Positive Transaction Growth and Strong Earnings Outlook for CAVA
CAVA Group, one of the few publicly traded restaurant companies, is uniquely positioned for sustained positive annual transaction growth and has set realistic long-term revenue and unit growth targets. With increased near- and medium-term visibility, current 2024 and 2025 same-store sales (SSS) growth and EBITDA expectations are seen as conservative, promising a robust future for the company.
Q2 Performance Exceeds Expectations
Recent checks for Q2 indicate that CAVA’s SSS growth is trending above the 6.6% consensus, propelled by several positive factors. The launch of steak on June 3rd, improved staffing and service speed, and enhanced brand awareness have all contributed to this success. As a result, the Q2 SSS growth estimate has been increased to 8.0% from the previous 6.0%. The Q3 and Q4 SSS growth estimates remain at 8.0% and 9.0%, respectively, compared to the consensus of 7.5% and 7.7%.
Multiple Growth Drivers for 2024 and Beyond
CAVA has multiple drivers in place to support SSS growth in the second half of 2024 and into 2025. A 3% menu price increase was implemented in January, with no further price hikes planned for the rest of the year. The company’s expanding value proposition is seen as a core driver of transaction growth in the near, medium, and long term. The successful steak launch is expected to positively impact both mix and transaction contributions. Additionally, increased advertising, digital growth, a new loyalty program set to roll out company-wide by the end of the year, throughput-focused operational initiatives, and the maturation of new units are expected to bolster SSS growth in the near to medium term.
Conservative AEBITDA and Margin Expectations
Current AEBITDA and margin expectations are considered conservative. For 2024, restaurant-level EBITDA margin guidance is between 23.7% and 24.3%, while consensus stands at 24.6%. The increased comp estimate has raised the 2024 unit-level margin estimate to 24.7% from 24.3%. Despite the potential for higher costs of goods sold (COGS) due to the steak launch, incremental leverage on labor, occupancy, and other operating expenses is expected. Consequently, the 2024 AEBITDA estimate has been increased to $108.6 million from $104.6 million, and the 2025 estimate to $139.4 million from $132.2 million, compared to the consensus estimates of $105.6 million and $132.4 million, respectively.
Positive Earnings Outlook
The 2024 earnings per share (EPS) estimate has been increased to $0.35 from $0.32, and the 2025 EPS estimate to $0.51 from $0.45. These increases reflect the company’s strong performance and growth potential.
Maintaining OUTPERFORM Rating and Increased Price Target
CAVA’s price target (PT) has been increased to $100 from $90, based on an 82.2x enterprise value/EBITDA (EV/EBITDA) multiple on the 2025 EBITDA estimate. This multiple is approximately 2.9 times Chipotle Mexican Grill’s (CMG) 28.5x multiple. Given CAVA’s expected 25%+ long-term annual EBITDA growth compared to CMG’s low to mid-teens growth, a 2.5-3.0x multiple is considered reasonable. The 82.2x EV/2025 EBITDA multiple also represents a ~190% premium to growth peers’ 28.5x median. Given CAVA’s potential to sustain positive transaction growth and gain transaction share over the near, medium, and long term, even relative to growth peers, this premium is deemed justifiable.
Conclusion
CAVA is well-positioned to deliver positive annual transaction growth and meet its long-term revenue and unit growth targets. With multiple drivers in place for continued SSS growth and conservative EBITDA and margin expectations, the company’s future looks bright. The increased EPS estimates and price target reflect confidence in CAVA’s ability to outperform its peers and achieve significant growth in the coming years. Investors can look forward to a promising future for CAVA as it continues to expand its market presence and deliver strong financial performance.
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