Morgan Stanley Raises Price Target on CAVA Group to $135 From $123, Keeps Equalweight Rating

Shares of Cava Group , the Mediterranean fast-casual restaurant chain, have been on a tear this year, growing by approximately 257% year-to-date. This incredible growth highlights the company's ability to consistently deliver on key financial metrics. Strong same-store sales, improving restaurant-level profit margins, and an expanding restaurant footprint have all played a significant role in driving investor confidence and its stock price.

Q3 Earnings Fuel the Rally

Today's surge in CAVA stock was supercharged by its Q3 earnings release, which exceeded analysts’ expectations. The company’s robust performance and upbeat outlook boosted investors’ confidence, resulting in a nearly 7% jump at midday. This marked yet another successful quarter in which Cava surpassed Wall Street’s estimates and raised its guidance.

While Cava’s impressive growth and earnings momentum are hard to ignore, its sky-high valuation is starting to raise eyebrows. Against this background, let’s examine whether investors should step away from Cava stock for now.

Cava Group Shines in Q3

Cava Group delivered a stellar performance in its third quarter, exceeding Wall Street’s expectations on both earnings and revenue. The restaurant chain reported revenue of $243.8 million, marking a robust 39% year-over-year growth. This outpaced analysts’ forecast of $235.1 million.

A major driver of this growth was Cava's same-restaurant sales, which climbed 18.1%. This growth was fueled by increased guest traffic (up 12.9%) and higher revenue per visit, thanks to a 5.2% boost in menu pricing and product mix.

Cava's restaurant-level profit jumped to $61.8 million, or 25.6% of revenue, compared to $43.6 million (or 25.1%) in the same period last year. Higher sales more than offset cost pressures from rising wages and the national rollout of steak offerings, which began in mid-Q2 2024.

The company’s bottom line showed significant improvement. Cava posted earnings of $0.15 per share, more than doubling last year’s $0.06 per share and beating the consensus estimate of $0.11 per share.

Cava's Q3 performance highlights its ability to grow both its top and bottom lines in a competitive market and macro uncertainty. Its focus on expanding its menu and improving operational efficiencies continues to pay off, even as it navigates rising costs.

Growing Store Base to Boost Sales

Cava Group is firing on all cylinders as it continues to expand its store count. In the third quarter of 2023, the fast-casual Mediterranean restaurant chain added 11 new locations, bringing the total to 352 restaurants.

Looking ahead, Cava has ambitious goals for 2024, targeting 56 to 58 net new restaurant openings. By 2025, Cava expects to grow its restaurant count by at least 17%, capitalizing on a robust development pipeline. These expansion efforts align with Cava’s focus on boosting its top-line growth and scaling its business.

Operational efficiency also remains a key focus. Cava forecasts its restaurant-level profit margins to range between 24.5% and 25% in 2024, with similar margin levels expected in 2025. As it scales, the company anticipates improved cost leverage, which should further enhance profitability.

Cava’s Multichannel Strategy: A Recipe for Growth

Cava’s innovative multichannel strategy positions it well for long-term growth. With a strong focus on digital transformation and an ever-expanding network of fulfillment options, the company will gain a larger share of the fast-casual dining market.

The chain's guest-centric approach revolves around offering convenience. Its multichannel model includes various options such as in-restaurant dining, digital pick-up, drive-thru pick-up, and delivery. Each channel is fully supported by a robust digital infrastructure. This digital-first focus is paying off, with Cava’s online platform driving a significant portion of its sales. Interestingly, customers who order through digital channels tend to have higher average order values, further enhancing the company's revenue streams.

Upbeat Guidance

Cava upwardly revised its financial guidance for 2024. The restaurant chain operator expects adjusted EBITDA to be between $121 million and $126 million, an increase from its previous projection of $109 million to $114 million.

Management also raised its forecast for same-restaurant sales growth. The company now anticipates growth of 12% to 13%, a notable improvement from its earlier estimate of 8.5% to 9.5%.

This upward revision signals strong confidence in the brand’s ability to continue its impressive growth trajectory, driven by robust demand and operational efficiency.

Is Cava's High Valuation Worth the Risk?

Cava is performing well, but its stock is trading at a steep valuation. This means that the positives are already reflected in Cava stock. It trades at an enterprise value-to-sales (EV/Sales) multiple of 20.1, far outpacing the sector average. Additionally, its price-to-earnings (P/E) ratio, based on fiscal 2025 earnings-per-share (EPS) estimates of $0.52, is equally elevated.

Despite the high valuation multiples, investors are betting on Cava’s growth potential. Meanwhile, Wall Street analysts have a “Moderate Buy” consensus rating, although the average analyst price target is a significant discount to current price levels - and the stock now trades almost flat with its Street-high target of $155.

Cava’s valuation may be rich, but investor enthusiasm could keep the stock trending higher as long as the growth story holds.

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On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policyhere.