Investors have long been looking for the next Chipotle Mexican Grill(NYSE: CMG) in the restaurant space, as it has been one of the best-performing restaurant stocks over the past nearly two decades. An early investment in the stock could have helped investors be set for life.
One restaurant operator that looks like it may have the potential to be the next Chipotle is Mediterranean food restaurant operator Cava Group(NYSE: CAVA). Let’s look at how the companies are similar, and whether an investment in Cava can help set you up for life.
Cava shares a number of important characteristics with Chipotle. The first comes down to the food itself. Both use a limited number of high-quality ingredients that people can use to customize their meals into a wide variety of options. The meals are then made in an assembly line process.
This method has a lot of advantages for restaurant operators. A limited number of ingredients helps create supply chain efficiencies, allowing a restaurant to buy from fewer suppliers and helping eventually give it some pricing power with its suppliers as it scales up. It can also create less prep work, saving on labor hours. Most importantly, though, it allows for the assembly line process of putting orders together quickly, which speeds up throughput.
Combined, all this tends to lead to strong restaurant level margins (RLMs), which is the operating income a restaurant produces before taking corporate costs into account. Last quarter, Cava had RLMs of 25.6%, compared to 25.5% for Chipotle. Given that Cava has less scale (with a lower number of restaurants and sales), that’s quite impressive. If you go back to third-quarter 2018 and 2019, which is a strong period for Chipotle between its food-borne illness issues and COVID, its RLMs were 18.7% and 20.8%, so Cava is very well situated with this metric.
All in all, customers are getting high-quality custom meals quickly, which is helping drive the restaurant chain’s popularity. This is leading to Cava seeing very strong same-store sales growth, driven by big increases in traffic and increased prices. This combination shows a restaurant concept that is not only popular and gaining new customers, but also one with pricing power.
For its fiscal Q3, Cava’s same-store sales soared 18.1% with a 12.9% increase in traffic. Impressively, this came on top of a 14.1% increase the year before, representing what is referred to as a two-year stacked comparable-store growth rate of 32.2%. That’s a huge number and demonstrates the success that Cava is seeing.
Cava’s strong same-restaurant sales over the past two years have increased the company’s average unit volumes (AUVs) — the average amount of sales its restaurants generate in a year — to $2.8 million. That is not far from the $3.2 million AUV Chipotle reported each quarter. Looking back once again to those 2018 and 2019 Q3 periods for Chipotle, its AUVs rose from $2 million to $2.15 million, so Cava once again looks ahead of the game. Even when adjusting for inflation, Cava’s current AUVs are higher than Chipotle’s in Q3 2019 — its inflation-adjusted AUV would be $2.65 million in today’s dollars.
Like Chipotle, Cava is seeing success through culinary innovation, such as the introduction of its popular grilled steak, and the introduction of limited time offerings, such as its garlic pita chips. The company is also leaning into marketing and technology. It launched a new loyalty program in October, and it’s looking to embrace AI with its connected kitchen to improve order accuracy and ingredient management.
Image source: Getty Images.
While Cava appears to have all the ingredients to be the next big restaurant stock, its biggest opportunity is expansion. The company ended last quarter with only 352 locations, compared to 3,615 for Chipotle. It is currently looking to grow its restaurant base by at least 17% next year, and has discussed 15% yearly unit growth in the past. This gives it a long runway of future expansion growth.
Importantly, the company is free cash flow positive, which allows it to fund its expansion plans without having to tap the debt market. This is important, as is expanding at a measured pace into new markets. The company has been using what it calls a coastal smile expansion strategy and has now slowly branched into the Midwest.
With similar RLMs and with AUVs on track to be similar to Chipotle, it’s quite easy to imagine the company growing to match Chipotle’s current market cap in the next 10 to 15 years when it reaches a similar number of restaurants. That would be equal to about a 6 times increase in its stock price if the share count were to stay the same.
While that type of return isn’t likely going to set you up for life, it is still an excellent potential return over the next decade. That makes the stock a solid option to consider buying.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
