The hype surrounding Cava Group (NYSE: CAVA) is fading. The stock initially soared over the last few months but is now down 4% since going public back in June. Although the fast-casual restaurant chain posted a strong earnings report in August that showed a profitable bottom line, investors appear to be wary about the company’s future.
For one thing, Cava is projecting that its growth will decline, and that could make it difficult for it to stay out of the red. What does that all mean for investors? Let’s take a look.
Same-restaurant revenue growth may soon crash
One of the things that has excited investors about Cava is its impressive same-restaurant (or comps) revenue growth. That’s a key metric for restaurants because it tells investors whether the company is truly growing organically or whether it is just benefiting from opening more locations.
In Cava’s case, it’s been doing both, opening more restaurants as its existing locations also generate impressive year-over-year growth. In the second quarter, which ended July 9, Cava’s comps growth was 18.2%. That was down from 28.4% in the previous period, but it’s still impressive given that many fast-food and restaurant chains would be thrilled with any kind of double-digit growth.
But what concerns investors is that for the full year, the company is projecting comps growth to land between 13% and 15%. Given that this is well below the growth it has achieved through the first two quarters of the year, that suggests a steep slowdown in growth toward the back half of the year.
On the company’s earnings call, Tricia Tolivar, Cava’s chief financial officer, said that in the last quarter “there was an amplification of our brand awareness in the second quarter that we wouldn’t necessarily expect as we go into the back half of the year,” and that the company was taking a “very cautious approach” with its guidance.
Cava appears to believe it benefited from more popularity due to its recent public offering, suggesting that this boost might not be sustainable as the year goes on.
If growth slows, staying profitable could be challenging
In the second quarter, Cava reported a profit of $6.5 million on revenue of $172.9 million, for a margin of just 3.8%. On a year-to-date basis, however, the profit margin is worse: just 1.2%. The company’s tight operations don’t leave a lot of room for error. And with Cava scaling up now that it’s a public company and incurring more overhead and expenses, turning a profit could be a challenge if its growth can’t remain at a reasonably high rate.
Through the first half of 2023, revenue grew 27% to just under $376 million. Cava’s operating expenses rose by just 15% to $372.5 million. If that trend changes and the revenue growth can’t stay far ahead of rising expenses, the bottom line could soon be back in the red just as it was this time last year.
The chart below shows the company’s main operating expenses as a percentage of revenue during the first half. Operating expenses and general and administrative costs accounted for 88% of Cava’s sales.
Why Cava stock is a risky buy right now
The honeymoon period for this new food stock already looks to be over. Investors are becoming more cautious of Cava, and with challenging economic conditions potentially weighing on its growth rate, it might be difficult to remain bullish on the stock. Investors are better off taking a wait-and-see approach with the stock to know just how low its growth rate gets now that the dust has settled from its offering.
Cava had a good second quarter, but the company still has a lot more to prove before it can make for a convincing buy.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.