CAVA: The Next Chipotle?

A natural place to start an analysis of CAVA CAVA is with the current state of the business: how does the company's financial performance compare to a best-in-class operator when they were at a similar size - for example, Chipotle CMG in the early 2000’s? Let’s use 2003, a year where Chipotle finished with 298 stores, as a point of comparison (CAVA 2023e is to end with ~300 units). In that year, Chipotle generated $316 million in revenues, with AUV’s for stores open 12+ months of ~$1.3 million. The company spent $268 million on restaurant-level expenses, including its food, beverage, and packaging costs, labor costs, occupancy, utilities, etc.; those expenses amounted to ~85% of Chipotle’s revenues in 2003, leaving restaurant-level operating margins of ~15%. The 2022 results at CAVA, including the remaining Zoes units that haven’t been closed / converted, were in the same ballpark (restaurant-level EBIT margins of ~16% for the year). If we exclude Zoes and look solely at CAVA branded units, restaurant-level EBIT margins were ~20%, or ~500 basis points higher than Chipotle in 2003... The main takeaway is that the unit economics at the CAVA-bannered locations have been attractive (at a minimum, comparable to Chipotle’s results in the early-2000’s). In addition, I think we have clear line of sight for a significant improvement in operating efficiency over time on the below the line expenses. Given that management believes there is a path to more than 1,000 locations nationwide over the next decade, I think you can appreciate why Mr. Market is willing to put a seemingly high price on the equity. While the likelihood of this outcome is uncertain, there’s no question in my mind that there’s a scenario where today’s valuation ultimately proves reasonable, or even attractive (as was the case for Chipotle after its own gangbuster IPO).

Read the complete CAVA deep dive at the TSOH Investment Research Service: https://thescienceofhitting.com/p/cava-the-next-chipotle