Cava Group’s ($CAVA) 2024-Q2 corporate earnings analysis
Key Highlights
- Company opens 18 new locations this quarter, bringing total locations to 341 (permanent closure of 1 restaurant this quarter).
- Cava increases customer traffic 9.5% in the quarter and exhibits a whopping 14.4% same store sale increase (one of, if the the best, in the industry this quarter)
- On the call, management explains this quarter’s growth driver being a new menu item in a grilled steak offering, and future growth driver being the launch of a rewards program (coming in October)
- Revenue grew 35.2% YoY to 231.4M (2023-Q2 revenue was 171.1M); Year to date revenue of 492.5M compared to last year’s 376.0M is a 31% increase
- 118.3M diluted shares outstanding as of the filing
- Company offers future guidance, raising new store openings estimates to 54–57 range; same store restaurant growth of 8.5–9.5% range; and restaurant profit margin of 24.2–24.7% range
Operating Margin Analysis
Cava includes more subcategories in their operating expense definition compared to some of the software companies I’ve analyzed in recent days. It seems as though they are breaking this into two separate categories — restaurant specific expenses, and overall company expenses.
Now I can do an analysis of both, but I personally think that is unnecessary. I understand what they are presenting here, considering the restaurants are the Company’s core business offering (Cava Group is organized as a holding company I believe, with Cava the restaurant being a “component”).
However, for this calculation I will stick again to consistency and look at overall expenses. I mentioned this in a previous article, but I want to stay consistent throughout these analyses as much as possible so that I have a common comparison each quarter of the leaders of each category.
Ok… onto the analysis.
We can see the following line item expense growth YoY being:
- Restaurant OpEx growth of 30.3% YoY
- G&A OpEx growth of 18.7% YoY
- Pre-Opening OpEx decrease of -28.7% YoY
Leading to an overall OpEx growth of 25.4% Year over Year. At the end of last year the company had finished converting all the former “Zoe’s Kitchen” restaurant locations into Cavas. (Zoe’s Kitchen was a former chain that was acquired by the holding company in 2018, and used to fuel the store growth figures of Cava once Zoe’s failed).
It makes sense then that moving forward it would seem that the cost to open new restaurants should increase for the company. So that is something to monitor, however, it seems that management is aware of this and they are looking to grow quickly but with moderation as well from listening to their conference calls.
Since Cava doesn’t have much data releases to date (they IPO’d in 2023) the charts in this article will not have enough to make conclusive decisions but we can watch how this evolves over time.
Despite that above analysis, we can see that operating margin is improving YoY thanks to growth in top line revenue expansion. I expect this to continue improving as more locations open, more awareness is brought to the chain, and more growth drivers are released.
Historical Analysis
In the simple press release figures, Cava does not include the full Cash Flow statement, which honestly I’m not a fan of that move. Thankfully at the time of this writing the full 10-Q was submitted to the SEC, but I would hope that the company starts to include this in future press releases for the benefit of investors.
As I mentioned, with the company only IPO’ing a year ago, we do not have much historical data to go off of. These figures below are only half year-to-date metrics, so I am not including their full IPO submission as those figures are accounting for the year as a whole. I will include that data in the future articles on Cava.
This data isn’t enough to make a conclusive statement, but we can see that the company is performing well in almost every category.
I would like to see EPS growth in the future, but for now with the company’s plan to rapidly expand the number of store openings, coming in flat from the previous year is a sign that management is aware of their financials. This carries over in their flat line debt to asset ratio holdings. In terms of debt, I was very impressed by this company’s understanding of not raising their debt holdings in this period of higher interest rates. They have room to expand liabilities further when those rates come back down in the future, which could lead to faster than expected growth as well.
Free cash flow growth is great, now that the company is cash flow positive on the year to year comparison. I will watch that this continues positive and even may improve in the future with the release of their rewards program.
Final Thoughts
I will mention here that Cava is in my long term portfolio of holdings. It’s a decent sized position in my portfolio, representing about 7% of holdings, but I wanted to include this as it is my clear bias that I enjoy the company.
I mentioned in the Target analysis that my wife and I began dreading going to that store to shop, when it used to have the aura of an “experience.” Well, Cava has that aura now. There are not many locations near us, with the closest being about a 35 min. drive away, but when we have the opportunity to be in the area, we are genuinely excited to eat there. The company has a significant and growing fan base, and it’s uniquely positioned as one of the only mediterranean brands in this Fast Casual category.
With all that aside, the company’s stock price has seen a significant explosion in price this year. At these levels, I’m personally not buying any more, as I’m watching my current position continue to perform well. However, with this analysis, I am confident in purchasing more in the future when we hit a macro level event that drags down market prices on the whole (I do wish I bought more during the “Yen Carry Trade flash crash that wasn’t”), or if their is something that shifts in short term investor mindsets.
Here is the company’s annual price chart over time:
With these releases, I am confident in buying the company at a per share price in the $80 range. So I will continue to monitor this as we continue this year.
