CAVA Goes Public at the Worst Time

We haven’t seen financial pros this interested in a restaurant stock since Mcdonalds’ departed Russia.

CAVA Group (CAVA) decided to go public on June 15, 2023, raising $318 million with a $2.45 billion valuation.

Surely it can’t be bad to go public when the markets near all-time highs?

If debt rates were as cheap as they were in 2019, it would make total sense.

But borrowing costs are the highest they’ve been in decades – a serious problem for a capital-intensive growth business.

And for a company that barely generates a few million in cash from operations to turn around and spend +$100 million on Capex…well…it feels like 2021 all over again.

Maybe we’re being too pessimistic. So we’ll let you be the judge.

Cava Group’s Business

Founded in 2006 by three childhood friends, CAVA has grown from Greek family recipes into a thriving brand with hundreds of outlets across the US and products lining grocery store shelves nationwide.

CAVA operates as two reportable segments: 

• CAVA – The core business segment that includes company-owned restaurants, franchised restaurants, catering, delivery, and e-commerce sales. 
• Zoes Kitchen – An acquired business segment that includes the remaining restaurants that have not been converted to CAVA yet. 

As of April 16, 2023, CAVA had 263 restaurants in 22 states and Washington, D.C., of which 255 were CAVA restaurants, and eight were Zoes Kitchen restaurants.

Last year, CAVA earned $564.1 million in revenue, of which $531.4 million came from restaurant sales and $32.7 million came from CPG sales.

In their first quarterly report as a public company, released in August 2023, CAVA demonstrated strong growth, with highlights such as:

• 46% YoY increase in revenue
• 28.4% YoY rise in same-store sales
• A significant reduction in net loss by 54% year-over-year to $7.9 million 
• Restaurant-level profit margin increased by 430 basis points year-over-year to 22%
• Opened 14 new restaurants, including six Zoes Kitchen conversions

Management guided 2023 totals as follows:

• Revenue of $690 million to $710 million, representing a growth of 22% to 26% year-over-year
• Same-store sales growth of 18% to 20%, representing a two-year growth of 42% to 45$
• Restaurant-level profit margin of 21% to 22%
• Net loss of $25 million to $30 million
• Opening 34 to 44 new restaurants

Financials

Source: Stock Analysis

Cava isn’t profitable. In fact, they generated $6 million in cash from operations last year while spending $100 million in Capex.

For 2023, they expect Capex of $75-$85 million with no guidance on cash flow. But we can probably extrapolate it to be somewhere between $10-$20 million, still leaving them in the negative.

With little on their balance sheet, the $318 million raised will list them for 2-3 years.

However, restaurants supposedly have a payback period of three years or less.

If that’s true, then there’s a lot of junk in their financials that needs to be cleaned up to get a true picture of their business.

Valuation

Source: Seeking Alpha

With no earnings, we can’t really tell where CAVA lands relative to its peers. Plus, its convoluted prospectus doesn’t really tell use the true price to sales ratio or other necessary metrics.

Growth

Source: Seeking Alpha

Growth metrics also appear skewed given the revenue growth was supposedly 46% last quarter.

The rapid pace of store openings and conversions also makes growth tough to nail down.

Profitability

Source: Seeking Alpha

What is interesting is for all the measures we can get a read on, gross margin appears to be in line with other restaurant chains. This lends some credibility to the profitability estimates for restaurants.

Our Opinion 2/10

Investing in CAVA is a gamble at best. The financials are so jumbled with moving parts, that it’s near impossible to get an accurate valuation.

What we do know is that the cost of capital is higher now than it’s been in years, but folks are dining out more.

Frankly we’d rather put our money to work somewhere with more clarity.