Yahoo Finance Cava turns profitable, justifies high valuation with big quarter for sales
After its first earnings report since its IPO, investors ate up Cava stock after hours as same-store sales jumped 18.2% in the second quarter.
Wall Street got its first taste of Cava's (CAVA) future earnings potential.
In its first quarterly report since its much-hyped IPO, the Mediterranean fast-casual restaurant chain turned profitable, with revenue jumping 62.4% year over year and same-store sales moving higher, up 18.2%, in its Q2 earnings results.
Cava shares (CAVA) popped more than 11% in pre-market trading on Wednesday.
Profitability is a key focus, given the restaurant chain's strong second quarter margins may not last.
Last quarter, the company posted a net income of $6.5 million. In all of fiscal year 2021, the company posted a net loss of $37.4 million, which widened in 2022 to a net loss of $59 million.
"As it relates to profitability, our new restaurants are exceeding our expectations," Cava CFO Tricia Tolivar said on the earnings call. "Our second quarter profitability demonstrates the power of our business model, but given our current stage of rapid growth, we do not expect to maintain this level of profit margin in the near term."
The Earnings Rundown
Net sales: $172.9 million, up 27% year over year
Diluted EPS: $0.21
Same-store sales: 18.2% increase
Net income: $6.5 million
Average Unit Volume: $2.6 million
Following its IPO, Cava stock closed at $43.30, valuing the restaurant chain at roughly $4.8 billion — almost twice what the company priced its valuation the night before at $22 per share (for a total valuation of $2.5 billion).
The IPO was widely seen as a bellwether for other startups eyeing the public market.
"While we anticipated a consumer slowdown this year, the resilience of our guests and likely increased brand awareness from our IPO delivered strong traffic growth in Q2," Cava CFO Tricia Tolivar said on the earnings call. "We continue to see positive traffic trends into Q3."
In mid-July, analysts initiated coverage on the stock with high hopes about its long-term potential and some drawing comparisons to rival Chipotle (CMG).
In Q2, Cava saw same-store sales grow 18.2% year over year, topping Chipotle's 7.4% same-store sales growth in the second quarter. Sales were boosted by a 10% increase in guest traffic and higher menu prices and product mix, up 7.9%.
What Else We're Watching: New Restaurant Openings
Cava said in its S-1 filing that it plans to use the proceeds to open new restaurants and for general corporate purposes.
Already, the fast-casual chain seems to be putting some of that cash to use, adding 16 net new restaurants in the quarter. As of the end of Q2, there are now 279 Cava restaurants.
The chain opened its first fast-casual concept back in 2011. Since it acquired the Mediterranean fast-casual chain Zoes Kitchen for $300 million back in August 2018, it has successfully converted 145 Zoes Kitchen locations into the Cava brand.
In 2023, the company plans to open 65 to 70 total locations. By 2032, the company said it plans to operate 1,000 locations in the US.
What Executives Said on the Earnings Call
Despite the earnings surprise for the quarter, Cava execs highlighted potential weakness for the rest of 2023.
The chain, known for its crazy feta and harissa dipping sauces, is taking a "very cautious approach," CFO Tolivar said on the call with investors about how the team is thinking about this "uncertain macroeconomic environment" that may come in Q3 and Q4.
Cava expects same-store sales to grow between 13% and 15% for the full fiscal year. It also expects a profit margin of at least 23%.
Economic headwinds from gas prices to student loan repayments resuming may be picking up as the IPO spotlight fades.
"There was "an application of brand awareness that we wouldn't necessarily expect as we go into the back half of the year, and then even more so is really being mindful of potential headwinds with consumers around gas pricing or other options," Tolivar said.
"From a macro perspective ... we're mindful of a lot of pressures facing our guests outside of their Cava experience, whether it's gas prices, ... some of the utility bill cost pressures related to extreme heat, ... student loan repayment hanging in the wings this fall," Cava CEO Brett Schulman added. "You have a hawkish Fed that has also signaled that they're looking to temper growth to ensure they tamp out any potential inflation reigniting."
Wall Street Hot Takes
"We believe CAVA warrants a premium valuation because of its average unit volume and unit count growth opportunity and the potential for operating momentum to cause upward revisions to near-term estimates and long-term earnings potential." Stifel, Chris O'Cull
"In its first quarter since joining the public markets, CAVA came out of the gates with the hallmarks of a successful early-stage growth concept: (1) a strong top and bottom-line beat vs. expectations along with a guidance raise, (2) data building confidence that new unit growth will persist in-line with expectations (e.g., new market expansion, progression of the academy GM training program), (3) comp drivers are resonating with consumers (see traffic/check upside) and (4) that the brand’s upfront investments in technology (e.g., microservices, unified ecommerce site, app refresh) came without compromising NT SSS/cash flows/balance sheet. We believe the comp outlook mixes in a healthy dose of conservatism, but with shares trading at 68x our 2024E EBITDA, should some of management’s concerns on 2H come to fruition, the stock leaves little room for a fundamental hiccup." Citi, Jon Tower
"Company is executing well on core drivers against its attractive LT algorithm (upside in opening AUVs & margins) which in the context of a largely conservative 2H view could set up for potential upside near term. We take our ests modestly higher, and also maintain some level of conservatism." Jefferies, Andy Barish
"While we would not call for valuation expansion, we expect rapid growth and likely upward earnings revisions will outpace eventual downward valuation pressure. Longer term, we see the potential for CAVA to generate more than $2.5 billion in revenue and roughly $400 million of adjusted EBITDA by 2032 at roughly 1,000 locations." William Blair, Sharon Zackfia
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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