CAVA Group looks tasty following buy call, high-volume breakout

Key Points

• Approximately 34 million shares of CAVA exchanged hands last week, almost 10 million more than were traded during its June 2023 IPO week.
• CAVA aims to differentiate itself by offering healthy Mediterranean fare while promoting hot social topics in an ultra-competitive, fast-casual space.
• The key piece of CAVA's growth strategy is well-dispersed with an ongoing store expansion.

Like one of its colorful salad bowls, fast-casual restaurant chain CAVA Group Inc. NYSE: CAVA has been a mix of green and red since its June 2023 IPO. 

The Mediterranean-themed Chipotle challenger ran nearly 60% in its first two months of trading on a healthy investor appetite for new issues. Its market value slashed in half a few months later as buying demand dried up like a cured Greek olive.

After winning over a closely followed Wall Street research analyst, CAVA appears to be on the upswing again.

Last week, TD Cowen's Andrew Charles began covering the company with a Buy rating. The analyst has successfully picked several restaurant-related winners in the previous five years, including McDonald's, Domino’s and GrubHub. His optimistic report and $46 price target helped CAVA record its highest weekly trading volume.

Approximately 34 million shares were exchanged last week, almost 10 million more than were traded during CAVA's well-hyped first week on the NYSE. The surge in buying interest helped the stock bust out of a 10-week sideways pattern and reached the $40 level for the first time since September. 

In technical analysis, reclaiming key moving averages (including the 20-day MA and 50-day MA) in heavy volume — as CAVA has — often leads to a sustained uptrend.  

TD Cowen decided to sit at the bullish lunch table after CAVA laid out some delicious third-quarter results.

How did CAVA perform in Q3?

In its second quarterly report since becoming a public company, CAVA announced that its third-quarter revenue jumped 50% year-over-year to $173.8 million. 

Although a substantially larger U.S. footprint drove most of the gain, a 14% increase in same-restaurant sales shows that the brand is gaining traction. In an ultra-competitive, fast-casual space that includes the likes of Chipotle and Panera, CAVA aims to differentiate itself by offering healthy Mediterranean fare while promoting hot social topics like inclusivity and self-expression. So far, the recipe seems to be working.

Restaurant traffic increased 8% as consumers searching for a fresh option visited CAVA's 290 locations across 24 states. The fact that more people are discovering the brand in a tough macro environment is an encouraging sign. As inflation and rate pressures ease, American budgets will have more leeway for discretionary restaurant purchases. According to co-founder and CEO Brett Schulman, along with growing brand awareness, this should lead to market share gains.

Another positive development is that profitability is improving. After recording a $12 million loss a year prior, CAVA posted net income of $6.8 million in the third quarter of 2023. Menu price hikes are partly responsible, but so are increased sales and lowered costs. Due to lower input costs and a focus on higher-priced premium items, CAVA's restaurant-level profit margin expanded 3.4%.

What is CAVA's growth outlook?

The key piece of CAVA's growth strategy is ongoing store expansion. After opening 11 new restaurants in Q3, management expects to open at least 70 locations this year. It also raised its full-year guidance on same-restaurant sales growth, profit margin and adjusted EBITDA. CAVA’s outlook is brightening heading into the new year, which could lead to some eye-opening 2024 financials. 

Of course, nowadays, CAVA can’t lean fully on expanding its brick-and-mortar footprint. Pick-up and delivery orders will be valuable components of long-term success. Fortunately, the company has a good jump in catering to customers' evolving convenience needs. Last-quarter digital orders accounted for 36% of total revenue.

CAVA has a long way to go to reach its $1 billion revenue target but is heading in the right direction. Increases in store count, same-store sales and profit margins hold the potential for grabbing a bigger share of the restaurant wallet. More importantly, it seems to have a model that works anywhere. 

From California to Connecticut, CAVA's presence is already well-dispersed, a trait for which it deserves more credit. Often, new restaurant chains stick to a few flagship states to jumpstart growth, but CAVA is achieving growth on a broad scale. This shows that the brand isn't region-specific and can potentially catch fire nationwide. 

CAVA's app and rewards program resonates with health-conscious customers. Its social media presence is driving word-of-mouth advertising. A run back toward $60 may be on next year's menu if trading volume stays hot.