Kava Groupof (NYSE: CAVA) Shares have more than doubled since the beginning of the year. The fast-casual Mediterranean restaurant chain has been expanding rapidly, building a customer base looking for new, healthier fast-food options.
Still, such concepts do not necessarily translate into profitable stock selection. Chipotle Mexican Grill (NYSE:CMG)There are plenty of other restaurant stocks that have struggled to rise in value over time. Fortunately for Cava shareholders, the company has generated big gains. For investors who are still on the sidelines, the question is whether they waited too long to buy restaurant stocks.
Cava Group Share Status
Part of Kava Group's appeal is that many see it as a kind of second-chance stock for people who missed out on Chipotle, which has risen roughly 140-fold from its 2006 initial public offering price to current levels.
On the surface, the comparison makes sense: Both are fast-casual restaurants that focus on cooking with healthy ingredients, and Cava specializes in Mediterranean cuisine, so it doesn't compete with Chipotle's Mexican offerings.
Additionally, Cava operated 323 stores as of April 21 (the end of the first quarter), less than one-tenth the size of Chipotle's roughly 3,500 stores. It's easier to achieve higher growth rates from a smaller base, which should work in Cava's favor.
But Cava may face more constraints than Chipotle. First, Cava has a long-term goal of opening 1,000 stores by 2032. Cava could increase this goal later, but Chipotle executives have said they plan to eventually have 7,000 stores in North America, meaning they plan to grow more than Cava.
Cava may also struggle to grow its customer base as quickly as it hopes: Though Mediterranean food has recently grown in popularity, interest in it has lagged well behind Mexican food, another sign that Cava's growth potential may not match that of Chipotle.
Improved finances
Not surprisingly, the results have stoked investor optimism for Kava. The company's first-quarter sales were $259 million, up 30% from a year ago. That's not as fast as the 60% increase it's expected to see in fiscal 2023, but it's still a rapid increase. Same-store sales were up 2% year over year, so most of the growth was due to the 60 new restaurants the company opened in the past 12 months.
The company managed to limit operating expense growth to 22 percent and report an operating profit, helping to improve first-quarter net income to $14 million, compared with a loss of $2 million in the same period last year.
Management did not provide sales guidance but said the company plans to open 50 to 54 stores over the next 12 months, which should help it maintain its rapid pace of growth.
Still, the aforementioned share price increase has caused the company's price-to-sales multiple to soar to 13, well above Chipotle's 8. This is concerning given the tough competitive environment Cava faces. Chipotle is a more developed chain and serves more popular dishes, which may leave potential investors wondering whether Cava's stock is worth the premium price.
Where is Cava's share price headed?
With continued growth and rising valuations, the answer to the question of whether it's too late or too early to buy Cava shares depends on an investor's perspective.
If you're not a shareholder, it may be too late to take advantage of the recent stock price surge: these potential buyers will likely need to pay a fairly high valuation for the company.
But management appears to have built a successful restaurant chain, and given the company's growth and increasing popularity, it has the potential to go even higher in the long term, meaning investors could be well placed to make money buying into this relatively early-stage company.
Investors who choose to buy now will need to build up their stake over time, as the share price is becoming increasingly unpredictable in the short term. Still, Cava Group's rapid expansion plans should pave the way for increased revenue and profits in the long term.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Chipotle Mexican Grill. The Motley Fool recommends Kava Group. The Motley Fool has a disclosure policy.
Is It Too Late to Buy Cava Group Stock? was originally published by The Motley Fool.
