Cava turns in profits, justifying the high valuation with a great sales quarter

Wall Street got its first taste of Cava’s (CAVA) future earnings potential.

In its first quarterly report since its initial public offering, the Mediterranean fast-food chain turned profitable, with revenue jumping 62.4% year-over-year and same-store sales, up 18.2%, in its second-quarter earnings results.

CAVA stock jumped more than 9% after the market closed on Tuesday.

Profitability is a major focus, since the restaurant chain’s strong second-quarter margins may not last.

Last quarter, the company reported net income of $6.5 million. In all of fiscal 2021, the company posted a net loss of $37.4 million, which widened in 2022 to a net loss of $59 million.

“In terms of profitability, our new restaurants are exceeding our expectations,” Cava CFO Tricia Tolivar said on the earnings call. “Our second quarter profitability demonstrates the strength of our business model, but given the current phase of rapid growth, we do not expect to maintain this level of profit margin in the near term.”

Earnings summary

  • 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 size: $2.6 million

After its IPO, Cava stock closed at $43.30, valuing the restaurant chain at about $4.8 billion — nearly twice what the company priced at its valuation. the night before At $22 per share (total value of $2.5 billion).

The IPO was widely seen as a pioneer for other startups looking to the public market.

“While we were anticipating a slowdown in consumers this year, the resilience of our guests and increased brand awareness likely from the IPO drove strong traffic growth in the second quarter,” Cava CFO Tricia Tolivar said on the earnings call. “We continue to see positive traffic trends in the third quarter.”

In mid-July, analysts began covering the stock with high hopes about its long-term potential and some comparisons to competitor Chipotle (CMG).

In the second quarter, Cava saw same-store sales grow 18.2% year-over-year, surpassing Chipotle’s same-store sales growth of 7.4% in the second quarter. Sales were boosted by a 10% increase in guest traffic and a 7.9% increase in menu prices and product mix.

NEW YORK, NY - JUNE 15: A sign for Mediterranean restaurant chain Cava is displayed outside the New York Stock Exchange (NYSE) as the company goes public on June 15, 2023 in New York City.  Cava priced the IPO at $22 per share, valuing the company at $2.5 billion.  (Photo by Spencer Platt/Getty Images)

A sign for Mediterranean restaurant chain Cava is displayed outside the New York Stock Exchange (NYSE) as the company goes public on June 15, 2023 in New York City. (Photo by Spencer Platt/Getty Images)

What else we’re watching: New restaurant opening

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 appears to be putting some of that cash to use, adding 16 new restaurants in the quarter. As of the end of the second quarter, there are now 279 Cava restaurants.

The chain opened its first fast casual concept in 2011. Since it acquired the Mediterranean fast food chain Zoes Kitchen for $300 million in August 2018successfully converted 145 Zoes Kitchen locations to the Cava brand.

Over the rest of 2023, it plans to open 34 to 44 new Cava sites and open eight more Zoes converted sites (the remainder of the sites). By 2032, the company said it plans to operate 1,000 locations in the United States.

What the executives said on the earnings call:

Despite the quarter’s earnings surprise, Cava executives highlighted potential weakness for the rest of 2023.

CFO Tolivar said on the call with investors about how the team is considering this “uncertain macroeconomic environment” that may come into the third and fourth quarters that the series, known for its crazy feta-and-mash sauces, is taking a “very cautious approach.” .

Cava expects same-store sales to grow between 13% and 15% for the full fiscal year. You also expect a profit margin of at least 23%.

Economic headwinds from gas prices to resuming student loan repayments may be building as the IPO lights fade.

There was “an application of brand awareness that we’re not necessarily anticipating as we head into the second half of the year, more so that we’re already mindful of potential headwinds with consumers around gas pricing or other options,” Tolivar said.

“From a holistic perspective…we recognize a lot of the pressures facing our guests outside of the Cava experience, whether it be gas prices,…some of the cost pressures of utility bills associated with extreme heat,…demand demand,” Brett Schulman, Cava CEO, added. Loan repayments are hanging in the wings this fall.”You have a hawkish Fed who has also indicated that they are looking to moderate growth to ensure that any potential inflation is eliminated.”

Brooke DiPalma is a correspondent at Yahoo Finance. Follow her on Twitter at @BrookeDiPalma Or email her at [email protected].

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