CAVA Group: A Monster Stock (NYSE:CAVA)

peepo/E+ via Getty Images CAVA Group, Inc. (NYSE:CAVA) is taking the investing world by storm. The stock has been a complete monster. Shorts are getting squeezed today. And here is the thing. While the valuation here is obscene, the momentum is strong. While we are likely to see some give back in shares, the fact of the matter is that there is a massive runway for growth here still. Not only is traffic up markedly, and comparable sales are shining, there are only about 350 stores. In short, it is still very early in the story. For our members and followers who are unfamiliar, CAVA is a Mediterranean fast-casual restaurant brand. The company is benefitting from consumer demand for healthy living and consumption of diverse foods. The stock is surging even further today following the just-reported Q2 earnings which dazzled. Let us discuss. Data by YCharts This year-to-date chart speaks volumes, but the past few weeks have seen a surge and a short-squeeze. We do reiterate that we think there will be a breather in coming weeks, so new money should wait for entry. Chasing it here is tough, even though there is a great long-term path for growth. CAVA reports dazzling comparable sales The quarter that was just reported was strong. Revenue was $231.4 million, an increase of 35.2% compared with Q2 2023. Now, the bulk of this increase resulted from the addition of 78 Net new CAVA restaurant openings during or after Q2 2023. Management noted that the new stores have been exceeding performance expectations. Now, while new store openings are fueling revenue growth, existing stores are enjoying massive growth as well. The most critical indicator we look for in restaurants is the same-store sale print. Folks, this company is seeing massive comparable sales. Same-store sales growth was 14.4% compared to last year. While prices and mix impacted this, traffic is so strong. There was a 9.5% increase in guest traffic and a 4.9% increase in comps from menu price and product mix. Margin expansion We love to see increasing sales and such dazzling comparable sales. What is more, with this growth in traffic and sales, we are also seeing expanding margins. CAVA’s store-level profit margin was 26.5% compared with 26.1% in a year ago, a 40 basis point improvement. Much of this increase was due to leverage from higher sales, though this was offset by higher wages as well as some rising input costs associated with the June 3rd, 2024 launch of grilled steak offerings at the restaurants. CAVA is managing expenses When you see massive surges in revenue, and new store openings, you will see spikes in general and administrative expenses. That happened with CAVA, unsurprisingly, but the good news is that despite these expenses rising they represented a smaller percentage of sales. This is bullish. General and administrative expenses were $28.3 million, or 12.1% of revenue. While the costs are up 21.5% from $23.3 million a year ago, as a percentage of revenue, the expenses last year were 13.5% of revenue. Note this does not include share-based compensation and those costs were up to $24.7 million, or 10.6% of revenue, versus $20.4 million, or 11.8% of revenue, a year ago. Earnings power So with better profit margins and lower expenses as a percentage of sales, we saw a strong expansion in earnings power. Net income was $19.7 million, or 8.5% of revenue, an increase of $13.2 million versus $6.5 million last year. On an EPS basis, we saw $0.17, a beat of $0.05 versus estimates. Adjusted EBITDA was $34.3 million an increase of $12.7 million, or 59.0% from last year. A beat and raise So CAVA, which is certainly priced for perfection, delivered a strong Q2 print. More importantly, not only was it a big beat versus expectations, we saw a guidance increase. The company has boosted its new store openings outlook from 50 to 54 this year to 54 to 57. That will lead to better than expected sales. Further, the boost to comparable sales was incredible. Previously, CAVA guided for 4.5% to 6.5% increases in comps. Now, management is guiding for 8.5% to 9.5% growth in comps. Hard to find other restaurants posting these types of comps. Profit margin at the store level was boosted to 24.5% at the midpoint from 24.0% previously, and adjusted EBITDA was upped to $109.0 to $114 million from $100.0 to $105.0 million. This is a considerable increase in the outlook. Final thoughts Kind of tough to chase the stock here, even if the growth is impressive. This is especially true when you consider many of our members have a cost basis around $40. Now we are 3X higher. We really love the store concept and the quality of the food, but the market has more than priced in the coming near and medium-term growth. We like holding shares here, but would be hesitant to open a new position at these levels. Furthermore, with CAVA Group, Inc. stock, we think it’s best to wait for a bit of a breather. If it does not come down a bit toward $100 in the upcoming months with a pending election in the US and seasonal weakness around the corner, we would be surprised. However, we are happy to hold here, and frankly, taking something off the table is wise. Buy low, sell high. In this case, with massive gains, shaving some near-term is a prudent trading strategy. Moreover, you could consider doing what we teach our members, and that is considered running a house position with your profits for a lifetime. If you would like to learn more about our trading and investing approach to build generational wealth, check out the service below.

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