Mediterranean Growth Monster: CAVA Keeps Surging—Buy the Dip?

Key Points

• CAVA is often referred to as the Mediterranean fast-casual restaurant version of Chipotle due to its build-you-own-bowl (BYOB) format.
• CAVA reported 21.2% same-restaurant YoY sales growth (comps) for the fourth quarter of 2024, crushing Chipotle's 5.4% and Sweetgreen's 4% YoY comp growth.
• CAVA shares fell 10% since they missed earnings estimates by a nickel and provided potential lowball estimates for comps in 2025.

It’s not common to see a restaurant chain perform double-digit same-store restaurant sales growth, also referred to as year-over-year (YoY) comparable (comp) sales growth, these days.

The retail/wholesale sector is reeling from strapped consumers trying to survive food inflation. CAVA Group Inc. NYSE: CAVA is a chain of Mediterranean fast-casual restaurants taking the nation by storm.

The company posted YoY comp sales of 21.2% in its fourth quarter of 2024 as it opened up 15 new restaurants to bring the total to 367 in the United States.

Rise of the BYOBs, But CAVA Best Them All

CAVA is a build-your-own-bowl (BYOB) style operation like Chipotle Mexican Grill Inc. NYSE: CMG but with Mediterranean fare, which includes proteins like lamb meatballs, grilled chicken, steak and falafel. Customers can mix and match 38 ingredients and toppings for over 17.4 billion combinations of bowls. Sweetgreen Inc. NYSE: SG is another popular BYOB-style fast-casual restaurant that has gained popularity since adding its garlic caramelized steak to the menu. However, CAVA bested both of them with 21.2% comps sales. Chipotle only pulled off 5.4%, and Sweetgreen only 4% YoY comps sales in their respective fourth quarters.

Rather than surge on this news, shares of CAVA sold off nearly 10% the following days, providing investors with a buy-the-dip opportunity.

Here's 2 Reasons Investors Ran for the Hills on Q4 Earnings

There are two reasons CAVA stock sold off after its earnings announcement. First, while CAVA performed phenomenally well in comp sales, it missed bottom-line consensus analyst earnings per share (EPS) estimates by 2 cents. The company reported EPS of 5 cents, but analysts expected 7 cents for Q4.

From there, the metrics were robust. Revenues rose an impressive 28.3% YoY to $227.4 million, which beat consensus estimates of $223.25 million. Foot traffic increased by 15.6%, and the restaurant-level profit margin rose 50 bps to 22.4% on a restaurant-level profit of $50.4 million.

Adjusted net income surged to $6.5 million, up from 2 million in the year-ago period. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $25.1 million, up from $15.7 million in the year-ago period. CAVA opened 15 new locations, which amounts to an 18.8% YoY increase in restaurants to 367.

Comps Sales Estimates Lowered from 13.4% in 2024 to 6% to 8% in 2025

The second reason some investors panicked out of shares was the guidance forecast for the next year. Despite scorching hot 21.2% YoY comps in Q4 and 13.4% YoY comps for the full year 2024, the company expects 2025 comp sales to (only) grow between 6% to 8%. This took the steam right out of the stock, causing shares to tumble 10% the following day.

Did Management Lowball the Guidance?

The other line of thinking is that management set the bar low on purpose so they could leap over it. This is referred to as lowballing the guidance, under-promise and over-deliver. Lowballing is less extreme than kitchen sinking, where management throws all the bad news out up front to set the bar super low to step over. If that is the case, then buying the dip may be a solid game plan to pursue, especially at the support levels.

Piper Sandler Upgrades CAVA to an Overweight

One analyst sees this as a potential opportunity to add shares. Piper Sandler analyst Brian Mullen sees fast-casual restaurants as a secular growth trend, and CAVA is one of the best ways to get a piece of it, especially when shares are trading down 15% to 20% year-to-date (YTD).

Mullen stated, “We think that CAVA is one of the best-positioned companies in our coverage to navigate any environment. Specifically, we note that CAVA has taken only ~15% menu pricing versus 2019 (as compared to FAFH at ~30%, and more at certain restaurant peers); and while this is likely not the only reason for CAVA's traffic outperformance, it has almost certainly helped." FAFH refers to food away from home.