In recent days, shares of the fast-casual restaurant chain Cava Group (CAVA) have been on a rollercoaster ride following their earnings report released late on Thursday, August 22nd. Cava is a restaurant chain specializing in Mediterranean-inspired cuisine, offering customizable bowls, salads, and pita wraps made with fresh, flavorful ingredients. The restaurant focuses on healthy, vibrant meals, allowing customers to personalize their dishes with a variety of proteins, toppings, and dressings. The chain has seen significant growth in recent months, as evidenced by their strong second-quarter results.
Cava reported adjusted earnings of 17 cents per share, exceeding analysts' expectations of 13 cents. Additionally, revenue surged 35% to $231.4 million, far surpassing the forecasted $219.5 million in sales. While these numbers are impressive, they also marked Cava’s first earnings decline in six quarters, indicating a slight slowdown in the company’s growth. Same-restaurant sales, a key metric for evaluating the performance of existing locations, increased by 14.4%, down from an 18.2% rise last year but still ahead of the expected 8.2% increase. The 14.4% same-store sales growth wasn’t the only driver of Cava’s strong revenue and earnings; the company also opened 18 new restaurants during the quarter and has further expansion plans.
Additionally, Cava raised its guidance for the upcoming quarter, signaling continued confidence in its growth trajectory. Harrison Miller, Investors Business Daily author, reported, “Cava lifted its guidance slightly on the results. The Mediterranean chain now sees same-restaurant sales growth ranging from 8.5% to 9.5% for 2024, from its prior outlook of 4.5% to 6.5% growth. Cava expects adjusted EBITDA to range from $109 million to $114 million. It previously guided adjusted EBITDA at $100 million to $105 million. The company expects to open 54 to 57 new restaurants, up from its prior plans for 50 to 54. Cava also sees its restaurant-level profit margin ranging from 24.2% to 24.7%. In May, Cava said it expects restaurant profit margins of 23.7% to 24.3%.”
This beat-and-raise quarter caught the attention of brokerage and investment banking firm Stifel, which expects the momentum to continue. Stifel raised its price target on Cava stock from $90 to $110 and maintained its buy rating. These developments propelled the stock nearly 20% higher on Friday, closing at a new record high of $122 per share.
This remarkable market surge caught the attention of Bloomberg Markets: The Close, which featured an interview with Cava CEO Brett Schulman to gain insights into the company’s strong performance and growth strategy. During the interview, Bloomberg host Alex Steel asked Cava CEO Brett Schulman, “Who are you guys stealing market share from?” Schulman’s response was insightful: “From the end of 2019 to the end of 2023 we raised prices about 12% during that time period, while CPI grew about 18%. The Department of Labor has noted that fast food has raised prices upwards of 30% so that's magnified our relative value proposition. What we're seeing is folks trading down from full service, trading up from traditional fast food, and even trading over from Legacy fast casual players.”
This response illustrates how Cava is attracting a broad range of customers from various demographics, contributing to the significant growth they've experienced in recent quarters. It also highlights how inflationary trends have actually benefitted Cava, as their consistent pricing stands in contrast to other restaurants that have had to raise prices. This stability has helped retain existing customers and attract new ones who view Cava as a more affordable alternative compared to chains that have increased their prices more substantially.
Another strategic focus for Cava is appealing to health-conscious consumers. Schulman highlighted this approach, saying, “Our unique, differentiated Mediterranean cuisine is another way we're resonating with guests. That unique cuisine where taste and health unite. The modern consumer, they want flavorful, satisfying food, but they want their health too.” Cava has effectively balanced attracting customers with strong, flavorful food while maintaining a focus on health. Recently, they made a strategic move by adding grilled steak to their menu, which has proven successful. This addition has drawn in new customers and encouraged existing ones to visit more frequently.
Schulman also shared some of Cava’s ambitious future goals, including their target of reaching 1,000 restaurants by 2032, which represents a compound annual growth rate of over 15%. He praised the efforts of Cava’s development and real estate teams, noting their success in building a strong pipeline and opening restaurants on schedule, and in some cases ahead of schedule. This efficiency has enabled them to surpass their projected growth rate for the current quarter. Each of these comments by thier CEO highlights Cava's expanding customer base and anticipated growth.
This raises the important question of how the company plans to retain these new customers. Scarlet Fu of Bloomberg addressed this issue to conclude the interview. Schulman responded, “We've had the same loyalty program for over a decade. We're very excited to finally be able to relaunch that program in October, and it's what we call an earn and bank points model, where you'll be able to bank up points and then redeem those points for a variety of reward redemptions, a catalog of options for different menu items.” This loyalty program closely resembles those of major chains like McDonald’s, where points are earned through spending and can be redeemed at a later date for select menu items.
The earnings beat and optimistic interview made it all the more surprising when, on Monday evening, CEO Brett Schulman and several other executives disclosed insider share selling following the significant stock spike on Friday. Ed Carson, Investors Business Daily author, wrote, “CEO Schulman sold 210,504 shares for $24.87 million, according to SEC filings released Monday night. That's just about 5.5% of his Cava stock holdings. Ted Xenohristos, Cava co-founder and chief concept officer, sold 98,490 shares for $12.387 million. CFO Patricia Tolivar sold 5,000 shares for $628,175. Board member James White sold 1,500 shares for $190,770. A trust linked to board member David Bosserman sold 5,000 shares for $627,550. Meanwhile, Cava's largest shareholder, Artal International, filed to sell 6 million shares.”
This trend can be concerning for investors, as insider stock selling by a CEO might suggest that the executive believes the stock is overvalued or that the company’s future prospects are uncertain. While this isn't always the case, it was enough to affect investor sentiment, causing the stock to drop around 8% in early trading. However, it did recover somewhat, ending Tuesday’s intraday trading down just over 5%. Although this stock decline is significant, it’s relatively minor compared to Cava’s impressive 190% year-to-date growth and monthly gains of over 43%. These substantial returns highlight the company’s strong performance and ongoing appeal to even the most savvy investors.
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