Investors are eating up Cava (CAVA).
On Tuesday, shares of the Mediterranean fast-casual chain hit a new record of $59.91. Shares are up more than 40% year to date, jumping by as much as 19% in the last five days after posting a beat on its top and bottom lines for its Q4 results.
For comparison, the S&P 500 (^GSPC) is up more than 7% year to date, whereas fast-casual powerhouse Chipotle (CMG) is up nearly 20%.
For the fourth quarter, Cava’s revenue came in at $177.17 million, versus $174.09 million expected, while adjusted earnings were $0.02, versus $0.01 estimated.
Same-store sales soared 11.40% year over year, handily besting the 6.25% Wall Street had anticipated.
“Our results are reflective of how we’re able to demonstrate the power of our category-defining brand,” CEO Brett Schulman told Yahoo Finance. He believes there is major “white space potential in front of us” in the Mediterranean food sector.
In a note to clients, JPMorgan analyst John Ivankoe wrote that he believes the company’s team and operating structure “supports the likelihood of CAVA becoming a highly visible, important national brand that should dominate the large and flexible “Mediterranean” category.”
Stifel analyst Chris O’Cull wrote to clients that Cava’s “premium valuation can be justified by its healthy unit economics, development visibility, and solid operating momentum,” which could lead to “further upward revisions to near-term estimates and long-term earnings potential.”
Jefferies analyst Andy Barish increased his price target by 16% to $66 from $48 following the Q4 results, citing “an attractive runway ahead for CAVA to further scale.”
One persistent problem — labor costs — has followed the restaurant industry into 2024.
22 states raised their minimum wages on Jan. 1, while Oregon, Nevada, and Florida are set to increase theirs later this year.
And California is facing a looming wage jump as a result of AB 1228 and its predecessor, the FAST Act. Beginning April 1, food chains that have at least 60 locations nationwide will be required to raise their minimum wage for restaurant employees to $20 per hour.
The company plans to “absorb that 30 basis point impact,” Schulman said, adding that it has always “aspired” to pay more than the average wage, as well as “be competitive and have attractive wages in every market we operate in.”
In 2024, the company expects its restaurant-level profit margin to be between 22.7% and 23.3%, or 150 to 210 basis points below 2023’s margin. Schulman said that the impact on margin from the higher wage growth is “an investment in our team that will create … restaurant-level margin growth over the long haul.”
In January, Cava increased menu prices by 2.5% to 3%. The average price per person, which includes premium add-ons to the entrees, is now $14. In August 2023, Schulman told Yahoo Finance the average price per person was “a little bit north of $13.50.”
“We have pricing elasticity,” he said when asked about his company’s pricing power. “We don’t want to just take it because it’s there, we want to put the best value proposition for it for our guests,” he added.
CFO Tricia Tolivar said the company expects the cost of food to increase in the low to mid single digits in 2024, but Shulman said its new steak offering “is a premium item and it will be priced as such. … We see it as dollar margin neutral to our basket.”
Cava lays out slow and steady growth plans
By 2032, the company plans to have 1,000 Cava locations.
At the end of fiscal 2023, the company had 309 locations, with 72 opened last year, and plans to launch 48 to 52 this year.
“We are projecting 15% compound annual unit growth,” Schulman shared, “we feel really comfortable about our pipeline and our ability to maintain this growth rate.”
It plans to enter Chicago this year with three locations, sticking to the model of penetrating established markets.
Ivankoe believes the brand is a “preferred tenant,” especially as “the high-profile IPO draws attention to the company’s cash-rich balance sheet with less than $300 million and prospects for brand longevity.”
Earlier this year, the company also got its new food processing facility up and running in Verona, Virginia, which can serve up to at least 750 Cava stores. In addition, it can supply packaged goods like its Crazy Feta and Harissa for up to 1,000 stores.
“We are in about 650 grocery outlets today, and we are slowly growing that,” Schulman shared, with the new facility providing an opportunity to scale its packaged foods business in the future.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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