Cava Stock Is Up 225% Since Its IPO — And Shares Could Keep Rising

Here are two rules of business:

• When a company exceeds quarterly growth targets and raises guidance, its stock price usually goes up.
• To achieve such growth, companies must invest — by offering new products customers crave and expanding geographically.

One company following these rules is Cava, a Washington, D.C.-based Mediterranean restaurant chain. The company’s stock soared 22% to a record on August 23 in response to a boffo second-quarter earnings report, according to CNBC.

Cava — whose shares have risen 225% since its June 2023 initial public offering — has attracted a 10.5% short interest, according to the Wall Street Journal. By defying Cava naysayers, pressure to cover those short positions by buying shares could be turbocharging the stock’s rise.

Despite short sellers’ concerns about insider stock sales and Cava’s high valuation, here are three things the company is doing that could keep the stock heading north:

• Growing same-store sales faster than investors expected.
• Launching a popular new menu item.
• Raising profitability and cash flow.

Cava’s Second Quarter Performance And Prospects

On August 22, Cava reported expectations-beating second quarter growth and profitability for the second-quarter of 2024 and raised its guidance for 2024.

• Q2 2024 revenue: $233 million — up 35% and $13 million higher than London Stock Exchange Group estimates.
• Q2 2024 earnings per share: 17 cents — four cents more than LSEG estimates.
• Q2 2024 same-store sales increase: 14.4% — 6.5 percentage points faster than StreetAccount estimates.
• Fiscal year 2024 same-store sales growth estimate: a range between 8.5% and 9.5% — 2.5 percentage points faster than the company’s previous estimates, CNBC reported.
• Fiscal year 2024 estimated restaurant openings: a range between 54 and 57 —the midpoint of which is about three more than the company’s previous estimate, according to CNBC.
• Fiscal year 2024 estimated earnings before interest taxes and depreciation: a range between $109 million and $114 million — $9 million more than Cava’s previous projection, CNBC noted.
• Fiscal year 2024 estimated restaurant-level profit margin: a range between 24.2% to 24.7% — the midpoint of which is higher than Cava’s May estimate of 24%, according to Investor’s Business Daily.

A new menu choice and new locations contributed to the growth. The chain’s grilled steak option kept customers coming to its restaurants during the quarter, Cava CEO and Cofounder Bret Schulman told investors. Cava opened 18 net new locations in the second quarter — bringing the chain’s total to 341 restaurants, CNBC reported.

Cava modeled itself after Chipotle Mexican Grill. Founded in 2006, Cava has a “build-your-own Mediterranean meals” formula — positioning itself as a healthy and convenient option with new ingredients such as harissa and tahini, according to CNBC.

In 2011, Cava opened its first fast-casual location. The company took Zoës Kitchen private for $300 million in 2018 and spent the subsequent five years converting those locations to Cava restaurants, CNBC reported.

Cava stock doubled on the first day of trading in June 2023 — with optimism for the company’s future growth. “You’re seeing the inflection point in the business, and all of that robust structure we’ve invested in, the restaurant growth, starting to take hold and drive tailwinds to the business,” Schulman told CNBC in June 2023.

The Short Case Against Cava Stock

The short case against Cava stock hinges on significant insider sales of the company’s stock and the chain’s high valuation.

• Insider sales. Two major investors did most of the insider selling. Cava Chair Ron Shaich — cofounder and CEO of Au Bon Pain and Panera Bread, according to the Boston Globe — sold 13% of his Cava shares in March. Artal International sold 17% of its shares but has two members on Cava’s board and still owned 20% of the stock in March, according to GuruFocus.
• High valuation. Cava’s valuation is much higher than Chipotle’s. Cava’s normalized price/earnings ratio is about 310 — way higher than Chipotle’s 51, according to Morningstar. In May, there were concerns about Cava’s “comp growth and declining (Q1) traffic,” noted Seeking Alpha. However, Cava’s second-quarter results and forecast seem to dispel these concerns.

How Cava Defies The Short Sellers

Several analysts expect Cava to keep growing rapidly due to the success of its new menu items and its geographic expansion.

One analyst sees high growth potential for Cava and raised his price target by 22% to $110. Customer location data indicated Cava enjoyed sequential traffic improvement in the second quarter, according to Stifel. Moreover, Stifel sees Cava benefiting from an “organic flywheel effect” — as the chain’s “cravable products build on consumer awareness through unit expansion,” IBD reported.

Stifel doubled down on its bullish view in an August 23 report. “Sales benefited from stronger-than-expected uptake of the new Grilled Steak offering, growing brand awareness, and the appeal of CAVA’s unique value proposition that continues to resonate with consumers across income levels and geographies,” Stifel analyst Chris O’Cull wrote in a note featured by Dow Jones.

“We were pleased with the strength of the comp and new unit performance, with the latter outpacing the company’s underwriting targets. We believe that confirmation of new unit performance is a critical factor for the stock, as unit growth will build brand awareness and, in turn, comp sales,” added O’Cull.

Two other analysts were similarly bullish:

• Raymond James raises Cava’s EBITDA target 13% to $119 million. “Management noted a stronger than expected response to its steak launch on 6/3 which drove strong comp acceleration through the quarter,” Raymond James analyst Brian Vaccaro wrote in an August 23 note. “We expect strong comps over the next several quarters powered by 2Q steak launch and the launch of a new loyalty program in October 2024,” Vaccaro added.
• Wedbush raises Cava price target 20% to 120. The price target increase comes in the wake of “Cava’s maturation cycle of new units, attractive value proposition, growth in advertising, increased brand awareness, menu innovation like steak, growth in digital, new loyalty program, and throughput-focused operational initiatives,” according to Wedbush analyst Nick Setyan’s report, featured by Dow Jones.

Not all of Wall Street is so bullish. Of 16 analysts surveyed by FactSet, “eight have an overweight or buy rating, seven have a hold rating, and one has an underweight rating for Cava,” reported Dow Jones.

As Cava raises growth and profitability expectations, investors are likely to continue to bid up the stock as long as its growth investments enable the restaurant chain to keep beating and raising.