Could CAVA Group be the Chipotle of Mediterranean food?

Mediterranean fast-casual restaurant operator CAVA Group Inc. NYSE: CAVA is often compared to Chipotle Mexican Grill Inc. (NYSE: CMG), as customers get to personalize and build their food bowls. They point out and pick which vegetables, proteins, and sauces they prefer for their bowls as they run through the assembly line of hands, constructing the final product ready for payment and consumption.

Rather than Mexican food, this same dynamic is used with Mediterranean food and is arguably healthier as a result. The formula has been very successful, as evidenced by its impressive 49.5% YoY growth. CAVA is a member of the consumer discretionary sector. 

The age of personalization

Just as Uber Technologies Inc. NYSE: UBER ushered in the age of the gig platform, the popularity of build-it-yourself food assembly line-styled restaurants has surged thanks in part to Chipotle. Today, there are build-your-own-pizza chains like MOD Pizza or build-your-salad restaurants like CHOPT and Sweetgreen Inc. NYSE: SG. Consumers can also choose build-your-own pasta chains like Noodles & Co. And chains like QDOBA Mexican, Roti Mediterranean and Seoul Spice Korean foods provide different options depending on the cuisine you crave. This is the age of personalization.

CAVA is one-tenth the size of Chipotle in terms of its retail footprint. The company has 300 locations compared to 3,000 locations heading into 2024. However, this could also be considered an earlier opportunity as there is much room to grow with only 290 restaurants located in just 17 states with an annual unit volume (AUV) of $2.3 million, compared to $7.8 million AUV for Chipotle.

IPO and lockup periods

CAVA went public through an IPO priced at $22 on June 15, 2023, peaking at $47.89 and closing at $47.00. Shares have since peaked at $58.10 on August 2, 2023, and fell to a low of $29.05 on October 4, 2023. Lockup periods are when insiders and beneficial owners are free to sell some of their stock in the open market.

These stocks tend to sell off ahead of lockup expiration under fears of a larger sell-off to come, but often, lockup expirations tend to put a bottom in on the underlying stock. CAVA's first lockup expiration was on December 12, 2023. CAVA shares fell to a low of $31.47 the day before the lockup. However, on the actual lockup expiration day, CAVA shares spiked 19.64%, rising $6.38 to $38.87, and haven't looked back since.

Solid Q3 2023 earnings beat

CAVA reported Q3 2023 EPS of 6 cents, beating analyst estimates by 7 cents. Revenues grew 49.5% YoY to $173.8 million, beating the $171.49 million consensus analyst estimates. Same restaurant sales (SRS) grew 14.1% YoY. Restaurant-level profit margins rose 25.1% to $43.6 million restaurant level profits. CAVA opened 11 new restaurants, bringing the total to 290 by the end of the quarter.

Raised forecasts

CAVA raised forecasts for 2024. The company expects to open 70 to 73 restaurants in 2024, up from earlier estimates of 65 to 70 restaurants. It expects full-year 2024 comps to grow 15% to 16%, up from 13% to 15%. It bumped up its restaurant-level profit margins by 100 bps to at least 24%. Pre-opening costs were also bumped up by $1 million, averaging $14.5 million to $15.5 million. Adjusted EBITDA was raised from $70 million to $73 million, up from $62 million to $67 million in previous estimates.

CEO Insights

CAVA CEO Brett Schulman noted the company opened 12 new restaurants in the fourth quarter of 2023, putting them on track to open 70 to 73 net new restaurants in 2024. CAVA is investing in its people through its Academy GM network to support the pipeline as a farm system for future leaders. They planned to place 75% of new restaurant general managers (GMs) internally in 2023. They have 45 Academy GMs at the end of Q3 and plan to have 50 by the end of 2023. The company created its three-day CAVA Connect conference that brings all its GMs together for training, education and celebration.

Vertical integration

They have also invested in a vertically integrated production model producing its in-house dips and spreads, which are also being sold in grocery stores. Schulman commented, "Our new facility in Verona, Virginia, which further builds out these capabilities, is on pace to commence operations in Q1 2024. The envelope is complete, the management team has been hired, and equipment is being delivered and set in place. Verona, along with our current 30,000 square foot facility in Laurel, Maryland, we will be able to support at least 750 restaurants as well as our CPG business."

Analyst upgrades

Heading into 2024, Baird maintained CAVA as a top pick in 2024, raising its price target to $58, up from $48. Analyst David Tarantino also compared CAVA to Chipotle, stating that they share " many of the same attributes," including a straightforward operating model capable of generating much higher unit levels as the brand continues to grow. On December 12, 2023, TD Cowen started coverage of CAVA with an Outperform rating and a $46 price target. On December 21, 2023, Wedbush upgraded CAVA to Outperform with a $48 target, up from Neutral and a $35 previous price target. 

CAVA Group analyst ratings and price targets are at MarketBeat. CAVA Group peers and competitor stocks can be found with the MarketBeat stock screener. CAVA has a 19% short interest.

Daily cup and handle breakout

The daily candlestick chart for CAVA illustrates a cup and handle pattern. The cup lip line formed at $45.93 on August 31, 2023, before falling to a low of $29.05 on October 4, 2023. The daily market structure low (MSL) triggered a breakout at $32.68 upon squeezing on the lockup expiration as shares staged a rally to shy off the cup lip line. The handle formed after bouncing off the $39.05 pullback, sending shares up to the $45.93 lip line for a breakout attempt. The daily relative strength index (RSI) is rising back up to the 70-band. Pullback support levels are at $43.37, $40.61, $37.26 and $34.88.