Wow! It's been a while. For those of you that are new here, my name is Mateo Rioja, writer of the Finance Forever newsletter. Iām 14 years old, and I've been researching several types of asset classes, mainly crypto, stocks, and startups since I was 10 years old. I've gained quite a bit of knowledge since then, and have made some great calls, like buying Tesla before the pandemic. My goal is to share my opinions and knowledge about my interest with you, to build an investing community, with the motivation to create wealth and financial success. Happy Fourth and Enjoy!
Cava is worth 7.94 billion, 9 trading days after its IPO. The food is excellent, but I think this is a questionable valuation. So, I researched the company to help you decide if it is a worthy investment.
Hereās the rundown of todayās newsletter:
š„ Business model and what the company does (itās not just a restaurant)
š Industry: Comparing Cava to competitors, and seeing how the restaurant industry is performing as a whole
š¤ Financials and valuation: a heavily researched report on the companyās financials
ā ļø Competition/Risks - There are serious threats to every business, so they have to be covered.
š¼ Management - Are the people leading this company qualified?
šÆ How good of an investment is this? Weāll use our rating system to help you decide
š End of the newsletter - closing words and some HUGE updates!
šØ DISCLAIMER: This investment report is not intended to be financial advice in any way. Please do your additional research, or consult your financial advisor before investing.
Cava is newly public. What do they do and what is their business model?
Cava has been one of my favorite restaurants for a long time now. So of course, when they went public, I had to research them. I typically will research companies whose products or services I interact with, because I am more likely to have a thorough understanding of them, something similar to what Warren Buffet does. Anyways, letās get to it.
Cava Group is the company that went public. So essentially you would be investing in its subsidiaries, which are Cava (Grill) and ZoĆ«s Kitchen, as well as Cavaās dips and spreads, which can be found in grocery stores across the U.S.
Cava Grill: Cava Grill is a modern and energetic fast-casual restaurant that offers customizable Mediterranean dishes, such as pitas and bowls as well as drinks. They use fresh and high-quality ingredients and allow customers to build their bowls or pitas, with vegetables, meats, sauces, and more. There are plenty of options for toppings and components, in fact, so many, that there are 17.4 billion possible meal combinations. I like this restaurant because of the fresh food and the customizable experience. Whenever I go, many people are eating, which is a good sign.
Zoƫs Kitchen: Acquired by Cava Group in November 2018 for $300 million, with about 300 locations. Zoƫs Kitchen now has one location left, after Cava converted the other locations to Cava Grill, and gave the family permission to keep the last one open. Zoƫs had a similar offering lineup, with mainly Mediterranean foods available, however, Cava serves their food in more of a Chipotle style.
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Cavaās Grocery Store Products: Cava has several grocery store products. These include their traditional hummus, crazy feta, tzatziki, spicy hummus, lemon herb tahini dressing, roasted red pepper hummus, roasted eggplant dip, spicy lime tahini dressing, harissa, roasted garlic hummus, and yogurt dill dressing. Yes, a lot of products, but I really like that this gives them a way to diversify, and not āput all their eggs in one basket.ā In more recession-like economic environments, people are less likely to eat out, but they will always have to go grocery shopping, and this will still allow them to bring some form of Cava product home. This product lineup gives them something to fall back on when needed, which I think is great.
Business Model: Cava is ultimately putting their restaurant locations, which serve highly fresh Mediterranean food, in suburban areas, right outside of major cities, targeting an upper-middle-class consumer. Meanwhile, their grocery store products division sells throughout mainly high-end grocery stores throughout the country. Think Balducciās and Whole Foods. Here is a map of their locations:
Source: Jordan Bean - Medium
Yes, Cava has a pretty sparse amount of locations, but they are ambitiously expanding, something that isnāt often seen from a restaurant. But - this rapid growth is costing them, something that youāll see in their financials.
What is the industry looking like?
Yes, Cava is a restaurant. But it is worth noting that there is a misconception about how the restaurant industry performs on the stock market. I was about to find some evidence for a bearish case on this company, but then I found an article on Seeking Alpha, that was written about a month ago. It said:
āOver the last ten years, large-cap restaurants stocks have generated a 17% CAGR total return to outperform the 13% CAGR return for the S&P 500 Index, per data from Evercore ISI.ā
Turns outā¦this misconception is wrong.
Chipotle and Panera to some degree popularized this fast-casual/healthy type of restaurant. But I really like to look at Chipotle in this case. Chipotle has made this build-your-own right-in-front-of-you mainstream. Ultimately, I think this is a great strategy to provide quality food while getting customers through quickly. The industry is strong, restaurants are BOOMING, and I donāt see or foresee any headwinds coming for the restaurant industry (chain restaurants specifically) as a whole.
This companyās financials are questionableā¦
Cava is focused on rapid growth. Their acquisition of ZoĆ«s Kitchen was HUGE. Honestly, it didnāt really make sense how that was possible to me. Cava was about 5x smaller than ZoĆ«s in terms of location count. They paid about 1 million dollars per location since they had about 300 locations at the time, and since they were purchased for $300 million. Cavaās IPO registration filing is covered in the word āgrowth.ā I love to see this from a company, especially from a company in the typically sleepy restaurant industry, but when you take into account Cavaās valuation (a whopping 7.94 billion dollars) and their balance sheet (mostly covered in red) youāll begin to question these crazy numbers. HOWEVER.
Off the bat here, you could say that Cava is getting better. I mean, at this point, I was starting to change my mind. This is actually great to see. This right here definitely displays a clear path to profitability. Revenue growth is high (28% YoY) from Q1 of 2022 to Q1 to 2023, and despite this huge revenue increase, Cava shockingly managed to post losses of 2 million last quarter in 2023, only 10% of last yearās losses. This right here to me is what differentiates Cava from other high-profile restaurant IPOs, like Sweetgreen. Sweetgreen had a blockbuster IPO not too long ago (5.5 billion dollars after its first trading day) which is massive for a restaurant. Now, Sweetgreenās market cap is sitting at just under 1.5 billion, a huge loss for investors, and ultimately, I still wouldnāt invest because they have no clear path to generating money. Cava, however, seems to have losses under control, while massively growing revenue, something that is key to being the next big company.
Keep in mind that the numbers in the following two paragraphs are in thousands.
Looking at assets, Cava grew their assets by over 120,000 YoY to $583,883 as of December 25th, 2022. Keep in mind that this was before their IPO, so they have an influx of cash now from this new raise. Unfortunately, in that same period, liabilities grew by almost $300,000 to $370,078, so that is definitely something to keep an eye on. Cava actually managed to increase their cash reserves by $100,000 to $2.1 million YoY, which you could say is a pretty decent safety net, since theyāll likely be making money soon, and their IPO will provide the company a ton of cash.
On EPS, the losses are down, but only due to the fact that shares were diluted (almost doubled) over a one-year period. Cava makes me nervous, though, because the growth of their liabilities is not keeping pace with the growth of their assets.
Overall, this balance sheet gives me mixed feelings, however, I would lean toward a slightly bullish case here.
What are the biggest threats to Cava?
#1: Urbane Cafe: Urbane Cafe provides fast-casual Mediterranean food, and I believe that their food seriously competes with Cavaās. However, the two places cater to different people, so you could say that they are a medium-level threat.
#2: Sweetgreen: Sweetgreen has the same vibe as Cava - urban, fresh, fast-paced, and healthy. One of the biggest advantages over Sweetgreen is the fact that Cava has almost twice the amount of locations. This is big, and it really says something about Cava, too, since they are four years younger than Sweetgreen (Cava is 13 years old). Plus, Sweetgreen is running out of money.
#3: Chopt Salad: Not really a big issue here but you could say to some extent that Chopt is potentially a competitor. However, Chopt is closing locations. I tried going to one, it was closed. And eventually, I think Sweetgreen and Panera will run Chopt down to the ground.
In all honesty, I really believe there isnāt a restaurant like Cava that provides, fresh, build-your-own food, so I wouldnāt be too worried. They already wiped out their biggest competitor, ZoĆ«s, which will greatly help them in the long run.
Potential threats:
Grocery store segment fails: This would be really concerning to me because this segment is their only moneymaker, as well as their only diversification. In this area specifically, I view Panera as their biggest competitor, largely because they offer dressings as well.
Foodborne illness outbreak: Chipotle had to pay $25 million back in 2016 during their E. coli outbreak back in 2016. This would be pretty serious if something remotely like this happened to Cava, considering they have a pretty decent amount of locations. Additionally, their cash position before the IPO was pretty small, which could mean that a huge fine would put them out of business.
They canāt generate a profit: This one is obvious, but I think that Cava will turn a profit sooner than we expect. If they canāt within the next few years, though, I would stay away from this company.
Who is leading this company?
CEO: Brett Schulman left the banking industry in 2009 to become CEO of Cava. This CEO has great values. Even as Cava is going through rapid growth, he is committed to keeping the same culture and atmosphere, something a restaurant like McDonaldās or Subway lost as they became huge. Overall, Brettās experience in the banking industry should help him out as CEO of a rapidly expanding company.
CCO: Theodore Xenohristos is one of the original founders of CAVA. This guy had the idea from the start, and the vision, so I believe he is a good fit for a āconceptā position.
Wasnāt able to find information on any of the other big leaders. š
Will I be investing in this company?
In this newsletter, we researched five categories of the business: business model/product, industry, financials/valuation, competition/risks, and management. Weāll score Cavaās strength in each of these categories out of 20, then add the five to get a total score out of 100. Based on this rating, and my thoughts as I was researching, and writing this article, Iāll give you my final take. Just so you know, I would consider investing in anything with a score above 75. Letās get into it.
Business model & product: 18/20
The food is scrumptious, the restaurant is always packed, and I love the fact that theyāve diversified their business with their grocery store product lineup.
Industry: 17/20
Restaurants are booming, and fast-casual is becoming mainstream. I am looking forward to seeing other restaurants adopt this method as well. Now that the economy is looking up, I think people will start spending normally again.
Financials & valuation: 14/20
Cava painted this rosy picture with their nice charts - looking at you Cavašæ. However, the amount of cash they have in some areas is concerning. Additionally, itās worth noting one more time that their liabilities are outpacing their assets. However, I wouldnāt be surprised if they make a profit within a single quarter next year, something that excites me. Overall, looking to the future but right now as well, Cavaās finances are decent. But then looking at its sky-high valuation - it doesnāt really add up to something that is worth investing in.
Competition & risks: 12/20
Here, there are two sides to the argument. I am slightly worried about Urbane and Sweetgreen, however, Sweetgreen mainly does salads, which are somewhat similar to a product Cava offers - bowls. Meanwhile, you could say Urbane caters to a different market and offers different products, which is true. I am a little worried about the competition and risks, but I really donāt think these concerns will become a reality and put Cava out of business.
Management: 15/20
Nothing special here. Just four college friends who like Mediterranean food. I wish I was able to find more information on the top executives, but they are unfortunately pretty low-profile.
OVERALL RATING: 76/100
Will I be investing?
No. At least not for right now. I will give Cava credit, but I will be waiting for one of these two events to happen before I put my money into this business.
Cava turns a profit in a single quarter - theyāre actually getting very close to this.
Cava gets back down to its IPO price ($22 a share). Sadly, I just canāt justify an 8 billion dollar price tag on a restaurant that hasnāt made a profit yet. So I will be waiting until this stock gets back to the $22 to $25 range.
Until one of these things happens, Iām sitting on the sidelines.
Let me know in the comments if you will be investing in Cava.
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Thatās it for today! Enjoy your FOURTH OF JULYšŗš²
Nice article! Thanks for the write-up.
Yes, my absolute favorite newsletter is back and better than ever š„³š„³ This is an excellent and thorough analysis, Mateo! And it helps me understand not only this particular stock but how to make more educated decisions in how to invest in general.
Can you do an update next quarter? Curious to see if their score improves because they were pretty close to your benchmark of 80!