CAVA Group stock: priced for perfection ahead of earnings

CAVA Group (NYSE: CAVA) stock has done well this year, making it one of the best-performing restaurant companies in Wall Street. It has jumped by over 128% this year, beating the Invesco Food & Beverage ETF (PBJ), which is barely moved.

CAVA has beaten other popular names in the restaurant industry. Chipotle is up by just 13% while Starbucks has dropped by over 1.25% this year. 

Industry concerns remain

The restaurant industry has been under intense pressure this year as signs showed that growth was slowing. On Tuesday, an analyst at Piper Sandler downgraded the industry, pointing to the lack of pricing power and decelerating traffic at most companies.

Indeed, many companies have underperformed this year. Starbucks stock has only risen because the company hired Brian Niccol, the CEO of Chipotle, to be the new boss. Instead, its recent results have shown that its same-store in the US and China sales were slowing. 

Dutch Bros stock has crashed by over 28% from its highest point this year while Sweetgreen is down by 12% after publishing mixed results this month.

From a macro level, this slowdown in the industry is understandable since the unemployment rate has risen to 4.3% while wage growth has slowed recently. While inflation has eased in the last three straight months, prices remain at an elevated level. Year-to-date, prices have risen by over 3%.

Additionally, the industry is dealing with higher wages, especially in key states like California. Earlier this year, the state implemented a minimum wage of $20 for the fast food and restaurant industry, which has hurt their margins.

CAVA Group’s growth has been resilient

For CAVA Group, however, there are signs that the company’s growth is continuing as the brand gets more popular. 

Annually, its revenue has jumped from $500 million in 2021 to over $728 million in 2023 while the company has become profitable. It moved from an annual loss of over $37.4 million to over $29.9 million in the trailing twelve months.

CAVA’s revenue growth has been because of the growing popularity of Mediterranean cuisines in the country and increased store counts.

The most recent financial results showed that CAVA’s revenue rose by 30.3% in Q1 to over $256 million, with same store sales rising by 2.3%, lower than Chipotle’s 7%.

Its revenue was driven both by its digital and retail channels. Digital revenue accounted for 37% of its business, helped by platforms like DoorDash and Uber Eats.

Also, the revenue growth was because of new store openings. It opened 14 new stores in the last quarter and hopes to open 50 to 54 of them this year. 

Read more: Cava Group stock price analysis: is this the next Chipotle?

CAVA Group earnings ahead

The next important catalyst for CAVA Group, which some people compare to Chipotle, is its financial results scheduled on Thursday.

These numbers are expected to show that the company’s revenue growth continued in the second quarter. Annual growth is expected to come in at 27%, which will push its revenue to $219 million. For the third quarter, analysts expect its revenue guidance to be 25% ($220 million) while the annual revenue figure will be $903 million. 

CAVA Group has been a fairly conservative company when delivering its forward guidance, which explains why it has beaten on earnings figures in each quarter since going public in 2023.

Notably, the company has had 10 positive EPS revisions in the last three months, according to SeekingAlpha.

Biggest concern for CAVA

CAVA stock chart by TradingView

There are numerous concerns about CAVA Group among investors. The most important one is its valuation since the company has attained a market cap of over $11 billion. 

In June, JPMorgan analysts downgraded the stock, bringing its target to $77, 22% below the current level. In the note, the bank noted that CAVA Group’s valuation was unprecedented considering that its average unit volume was $2.6 million against cost of construction per box of $1.5 million. 

JPMorgan is the only Wall Street bank with a sell recommendation on CAVA, with Morgan Stanley having an overweight rating. Wedbush has an outperform rating.

Valuation is a real concern since the company trades at a forward EV-to-sales multiple of 12 while the restaurant industry averages about 1.22. Its forward-to-sales multiple of 12.65 is higher than the sector median of 0.88.

These numbers mean that the company is priced for perfection ahead of earnings. However, the fact that a stock is overvalued is not always a sign that investors should sell. Besides, overvalued companies like Visa, Mastercard, Chipotle, and Nvidia have done well over time.

For CAVA Group, the company needs to demonstrate that it is growing profitably to justify the current valuation issues. 

Technically, the stock has formed a double-top pattern around the $100 level, meaning that it could suffer a sharp reversal after earnings. The top levels to watch will be $95 and $105.