The restaurant industry is massive but highly competitive. As a result, plenty of restaurant stocks have fizzled out, but the industry has also produced some big winners. Chipotle Mexican Grill (NYSE: CMG), for example, is more than a 50-bagger from its 2006 initial public offering (IPO).
After a number of disappointments in the restaurant industry in the 2010s, investor expectations seem to have been reset, and that has set up two restaurant stocks for big potential gains. Let’s take a closer look at them.
1. Cava Group
Plenty of restaurant stocks have been dubbed the next Chipotle. Those have mostly disappointed, but Cava Group (NYSE: CAVA) actually looks like the real deal.
Cava is a fast-casual chain focused on Mediterranean food, and its menu and decor closely resemble Chipotle. It offers rolled-up pita sandwiches that look like burritos, along with bowls, and its restaurants have the same industrial minimalist aesthetic that Chipotle is known for at its locations.
But it’s not just the food that’s reminiscent of Chipotle. Cava, which went public last June, also has the numbers to match. The company saw revenue jump 52.5% to $175.5 million in the fourth quarter, driven by rapid expansion and a same-store sales jump of 11.4% in the quarter. This shows that customers are returning frequently, a promising sign for the brand.
Cava also has a strong restaurant-level profit margin, at 22.4% in Q4 and more than 24% for the full year, not far behind Chipotle. On a generally accepted accounting principles (GAAP) basis, the company is profitable, reporting a $2 million net income in Q4 as it’s spending aggressively to grow the business.
The company also has backing from one of the most successful people in fast-casual history. Ron Shaich, the founder of Panera, is currently the Chairman of Cava, and was an early investor, recognizing the opportunity the company had.
Finally, Cava shares also look reasonably valued, especially as the restaurant chain has a huge growth opportunity in front of it, finishing 2023 with 309 restaurants. The stock currently trades at a price-to-sales ratio of 5.4, a similar valuation to Chipotle. If Cava can maintain its current momentum, the stock has a lot of room for growth ahead of it.
2. Sweetgreen
Like Cava, Sweetgreen (NYSE: SG) is a fast-growing fast-casual stock, but it’s still down substantially from the peak it reached after its IPO in 2021. Sweetgreen is the leader in the fast-casual salad niche. Its restaurants generate average unit volumes of $2.9 billion, on par with Chipotle, showing that the brand is popular.
The company has not yet reached profitability. It posted an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $1.8 million on $153 million in revenue.
Sweetgreen is also expanding quickly, with revenue up 29% on 6% same-store sales growth in Q4, but it has a unique asset up its sleeve that could drive significant growth over the coming years.
The company has developed an automated platform it calls the Infinite Kitchen. This is essentially a salad-making robot, and it’s introduced the concept to two restaurants so far. The Infinite Kitchen has accelerated the company’s throughput and saved on labor costs.
Sweetgreen is planning to accelerate the rollout of its Infinite Kitchen this year, adding it to seven new restaurants, and converting three to four large restaurants to Infinite Kitchens. The restaurant chain has also proven it has a popular menu and restaurant concept.
But the business fundamentals could use some improvement. Adding Infinite Kitchens could help differentiate from other restaurant chains, improve its customer service by speeding up throughput, and drive profitability as it saves the company on labor costs and increases revenue.
With just over 220 restaurants currently, Sweetgreen has a lot of room for growth both as a business and as a stock. At a price-to-sales ratio of 4, the shares have plenty of upside potential if the company can take steps toward profitability.
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Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and Sweetgreen. The Motley Fool has a disclosure policy.
2 Restaurant Stocks to Buy and Hold for Great Long-Term Potential was originally published by The Motley Fool