CAVA Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 13 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the CAVA Q3 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Tuesday, November 7, 2023. I would now like to turn the conference over to Matt Milanovich.

Operator

Please go ahead.

Speaker 1

Good afternoon, and welcome to Cava's Q3 2023 Financial Results Conference Call. Before we begin, if you do not already have a copy, The earnings release and related 8 ks furnished with the SEC are available on our website at investor. Caba.com. The purpose of this conference call is to give investors further details regarding the company's financial results as well as provide a general update on the company's progress. You will find reconciliations of any non GAAP financial measure discussed on today's call to the most directly comparable financial measure Calculated in accordance with GAAP to the extent available without unreasonable efforts in today's earnings release and supplemental deck, each of which is posted on the company's website.

Speaker 1

Before we begin, let me remind everyone that this call will contain forward looking statements. For this purpose, Any statements made during this call that are not statements of historical fact may be deemed to be forward looking statements. Investors should be aware that any forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in Cabot's filings with the SEC. Please refer to these filings for a more detailed discussion of forward looking statements and the risks and uncertainties of such statements.

Speaker 1

All forward looking statements are made as of today and except as required by law, Cava undertakes no obligation And now, I'll turn the call over to the company's Co Founder and CEO, Brett Shulman.

Speaker 2

Thanks, Matt, and welcome to the call, everyone. Our results in the Q3 of 2023 clearly demonstrate the continued strength of our business, TABA's broad appeal And the proven portability of our innovative Mediterranean concept. In the face of consumer headwinds, we once again delivered strong top line growth An impressive unit economics, while successfully opening new restaurants across the country. While we're taking a measured approach in this environment, We remain confident in our long term strategy and growth targets. Cabot is creating and defining the next major cultural cuisine category With substantial white space opportunity, we have a powerful unit economic engine and we've invested in building an efficient, scalable operation, Putting us in a strong position to gain share and deliver on our extraordinary potential regardless of economic conditions.

Speaker 2

In the Q3 of 2023, we delivered a 49.5% increase in Cava revenue, 14.1 percent TAVA same restaurant sales growth, including a 7.6% increase in traffic 11 net new restaurants, Ending the quarter with 290 restaurants, a 35.5 percent increase year over year adjusted EBITDA of 19,800,000 A $15,000,000 increase over the Q3 of 2022 and net income of $6,800,000 Our strong Q3 results and ability to capitalize on the opportunities ahead are grounded in our 3 strategic pillars. First, we are solidifying our category defining Mediterranean brand. We opened 11 net new Cava restaurants during the quarter With continued expansion across Alabama, Arizona, California, Florida, Georgia, the Carolinas and Texas. In the Q4 so far, we've opened 12 additional restaurants, putting us on track for 70 to 73 Net new Cava restaurant openings in 2023. With our last Zoe's restaurant conversion completed, we are now operating under a Single powerful Kava brand.

Speaker 2

This important milestone has energized the team and we're seeing that in our results. As we share our craveable food and Mediterranean hospitality across the country, we continue to expect annual unit count growth of at least 15%. We're excited to enter Chicago in 2024 with at least 3 new restaurant openings expected in that market. Like others in the sector, We are seeing changes in the real estate market. However, the pipeline we've built is diverse and not dependent on a small number of markets or landlords.

Speaker 2

In addition, our real estate team has been building increased buffer into our pipeline over the past year to ensure we are insulated from potential delays in Our second strategic pillar is developing a modern best in class organization. As we scale, we continue to invest in team members and equip them with the tools and training to deliver strong, consistent results and run great restaurants We're committed to being the employer of choice by creating an exceptional culture And from a compensation perspective, ensuring we're positioned competitively among leading brands and markets across the country. To support sustainable growth, we're building a pipeline of qualified, highly engaged leaders with the skills to run great operations and provide fantastic guest experiences. In 2023, our target is to internally place 75% of our new restaurant GMs and we remain on track to achieve that goal. Our Academy GM network supports this pipeline and serves as a farm system for future leaders.

Speaker 2

At the end of Q3, we had 45 Academy GMs, including 7 Recently promoted to the multi unit leader position, we plan to have 50 by the end of the year, enabling localized training in existing markets across the country. In September, we held Cava Connect, a conference that brings all of our restaurant GMs together for education, Recognition and celebration. In addition to celebrating our mission and recognizing team members for exhibiting our values and competencies, The conference is rooted in education on our guests, people and standards initiative, what we call GPS. This initiative focuses the team on 7 foundational metrics and standards for operational execution. Over 3 days, leaders participated Robust training sessions on team member development, P and L management, food safety standards and the guest experience.

Speaker 2

Our 3rd strategic pillar is building the infrastructure to successfully scale and grow the business. We've made investments to support the growth we know this These investments, which will create leverage over time, are thoughtful and strategic with an emphasis on operational excellence, Efficiency and creating an exceptional experience for our guests. Among these investments is our vertically integrated production model. By producing our own dips and spreads, we're taking complexity out of our restaurants, improving costs overall and maintaining the quality and integrity of our unique recipes. Across more than 300 locations, Cava's Crazy Feta is as delicious today As it was when guests of our first full service Cava Meze restaurant fell in love with it.

Speaker 2

Our new facility in Verona, Virginia, Which further builds out these capabilities is on pace to commence operations in Q1 2024. The envelope is complete, The management team has been hired and equipment is being delivered and set in place. Verona, along with our current 30,000 square foot facility And Laurel, Maryland will be able to support at least 7 50 restaurants as well as our CPG business. Shifting to loyalty, Cabo has a diverse passionate customer base and we are in the early stages of launching a new loyalty program Aimed at developing deeper connections with our guests, creating more frequent relevant experiences and further driving traffic mix and check. In the next couple of weeks, we will transition all loyalty members to a bankable points model.

Speaker 2

And in December, we will pilot New rewards and engagement tactics in the Houston market. The pilot will inform the rollout of a new loyalty program nationwide expected in late 2024. Our best in class culinary team continues to innovate inside a robust stage gate process that validates new offerings and ensures efficient successful launches. We recently brought back 2 limited time only fan favorites, The Balsamic Day Chicken Bowl and our Sweet and Spicy Chicken Pita. And soon, we'll be market testing an exciting new main item, Steak.

Speaker 2

Steak is a highly requested item and brings a complementary offering to our existing portfolio of names. Our Mediterranean take is inspired by flavors from the Aegean Sea, including sun dried tomato, coriander and aleppo pepper, Showcasing what makes Cabot special and giving us an opportunity to delight existing guests, attract new ones and reengage those who haven't visited in a while. STAC has performed well at each stage date to date and our operational tests have been successful. The next stage Is a market test in Dallas and Boston, which is scheduled to begin next month. And if the positive results continue, We expect to launch stake nationwide later in 2024.

Speaker 2

Before I turn the call over to Tricia, I'd like to wrap up With Q3 highlights and reiterate the opportunity in front of us. This quarter's results continue to show the strength of our brand. ABBA same restaurant sales growth was 14.1%, driven by 7.6% traffic growth.

Speaker 3

Our

Speaker 2

powerful unit economics continue to build with a $2,600,000 AUV and 25.1 percent CABA restaurant level profit margin during Q3, resulting in nearly $20,000,000 of adjusted EBITDA and $7,000,000 of net Finally, I want to express my gratitude to our team members for their generosity and commitment to bringing heart health and humanity to food. We're living in a world that's more fluid and challenging than ever. Online life has failed to replace the real life emotional connections humans crave And consumers now say they are looking for restaurants that make them feel welcomed, warm and cared for, restaurants like Cabo. It is that exceptional hospitality combined with our unique cuisine we're tasting healthy night that embodies our Mediterranean way. At Cabo, Everyone is welcome at our table.

Speaker 2

With that, I'll let Tricia walk you through the financials.

Speaker 3

Thanks, Brett, and good afternoon, everyone. TABA revenue in the Q3 of 2023 grew 49.5% year over year to 173,800,000 Same restaurant sales increased 14.1%, driven by traffic growth of 7.6%. I would like to take a minute to clarify our same restaurant sales calculation. Both NROs and conversions Enter the same restaurant sales base when they have been open as a Cava restaurant for at least 3 65 days, Clarifying that the strong growth when a location converts from ZOE's to CABBA is not included in same restaurant sales. We noted broad based same restaurant sales strength across vintages, regions and both suburban and urban locations.

Speaker 3

We opened 11 net new Cava restaurants this quarter, bringing our total Cava restaurant count to 290. We are off to a strong start in Q4 with 12 new restaurants already opened, giving us confidence to raise our new unit guidance range The 70 to 73 for the year. New restaurant openings are outperforming the model from a top line and restaurant level margin standpoint. In addition, we continue to prove our portability with its overall AUV above 2,600,000 And all geographies over $2,300,000 Cava restaurant level profit in the 3rd quarter was 43,600,000 For 25.1 percent of revenue versus $25,200,000 or 21.7 percent of revenue in the prior year, representing a 72.8 percent increase. The margin expansion was largely a result of improved Given our current stage of growth and our commitment to continued investments in our restaurants, we do not expect to maintain this level of Harvest food, beverage and packaging costs were 29.4 percent of revenue, Lower than Q3 of 2022 by 190 basis points, driven by lower input costs and higher incidence of Premium menu items driving favorable product mix.

Speaker 3

Sava labor and related costs were 25.3%, down seventy basis points from the Q3 of 2022. The decrease was driven by leverage from increased sales, partially offset by an increase in average hourly wages and an increased mix of new restaurants. As discussed on our Q2 call, we intend to continue to reinvest in our team members with wage increases and other benefits. We believe that Cava is a place where our team members can build a career and not just have a job. At the beginning of Q4, we made incremental wage investments to ensure we are highly competitive in each market, driving Q4's average wage approximately 8% above Q4 of We expect this to have an 100 to 120 basis points impact on our restaurant level margins beginning in Q4 of Investments are critical to support our future growth and we expect further investments in 2024.

Speaker 3

TAVA occupancy and related expenses were 7.9 percent of revenue, an improvement of 50 basis points from the Q3 of 2022 due to increased sales leverage. TABA other operating expenses were 12.3 percent of revenue, a decrease of 30 basis points from the Q3 of 2022 due to higher sales. Shifting to overall performance. Our general and administrative expense for the quarter, excluding stock based compensation, was $21,300,000 compared to $15,400,000 in Q3 of 2022. This $5,900,000 increase is primarily driven by recurring public company costs, Higher performance based accruals and an increase in cost to support growth.

Speaker 3

As a percentage of revenue, G and A, Excluding stock based compensation was 12.1% in the current quarter, an increase of 100 basis points from the prior year quarter Due to recurring public company costs and higher performance based accruals, partially offset by leverage from higher sales. Adjusted EBITDA, including the burden of preopening costs for the quarter was $19,800,000 which was more than the adjusted EBITDA for all of 2022. The increase in adjusted EBITDA Was driven by 14.1 percent Cava same restaurant sales growth, improved Cava restaurant level profit margin And the performance of new openings. Keep in mind, Q3's preopening costs included expenses related to the restaurants opened in Q3 As well as costs related to the 12 units we've opened to date in Q4, we reported $6,800,000 of net income compared with a net loss of $11,900,000 in Q3 of 2022, representing an increase of $18,700,000 We reported diluted earnings per share of $0.06 in the quarter compared with a diluted loss per share of $8.96 in Q3 of 2022. I would like to remind everyone that we expect our share count to be between $117,000,000 $118,000,000 for Q4 of 2023.

Speaker 3

Shifting to liquidity. At the end of the quarter, we had 0 debt outstanding, dollars 340,400,000 in cash on hand and access to a $75,000,000 undrawn revolver with an option to increase our liquidity if needed. We delivered cash flow from operations of $73,100,000 for the current year to date period compared with $5,200,000 in the prior year period. The increase is primarily driven by our improved operations driving increased profitability across the fleet. Q3 results continue to demonstrate the power of our model and the value we are capable of delivering over the long term.

Speaker 3

Having said that and as reflected in our guidance, the restaurant level margins delivered in Q3 Should not be considered COVID's new normal given the continued wage investments in Q3 and Q4. Turning to our outlook for full year 2023, which includes the 53rd week, we expect the following: 70 to 73 net new Cava restaurant openings, Cava same restaurant sales growth, Excluding the impact of the 53rd week between 15% 16%, cover restaurant level profit margins of at least 24%, Pre opening costs between $14,500,000 $15,500,000 and Adjusted EBITDA, including the burden of preopening costs, between $70,000,000 $73,000,000 Before turning to Q and A, I want to provide some high level thoughts for 2024. First, regarding pricing, we expect to return to our historical price increases of 2.5% to 3% starting in January. While we will provide same restaurant sales And restaurant level margin guidance on our next earnings call, we want to share with you some initial color. We are taking into consideration a Q1 2023 benefit of an unseasonably mild winter Along with Q1 2022 Omicron Lab as well as the IPO HALO that benefited Q2 and to a lesser extent Q3 of 2023.

Speaker 3

Additionally, as previously discussed, We expect a more moderated restaurant level profit margin, reflecting recent labor investments and potential additional investments in 2024. Finally, as previously projected, we will move to an annual unit growth rate of at least 15%, translating to an expected net new unit count of 47 to 50 units in 2024. Now, I will turn the call back over to the operator to open it up for Q and A.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. You may certainly re queue if you have any additional questions. First question comes from Andy Barish from Jefferies. Please go ahead.

Speaker 4

Yes. Hey, guys. Great results. Just wanted to clarify, If I'm doing the math right on what you've reported year to date, it implies The 4th quarter same store sales are kind of flattish to slightly positive. Am I missing something there?

Speaker 4

Or Can you clarify a little bit on sort of how that, rose up to the 15% to 16% for the year? Yes.

Speaker 3

Hey, Andy, it's Tricia. Good to hear from you. So the implied guidance is a little positive up to about 4.7% or so. And what that reflects Is the strong comp in the Q4 of the prior year at 15% and taking to a lesser extent And to play the macroeconomic environment and the impact that it may have on the consumer.

Speaker 4

Okay. Got it. And then, yes, appreciate some of the early thoughts on 2024 and As we all look at the calendar turning in the not too distant future, are you still thinking You know that, comps can be positive even lapping, some of those really big numbers in the First half of the year?

Speaker 3

Yes. So we tend to look at things on a 2 year stack. And so when you had a 28% comp in the Q1 of last year, There was a benefit of about 10 points related to weather and omicron, and that is going to make Q1 of 2024 a bit challenging for us. So I wouldn't expect significant positive comps as we go into Q1, but certainly our long term approach in thinking about Low to mid single digits on a same restaurant sales basis annually seems to make sense to us.

Speaker 1

Okay. Much appreciated. Thanks for the color there.

Operator

Thank you. The next question comes from John Ivankoe from JPMorgan, please go ahead.

Speaker 5

Hi, thank you. Obviously, good results, but I was wondering if you thought you've actually left Maybe some customer money on the table in the Q3. And I asked this in the context of stores that have very clearly been very busy. In other words, Do you think that you've really had the throughput in place to properly serve all the customers that have walked into the stores And wanted to purchase Kava. And secondly, there's been some feedback around digital pickup times that haven't been Exactly accurate, at least relative to customer expectations.

Speaker 5

I wonder if that's been kind of a specific experience, if that's been a broader experience And if you do have some tightening opportunities perhaps from an operational execution perspective to post even better results Then what you already have then? Thank you.

Speaker 2

Hey, John, it's Brett. Thanks for the questions. First, I want to be clear. We're building this business for the long term And setting our team members up for success to deliver great guest experiences and working first and foremost on fundamentals of operations And hospitality, certainly, we always believe there are opportunities to optimize our operations and continue to look at it in all facets. As it relates to digital order specifically, we do track digital order accuracy rates as well as our Yext score.

Speaker 2

So this is How customers are rating us and judging us and we've been over 4 out of a 5 point scale For over the last 52 weeks, we've actually increased that in the last couple of periods almost to 4.5. So we've seen writ large our guests be very happy and even increasingly happy with our performance. But that's not to say that there are Opportunities to continue to drive that score higher as well as improve the speed in which we operate over time over the long haul, But we're certainly mindful of not overheating the engine, certainly from an operation standpoint.

Speaker 5

And obviously, introducing I mean, does that mean one protein necessarily has to come off as part of the stage gate process? I mean, it's always an interesting idea of introducing new products that Provide more variety, more use occasions to the customer, but just talk about how you balance the ability of maintaining that consistent execution as you do add additional

Speaker 2

Yes, great question, John. And I talk about our 38 ingredients with over 17,000,000,000 combinations and We try and be really disciplined about not introducing too much menu creep and complexity into the system. So back almost a year ago, we removed beef meatballs from the menu. That opened up a new slot within our mains category. So steak would actually be taking a spot that used to exist right now.

Speaker 2

We also have that rotational slot where spicy falafel currently exists, and we'll be bringing back our white sweet potato Over the winter, which was a fan favorite that we're going to rotate back through, but steak would actually be filling that former beef meatball slot, Reintroducing a beef item that's been highly requested on our menu.

Speaker 1

Perfect. Thank you.

Operator

Thank you. The next question comes from David Tarantino from Baird. Please go ahead.

Speaker 6

Hi, good afternoon and congrats on great results here. Tricia, I had a question. You mentioned a couple of times that You wouldn't expect the restaurant margin performance you've been delivering recently to be the new baseline. I was just wondering if you could maybe elaborate on what you think the right underlying baseline should be as we think about 2024 is a starting point just to make sure we're on the same page.

Speaker 3

Yes. Thanks, David. So we mentioned the investments in the business to make sure that we're well positioned for our continued growth over the long term. So it's something that we've been very focused on Historically, always firmly focused on our employees and how important they are to us. We view them as assets, Not as expensive and want to make sure that we're always reinvesting in them.

Speaker 3

Remember back in 2016, we went to a $13 starting wage. And certainly, our commitment to our employees will continue. But as you think about, our restaurant level margins, What Q2 and Q3 demonstrate is the power of the model and what Kava can deliver over the long term, but we'll make those We've already done and continue to evaluate the opportunity for additional investments in the near term so that we ensure that we're well positioned for what we can deliver over the long term. So overall, there's at least 100 to 120 basis points that we'll invest in and we have plans to continue to invest In 2024 as well, that will bring restaurant level margins a bit down a bit more.

Speaker 6

Got it. Thank you very much.

Speaker 3

One other thing, David, that I will add to is in 2023, there was a lot of value and benefit in very high same restaurant sales as well as A strong PPA and that strong PPA was the result of premium attachments and attachments in general, things like our pita chips that are more popular or our Honey Harissa Chicken and all of that drives leverage throughout the P and L. And given the uncertain environment that we're in, we're not sure if that continue into 2024, but we'll certainly be ready if it does.

Speaker 6

Makes sense. Thank you.

Operator

Thank you. The next question comes from Brian Harbour from Morgan Stanley. Please go ahead.

Speaker 7

Yes, thanks. Good evening, guys. Tricia, I had a question too just kind of about that labor line. So is that the net impact that you'd expect, I. E, You think labor costs as a percent of sales will be up 100 to 120?

Speaker 7

And I think also just broadly, Is there a little bit of catch up being played here? I know that that's I think more of an increase than some of your peers are seeing. And also does that account for maybe taking wages up in California next year at this point.

Speaker 3

Hey, Brian. Thanks for that. And so we don't view this as a catch up. It is really an investment in our team members. Going back to what I said earlier, really demonstrates our commitment to them and how we viewed, how we run Cava, historically and as we go into the future.

Speaker 3

So that's it's wages, it's other benefits and other things. So, it's a minimum $100,000,000 to $120,000,000 There could be other things we do in 2024 as well. And as it relates to California, we're not making any changes in price necessarily yet. The wages that we're reflecting In California, we'll have about a 30 basis point impact overall on restaurant level margins, when they do increase to $20 in April, And that piece should be factored in as you think about 2024 as well.

Speaker 7

Okay. And just on new unit openings, that's Obviously, come in quite strong this year. So maybe that just alludes to some of the pipeline building that Brett mentioned, but what's kind of enabling you to run ahead of that target where I think some peers have still seen challenges?

Speaker 3

Yes. Our real estate and design and construction teams have done a good job in anticipating the challenges that might lie ahead and really built in buffers into our timelines as well as into our pipeline. So we raised our buffer from 20% to 30% earlier in the year, creating a robust Pipeline that we could leverage, we've been successful in doing so. And so we see the opportunity to open more restaurants this year than we had originally planned.

Speaker 2

Thanks.

Operator

Thank you. The next question comes from Chris Saucall from Stifel. Please go ahead.

Speaker 8

Thanks. Good afternoon and congrats on a great quarter. The consumer's willingness to trade up to more premium items It's been a factor you guys have alluded to for a few quarters now. Tricia, can you dig into that point just a little bit more and help us understand the contribution To the comp you think that that has had maybe this quarter and whether you see that continuing to benefit you over the next several quarters?

Speaker 3

Yes. So I appreciate the follow-up question, Chris. So as we look at our incidents and the premium attachments, drinks and chips Our items that we've seen a significant increase year over year. So chips in particular are up a couple of points, as you look at them Q3 last year, Q3 this year. And then Honey and Reese Chicken, as I mentioned, is also up a few points as well.

Speaker 3

As it relates to comps, it has a modest Impact on overall same restaurant sales, really the strength in our same restaurant sales goes back to the traffic that we experienced. Nearly 8% growth in traffic. We saw that in across all vintages, across all geographies in suburban and urban, and really just Demonstrates how our food and culinary and hospitality is resonating across the country, as we create the next big cultural cuisine category.

Speaker 8

Okay. That's helpful. And then, Brent, the comp growth has been running ahead of expectations, which I'm sure has made it difficult for the to schedule the right amount of hours, which is led to this margin leverage that you've seen in the last couple of quarters. I'm just trying to understand, How do you think about addressing that potential? I guess it could be considered an issue in terms of labor scheduling, but How do you get ahead of that and make sure that you are you have the right number of hours for the right daypart and the right time?

Speaker 9

Yes, the team has done a

Speaker 2

lot of work on this, Chris. And what they found is that they have the right complement of hours. It's just Allocating those hours a bit more effectively and efficiently to align with some of the traffic patterns. So we've got a number of different labor deployment tests going on in various markets for the various different daypart mixes across the fleet and revenue bands to ensure that we're setting our team up for the best success and That we can then lean into driving potential additional throughput opportunities down the road, but we want to be focused on What is going to be the right staffing complement at the right times of day and the right prep load balancing at the right time of day To make sure that our team members are front footed before we open up additional fire hoses of revenue on them, I think it's critical To make sure we've got our operators positioned in the best place, as we drive revenue going forward.

Speaker 8

Okay, great. Thanks guys.

Operator

Thank you. The next question comes from Jon Tower from Citi. Please go ahead.

Speaker 10

Great. Thanks. Just a couple of clarifications and then a question. First, on the comments about the 4th quarter guidance, the implied comp, Are you seeing a slowdown of that magnitude quarter to date?

Speaker 3

So as we've stated Prior, we are not going to give inter quarter or intra quarter guidance as it relates to same restaurant sales, and that's all just reinforced what we said earlier. We had a very strong Q4 4 of 2022 at a 15% comp. And so factoring that in as well as the uncertainty in the macroeconomic environment, We feel comfortable with the guidance that we've outlined today.

Speaker 10

Got it. Okay. And then just on the stake itself, is that going to be a permanent menu item or is Slotted in an LTO.

Speaker 2

We are still looking at it through the stage gate process to make a final determination, and we'll have more on that in future earnings.

Speaker 10

Okay. And then just last one on the question piece. It's you're speaking quite a bit to the idea that The environment, the macro environment, there's a lot of uncertainty. And I'm just trying to think about how Caba Break through the noise in an environment where consumers are being a little bit more discerning on where they spend. Your brand awareness is Pretty low relative to the competitive set and we're already seeing value messaging starting to step up across the industry.

Speaker 10

What tools does the team have in place to kind of draw in new customers next year as kind of the noise across the industry around value really steps up?

Speaker 2

Yes, John, it's Brad. Thanks for the question. I think you called it, right? We've got fairly low brand awareness Brand from a brand awareness standpoint. When you think about the tools we have, our social team does a phenomenal job.

Speaker 2

It's amazing, The virality and the awareness you can get on a channel like TikTok these days and get millions of views and really have our brand awareness Have a network effect around markets as well as opening new restaurants with our community days And the earned media we get in these markets, we found our marketing spend to be incredibly efficient in driving brand awareness increases in markets. So you look at some of the markets we've opened A year or 2 ago, the brand awareness has already increased from 20% to 40%. So again, we're in our infancy and we're in the early stages of this. And then when it comes to the value perception, which is why I think our traffic has been resilient in the face of some of these macroeconomic headwinds Is the differentiated nature of our cuisine, the uniqueness of our cuisine and the fit of our cuisine to a modern consumer where taste and health unite, Right. You think about trying to recreate a cava meal at home or at the grocery store for a similar price or going to appear and getting a similar Type of meal that is satisfying, flavorful and helpful for you at a similar price.

Speaker 2

So we have been leaning into our value proposition. Tricia talked about the price increases or the lack thereof that we've taken compared to many peers working on behalf of our guests, trying to drive a great value proposition for them When they're feeling the pressures of inflation from other parts of their life, and we think that's what's kind of translated to the results this quarter and what we're leaning into next year to continue to not only be resilient, but grow market share in the face of those macroeconomic concerns.

Speaker 10

Thank you. And then just the last one for me. I know you spoke about the idea of wage rate investment or wage investments starting in this Q4 carrying over into next year. Are there any other investments we should think about Potentially getting the P and L in 2024?

Speaker 3

Yes. We're continuing to evaluate other opportunities For investments on the labor line, so that is another area that we're testing different concepts and different ideas that could evolve into something in 2024. And as those Get More solidified, we'll give more color on that on the next call. But then for the rest of the P and L from a restaurant standpoint, We're not anticipating significant labor investments and excuse me, significant investments on any of the other line items.

Speaker 10

Great. Thanks for the time.

Operator

Thank you. The next question comes from Matt Curtis from William Blair. Please go ahead.

Speaker 9

Yes, thanks. Good evening. I just wanted to know what your outlook is for commodity inflation in the Q4, as well as maybe just preliminary thoughts on What commodity inflation might look like in 2024?

Speaker 3

Yes. So thanks, Matt. So, 2023 has benefited for some From some favorable input pricing, particularly as it relates to chicken, and that will continue into Q4, nothing significantly different than what we've already experienced But as we go into 2024, we're anticipating low to mid single digit potential commodity inflation.

Speaker 9

Okay, great. Thanks. And then just separately, I was wondering if you could tell us a little bit more about how the class of

Speaker 3

And we're very pleased with our 2023 class. They have opened above our expectations both on the sales side as well as the restaurant level margin perspective. So Really pleased with that cohort and what they've been able to deliver and much like the other vintages prior to that. The way we do think as you go into 2024 is, being thoughtful in the new classes themselves and wanting to think about them from an 80% standpoint, nothing is concerning us in what we're seeing, but, this class has significantly outperformed this year and just want to be Thoughtful on how we think about classes in future years.

Speaker 9

Okay. Understood. Thanks for that.

Operator

Thank you. The next question comes from Ashling Grenninger from Piper Sandler. Please go ahead.

Speaker 11

Hi. This is Ashley on for Brian. Congrats on the impressive results today. My question is on the catering opportunity. I believe you're testing in a Traditional restaurant format, I was wondering if you could talk about what you're seeing in the test and if it's successful, is this something you'd imagine incorporating into all the stores Or is it something where you'd expect this to influence the design or layout of new store builds?

Speaker 11

Thanks.

Speaker 2

Yes. This is Brad. Thanks for the question. We continue to progress on our catering test and we are now up to 8 what we call our Kava hybrid kitchen. So these are new units we've built with an expanded back of house For centralized catering production, in addition to your point, we are testing in a traditional Cava restaurant and we're growing that To a few other units as we expand that format test, because we know that there aren't all units that really support catering Because the AUVs are so significant and the production capacity is so limited that we don't want catering to come at the detriment of the other channels.

Speaker 2

So we're looking at other formats or other locations around those locations to supplement production To be able to have catering offered across the country. So we're performing these different format tests over the next year or so To understand how we orient this production successfully to support what we think is a great opportunity to launch catering nationally across the board, just an example, We catered almost every single Major League Baseball team this summer. We catered for the Texas Rangers during their World Series run. We catered the Lakers when they were in the playoffs last spring. So we see this not only office workers or schools, but athletes, colleges, professional.

Speaker 2

We see our cuisine being a great fit for our catering channel. We just want to be thoughtful about how we build out the production capabilities

Operator

Thank you. The next question comes from Alton Stump from Loop Capital. Please go ahead.

Speaker 12

Great. Thanks so much for taking my questions. Just wanted to go back to the input cost front. Obviously, after over the last I'm not seeing 40 year high inflation, things need to be settling down. But as you know, I was kind of thinking about input cost versus pricing heading into next year.

Speaker 12

Do you think that Picker bucket is a positive or a negative to your store level margin next year versus this year?

Speaker 3

Yes. So we mentioned on the call that we anticipate raising pricing in January in the 2.5% to 3% range and the input cost on the commodity side is in the Low to mid single digits. And then as we also discussed, we've got some investments on the labor side that we have made and then are also So I think if you take all of that into consideration, I'll give you a good view into what, the impacts are going to be overall from a restaurant level margin perspective.

Speaker 12

Got it. Very helpful. Thanks, Tricia. And then I guess one quick follow-up, hop back in the queue. But just I mean on the pricing front, I just touched What your plans are for early next year?

Speaker 12

How competitive of an environment do you think it will be? You guys are actually tracking much more positive traffic Trends and almost anyone right now in the space, you've got probably more room than most, but just kind of how you feel about the pricing versus your competition moving into next year?

Speaker 3

Yes. So we're very mindful of pricing and where we sit versus the competition. While Brett touched on how It's really difficult to create the COVID experience at home. We want to make sure that we're accessible to as many guests as we possibly can be. And so as we think about pricing, we're very thoughtful about that and feel we're very well positioned against our competitors, to create that accessibility, but also perform well for the business overall.

Speaker 12

Got it. Great. Thanks so much. Ed congrats on the quarter. Thank you.

Operator

Thank you. As there are no further questions, I will turn the call back over to Brett Schulman, CEO and Co Founder for closing comments.

Speaker 2

Thanks everyone for joining the call today. I want to thank our teams once again for delivering an exceptional third quarter, which provides further evidence of the broad appeal of our Mediterranean concept. We have a significant white space opportunity in front of us as we define and create the Large scale cultural cuisine category, fueled by a powerful unit economic engine, successful new restaurant openings across the country And strategic investments in people and the infrastructure we need to scale, we are extending our clear leadership position. We're keeping a close eye on macroeconomic conditions, but our focus is on building a durable brand that can deliver value over the long term, and we couldn't be more excited about what the future holds. Thanks again for joining us.

Speaker 2

I look forward to speaking with you next quarter. And in the meantime, we wish you a happy holiday season.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.

Remove Ads
Powered by Quartr
Earnings Conference Call
CAVA Group Q3 2023
00:00 / 00:00
Remove Ads