Traders have lengthy been in search of the following Chipotle Mexican Grill(NYSE:CMG) within the restaurant business, because it is likely one of the best-performing restaurant shares over the previous practically twenty years. An early funding within the inventory may have helped traders put together for all times.
One restaurateur that seems to have the potential to turn out to be the following Chipotle is the Mediterranean delicacies restaurateur. Cava Group(NYSE: CAVA). Let’s check out how the businesses are comparable and if an funding in Cava might help set you up for all times.
Cava shares quite a lot of vital traits with Chipotle. The primary considerations the meals itself. Each use a restricted variety of high-quality components that individuals can use to customise their meals to all kinds of choices. The meals are then ready in an meeting line course of.
This technique has many benefits for restaurateurs. A restricted variety of components helps enhance provide chain effectivity, permitting a restaurant to buy from a decreased variety of suppliers and finally giving it some pricing energy with of its suppliers because it grows. It could additionally create much less prep work, saving man hours. However extra importantly, it permits the meeting line course of to organize orders rapidly, rising throughput.
Collectively, all of this tends to result in robust restaurant-level margins (RLMs), that are the working revenue a restaurant produces earlier than factoring in enterprise prices. Final quarter, Cava had RLMs of 25.6%, in comparison with Chipotle’s 25.5%. Provided that Cava has much less scale (with fewer eating places and gross sales), that is fairly spectacular. In case you return to the third quarters of 2018 and 2019, which is a powerful interval for Chipotle between its foodborne sickness points and COVID, its RLMs have been 18.7% and 20.8%, so Cava may be very nicely positioned with this measurement.
Total, prospects obtain high-quality, personalised meals rapidly, which contributes to the recognition of the restaurant chain. This causes Cava to see very strongly same store sales progress, pushed by robust will increase in visitors and costs. This mixture reveals a restaurant idea that isn’t solely in style and attracts new prospects, but additionally has pricing energy.
For its fiscal third quarter, Cava’s same-store gross sales climbed 18.1% with visitors rising 12.9%. Impressively, this comes on prime of a 14.1% improve from the earlier yr, representing what is named a two-year cumulative same-store progress fee of 32.2%. It is a big determine and demonstrates the success that Cava is having fun with.
Robust gross sales of Cava on the identical eating places over the previous two years have elevated the corporate’s common unit volumes (AUV) – the typical quantity of gross sales generated by its eating places in a yr – to $2.8 million. That is not removed from the $3.2 million AUV Chipotle reported every quarter. Wanting again as soon as once more to the third quarters of 2018 and 2019 for Chipotle, its AUVs elevated from $2 million to $2.15 million, so Cava is as soon as once more wanting forward with a head begin. Even accounting for inflation, Cava’s present AUVs are increased than Chipotle’s as of Q3 2019: its inflation-adjusted AUV can be $2.65 million in at this time’s {dollars}.
Like Chipotle, Cava is discovering success by means of culinary innovation, just like the introduction of its in style grilled steak, and the introduction of limited-time choices, like its garlic pita chips. The corporate can be shifting into advertising and expertise. It launched a brand new loyalty program in October and is trying to undertake AI with its linked kitchen to enhance order accuracy and ingredient administration.
Picture supply: Getty Photographs.
Though Cava seems to have all of the components to turn out to be the following large restaurant inventory, its greatest alternative is growth. The corporate ended final quarter with simply 352 areas, in comparison with Chipotle’s 3,615. It’s at present trying to develop its restaurant base by a minimum of 17% subsequent yr and has mentioned annual unit progress of 15% previously. This offers it an extended margin of progress for future growth.
What’s vital is that the corporate is free cash flow constructive, which permits it to finance its growth tasks with out having to resort to the debt market. That is vital, as is increasing at a measured tempo into new markets. The corporate used what it calls a coastal smile growth technique and slowly moved into the Midwest.
With comparable RLMs and AUVs poised to resemble Chipotle, it is fairly straightforward to think about the corporate rising to match Chipotle’s present market cap within the subsequent 10 to fifteen years when it reaches the same variety of eating places . This might equate to a couple of 6x improve in its inventory value if the variety of shares remained the identical.
Whereas the sort of return in all probability will not put together you for all times, it is nonetheless an incredible potential return over the following decade. This makes the inventory a stable possibility to contemplate shopping for.
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Geoffrey Seiler has no place in any of the shares talked about. The Motley Idiot posts and recommends Chipotle Mexican Grill. The Motley Idiot recommends Cava Group and recommends the next choices: Quick December 2024, $54 at Chipotle Mexican Grill. The Motley Idiot has a disclosure policy.
