. These are steep multiples and investors would be justified in thinking twice about whether the stock is a good buy at its current levels because with such high multiples, you are effectively paying for a lot of future growth.
While Cava may still be a good investment to hold for the long term, investors should also temper their expectations as it could be a bumpy ride ahead. Although this is a fast-growing company, its extremely high valuation means that there is virtually no margin of safety with the stock and it could be vulnerable to a sell-off under weaker market conditions.
David Jagielski 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.
