Is the buzz around this stock premature?
Since its IPO in June, Cava Group (NYSE: CAVA) has captured significant market attention, witnessing a 24% increase. As a purveyor of nutritious Mediterranean cuisines, the company has recently experienced noticeable growth. However, is this the ideal time for investors to secure a position in Cava, or is it wise to wait?
Navigating the profitability maze
Since 2016, Cava has shown impressive sales momentum, growing at a compound annual rate of 49%. However, the company’s profit margins remain negative. For instance, in fiscal 2022 (ending Dec. 25, 2022), Cava posted a net loss nearing $59 million, an increase from the previous year’s $37 million loss.
While the business touts restaurant-level profitability and bettering margins, other expenditures drag down the net income. Overhead costs like general and administrative expenses, which amounted to $70 million or 12% of their revenue last fiscal year, significantly impact the bottom line.
Combining these expenses with the company’s restaurant operating costs, which stood at $466 million, nearly equals their reported revenue of $564 million. After accounting for further expenses such as depreciation and restructuring, profitability seems even more distant.
Since restaurant ventures often have thin profit margins, Cava faces the uphill task of turning profitable. This challenge becomes even more evident, with sales and expenses growing by about 13% in fiscal 2022.
Anticipated financial injection
Growth-centric investors should always consider dilution risks. While Cava’s expansion into more states (currently in 22) represents potential, its financial metrics imply a need for further capital.
In the quarter ending April 16, the positive operating cash flow was slightly below $26 million. Concurrently, the company’s investment-related expenses reached $39 million. With cash and cash equivalents summing up to less than $23 million, it’s evident that more money is leaving than entering. This could lead to probable stock offerings soon.
Is the valuation justified?
At a valuation of $6.1 billion, Cava’s current trading is over ten times its last fiscal year’s revenue. In comparison, the similar high-growth stock, Chipotle Mexican Grill, trades at nearly half that ratio and is already profitable.
Investors might pay a slight premium for Cava, betting on its future success. However, even market analysts exhibit caution; the average price target for the stock hints at a potential decline.
To buy or not to buy Cava stock?
Since its public introduction, Cava’s stock has garnered attention. But given its steep valuation and the looming cash burn issue, investors might be better off observing for now.
Although the company shows promise, it must enhance its financial backbone to sustain growth without leaning on stock offerings or accruing debt. With potential macroeconomic challenges, like soaring interest rates and an impending recession, caution is advised. Before diving in, investors might want to monitor the company’s trajectory throughout the year.
In the intricate dance of the stock market, timing and due diligence are paramount. While Cava Group has certainly demonstrated promising growth and has captured the attention of many, the looming challenges cannot be overlooked. Investors are encouraged to keep a watchful eye, analyzing the present momentum and the potential roadblocks ahead. As with any investment, it’s essential to tread with optimism and caution, allowing for informed decisions that align with long-term financial goals.
