Shares of Cava Group (CAVA) have experienced significant growth, increasing by 300% over the past year. This Mediterranean restaurant chain has emerged as a strong performer in the stock market since its initial public offering (IPO). The company has gained popularity among investors due to its robust traffic growth and potential for expanding its presence across the United States. However, Cava Group is currently valued at $14 billion, with sales under $1 billion, raising questions about its future stock performance.
Cava Group, likened to Chipotle but specializing in Mediterranean cuisine, has successfully expanded to 341 locations across the U.S. The founders aimed to replicate Chipotle’s model with Mediterranean food, which has resonated well with consumers. In the last quarter, the company experienced a year-over-year unit growth of over 20%, with plans to open approximately 55 new locations in 2024.
The chain has seen encouraging growth in both customer traffic and same-store sales, with a 9.5% increase in traffic per restaurant and a 14.4% increase in same-store sales last quarter. Cava’s restaurant-level profit margins are currently at 26.5%. Once the company reduces its aggressive growth strategy, it could achieve consolidated profit margins of 10% to 15%, compared to its current operating margin slightly above 5%.
Cava Group’s growth projections suggest a path similar to Chipotle, with aspirations to expand to at least 1,000 U.S. locations. The chain plans to add 55 locations this year and aims for an average of 75 new locations annually over the next five years. If these goals are met, Cava could more than double its location count to 716 in five years. With current annual per-unit revenue of $2.7 million, the company expects this to increase to $3.5 million, potentially leading to $2.5 billion in revenue and $250 million in earnings in five years.
Despite its recent 300% stock price surge, Cava Group’s current market cap of $14 billion equates to roughly 17 times its trailing sales. In five years, the company is projected to have a price-to-earnings (P/E) ratio of 56 if earnings estimates hold, which is considered high on a trailing basis. While Cava Group operates a strong business, the stock’s current valuation raises concerns about its future performance. Potential investors may want to consider the possibility of the stock price declining or stabilizing over the next five years unless the valuation becomes more favorable.