CAVA Group, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A Mediterranean fast-casual restaurant chain, CAVA focuses on healthy, customizable bowls, pitas, and salads, and emphasizes its digital ordering platform and the “Cava experience”.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Cava is a fast-casual restaurant chain specializing in Mediterranean cuisine. Their menu primarily focuses on customizable bowls, pitas, and salads, emphasizing fresh ingredients, bold flavors, and a strong emphasis on healthy options. CAVA’s business model also leverages a strong digital presence, allowing customers to order online and through their mobile app.

Revenue Distribution

CAVA operates through two distinct segments: CAVA and Zoes Kitchen.

  • CAVA Restaurants: This segment includes all CAVA restaurants, including converted Zoe’s Kitchen locations. Revenues are driven by a combination of in-store sales and a rapidly growing digital platform.
  • Zoës Kitchen: Although there are many planned conversions of existing Zoës Kitchen locations to CAVA, some locations remain under the Zoës Kitchen brand. Sales are driven by both dine-in and takeout options.

Revenue is reported as a combination of same-store sales growth and new restaurant growth.

The restaurant industry is highly competitive, with fast-casual and fast-food chains vying for market share. Key trends influencing the industry include:

  • Health Consciousness: Consumers are increasingly drawn to healthy and fresh menu options, which benefits CAVA’s core offering of Mediterranean cuisine.
  • Digitalization: The shift towards online ordering and delivery continues to gain momentum, making a strong digital platform essential.
  • Customization: Consumers are increasingly demanding personalized experiences and products and customizable options.
  • Focus on experience: Customers are looking for restaurants that offer an engaging and enjoyable experience, which can include everything from the décor and ambiance to the food, service, and digital experience.

Competitive Landscape

The fast-casual sector is highly competitive. CAVA faces competition from diverse players, some of which include:

  • Other Mediterranean Chains: Companies like The Hummus & Pita Co. and Naf Naf Grill also compete for share in Mediterranean cuisine.
  • Established Fast Casual Players: Chains like Chipotle, Panera Bread, and Sweetgreen offer alternatives in the fast-casual sector.
  • Fast-Food Chains: McDonald’s and Taco Bell, have a massive reach, and can eat into the revenues of CAVA by offering cheaper alternatives.
  • New Entrants: New innovative brands can potentially become relevant competitors to CAVA and compete for market share.

What Makes CAVA Different?

  • Emphasis on Customization: CAVA’s build-your-own bowl format allows customers to tailor their meals to personal preferences, creating a differentiated experience.
  • Mediterranean Cuisine: CAVA is in the largely unrepresented Mediterranean cuisine sector and offers dishes that many consumers may not be as familiar with, creating differentiation.
  • High Quality Ingredients and Health: CAVA has been trying to focus on quality ingredients and is making an effort to show that they are a healthy, clean and diverse meal.
  • Strong Digital Platform: CAVA has built a strong online ordering and delivery infrastructure, allowing them to get their food into the hands of their customers with ease and efficiency.
  • Growth Potential: With a relatively small number of stores compared to other larger chains, CAVA has a massive potential to grow.

Financials Deep Dive

We will primarily be discussing the financial numbers from CAVA’s 2023 annual report and the latest Q1 2024 10-Q.

Income Statement

  • Revenue Growth: CAVA has seen very strong growth over the past few years. Total revenue in 2023 reached $730 million, a strong 30% annual increase. In Q1 2024, the company’s revenue was $256 million and represents a 26.9% growth compared to last year’s quarter. CAVA’s growth is driven by both same-store sales and new restaurant openings, both under CAVA and Zoe’s Kitchen brands. CAVA has a big growth runway, so we can expect very strong growth rates to continue in the near future.

  • Gross Profit: CAVA’s gross profit has a very consistent growth as well, but has been growing at a slightly lower rate than revenue, at 27% year over year.

  • Restaurant-Level Profit Margin: In Q1 2024, CAVA’s restaurant-level profit margin was 23.4% compared to 19.7% for 2023. This is very healthy, showing improving profitability of the business.
  • Net Income: CAVA’s net loss has been going down steadily, with Q1 2024 net loss at -$17 million compared to -$25.1 million net loss for the same period last year. CAVA’s net loss is also attributed to the large debt load.

Balance Sheet

  • Assets: CAVA has $1054.6 million in assets, with the largest share being property and equipment ($355.8 million) and intangibles ($164.3 million).
  • Liabilities: Total Liabilities are at $471.8 million with the highest proportion being lease liabilities at $165.1 million.
  • Equity: Total Equity is at $547.9 million. The most notable contributor is the company’s large paid-in capital at $1.012 billion. This shows that investors are betting heavily on CAVA’s growth.
  • Debt: The company has a good amount of long-term debt at around $260 million.

Overall, CAVA has relatively healthy financials, with its liabilities not outweighing its assets, and its revenues growing massively. The company is currently losing money, but with a very strong growth rate, and as CAVA achieves its scale ambitions the company should become highly profitable.

Cash Flow

  • Operating Activities: CAVA continues to produce cash flow from its operations, although it remains lossmaking for the time being. CAVA had an operating cash flow of $20.5 million in Q1 2024, which is a solid amount.
  • Investing Activities: The company has been investing heavily in new store openings and has spent -$55.2 million in the quarter.
  • Financing Activities: CAVA raised a net amount of $43.2 million to fund its operations. Most of these came from net sales of company stock.
  • Overall, CAVA continues to burn cash as it is aggressively growing, but it’s operating cash flow is improving steadily.

Moat Analysis

Moat Rating: 2/5 - Narrow Moat

CAVA’s economic moat is classified as narrow rather than wide. Here’s the rationale for this rating:

  • Brand Strength: CAVA has started to build a strong brand with a focus on fresh and healthy food. Its Mediterranean cuisine is a relatively unique offering, so consumers would be drawn to CAVA if they are interested in trying the cuisine or have eaten CAVA in the past. However, the fast-casual restaurant segment is also characterized by a high number of consumers who are looking for bargains, and brand loyalty might not be as large as in other industries. CAVA can potentially command a slight premium in pricing due to its brand but that could erode due to competitors who price below CAVA.
  • Switching Costs: Customers will rarely be locked into CAVA since it is a restaurant chain. Customers have a large choice in the fast-casual segment and can easily go to other establishments. So, CAVA’s switching costs are low. However, CAVA’s large emphasis on a customized menu might act as a minor switching cost, since it would take time for customers to learn another brand’s menu.
  • Network Effects: There are no network effects for CAVA, which is a massive detractor for the creation of a durable moat.
  • Cost Advantages: CAVA has a slight advantage in cost because the company produces most of its products in its own kitchen facilities, which eliminates reliance on third-party suppliers. The company has a vertically integrated distribution system, which should make it more efficient. However, these cost advantages don’t appear to be as strong as to generate a high price premium.
  • Scale: CAVA has a very good scale advantage, especially in the places it operates. However, the company is still small relative to its ambitions, and it hasn’t yet been able to reap all of the scale benefits of its business model.
  • Proprietary assets: CAVA has a small degree of proprietary technology due to its digital ordering platform, but that is easy to imitate and should not be considered a part of its moat.

Rationale: Although CAVA is growing rapidly and is creating strong revenue growth, the business is not extremely difficult to copy. There are few barriers to entry in the fast-casual sector, so, it is likely that other competitors will attempt to copy CAVA’s business model in the future. Despite the current growth and profitability of CAVA, its ability to have strong, durable returns in the future is not guaranteed. Hence, CAVA gets a narrow moat rating.

Risks to the Moat and Business Resilience

  • Competition: The restaurant industry is extremely competitive, and CAVA must continue to innovate and improve its offerings to stay ahead of rivals. In addition, new entrants that might have a superior offering, or an offering that resonates with consumers more might take away considerable market share.
  • Economic Downturn: Changes in macroeconomic variables could drastically impact CAVA’s operating model. Consumer purchasing power can wane in a recession, impacting CAVA’s growth.
  • Supply Chain Issues: While CAVA is trying to vertically integrate its supply chain, relying on a limited amount of suppliers can lead to production shortages. Disruptions in the supply chain might have an adverse effect on product quality, which affects the consumer experience.
  • Inflation: Inflation, particularly on labor, and food, could raise CAVA’s operating expenses, hurting the company’s profitability and potentially hurting brand loyalty as CAVA might have to increase menu prices to compensate for it.
  • Execution Risk: As a growing company, CAVA must execute properly on its growth plan by opening new stores, expanding its business model, and attracting new customers. Failures on any of these fronts could drastically impact the growth rate and profitability of the business.
  • Changing Customer Preferences: Consumer tastes can change frequently, and as a restaurant CAVA must be able to keep up with rapidly changing food preferences. If it fails to do so, it could be detrimental to its operations.
  • Labor Shortages: CAVA is a company that heavily relies on its employees. Shortages in the labor pool could make it difficult for the company to operate efficiently and effectively. CAVA has been seeing increased labor costs, and they might have to increase salaries even further in the future, decreasing profit margins and increasing the company’s cost base.

Despite these risks, CAVA’s strong brand, quality offerings, growing customer base, and strong digital platform give the company some resilience. However, with a lot of new companies trying to capture the Mediterranean market, it is important that CAVA continues to innovate and build a solid moat.

Understandability

Understandability: 3/5

CAVA’s core business model is fairly easy to understand. They sell customizable food through a fast-casual restaurant chain with a focus on digital ordering. However, assessing its long-term profitability, management strategies, and how it will cope with competitors is difficult. Evaluating the company’s complicated financing methods and various accounting metrics also requires additional effort.

Balance Sheet Health

Balance Sheet Health: 4/5

The balance sheet is not terrible for a fast-growing restaurant company. CAVA has a decent liquidity position. However, while the company isn’t highly leveraged, its debt load remains substantial, making it a moderate risk. CAVA has shown the ability to generate cash flows and increase its equity. The company’s assets and equity are also at a reasonable level. Overall, CAVA has a decent, but not extremely strong balance sheet.

Recent Concerns, Controversies and Management’s Outlook

  • Q1 2024 Performance: While CAVA had a good Q1 performance, with strong revenue growth and improved profits, there are some concerns about the company’s continued reliance on new restaurants and a relatively low profitability. However, as CAVA continues to grow, it should be able to take advantage of its scale to boost its operating margins. Also, the company’s expansion in new markets means that it will be able to capture higher revenue.
  • Competition: Management noted increased competitive activity within the fast-casual segment, which highlights the importance of maintaining and developing a differentiating strategy. Despite the competition, management believes that it will still be able to improve both revenue and profit by maintaining its high standards and operations.
  • Labor Costs: Labor costs were a concern on the latest earnings call as the company is facing higher hourly rates. Management plans to counter this with improved automation and efficiency across the business.
  • Valuation: CAVA has a high market valuation. It is important for CAVA to improve its profitability, or its current valuation could be considered extremely high by investors. CAVA’s valuation is highly dependent on its growth outlook and any decline in that growth, or a deterioration in its profitability, could result in a sharp downward correction in the company’s share price.
  • Restaurant profitability and ROIC: Management has stated it is focused on improving ROIC by scaling and improving current restaurants.