The objective of this exercise is to research a company to a reasonable depth using a reasonable amount of time, with the belief that a) whatever level of research conducted, there will still remain an area of unknown b) the most efficient way to get better at analyzing is with a manageable single cycle, that gets iteratively better c) getting my hands dirty by covering a breadth of companies will yield a new sense of understanding or at least provide the subsequent sense of direction.
1. How the Business Makes Money
Cava makes money by selling Mediterranean food in a Chipotle-like conveyer belt assembly way. The fast casual restaurant’s popular menu are bowls and pitas. They both cost around $11. Pricing is very similar to Chipotle. Bowl is an assortment of protein, salad and rice that are offered in a pre-made combination or selected according to customer’s choices. It differs from salad bowls from other places or Chipotle in that they focus on their Mediterranean style. Ingredients that give the cuisine’s distinct flavor including feta, tzatziki (cucumber, herbs and yogurt), hummus, pita crisps, arugula, Greek vinaigrette (oil, vinegar, lemon juice, herbs and spices), roasted eggplant, pickles, cabbage slaw are used in the bowl. Pita, normally indicating the flatbread made from wheat flour common in the Mediterranean, is a menu that wraps ingredients in this flatbread, similar to a burrito. Mexican tortilla was originally made using maize, however it is now widely made with wheat flour as well. This includes Chipotle. For sides, Cava has pita chips and side pita, comparable to fries or nachos, and various Mediterranean dips such as the chickpea based hummus, chili pepper based harissa, yogurt based tzatziki etc.
In 24Q2 they added 18 new locations, totaling 341. Great majority of stores are company-operated. in 10-K 2023 says they operated 309 stores, excluding 2 locations under a licensing agreement. Their expansion strategy was unique. Cava acquired Zoe’s Kitchen in 2018 for $300. Zoe’s Kitchen was also a Mediterranean style that had some 250 stores across the US. The consensus is that they were too aggressive in their expansion, fueling much capital from debt, not surplus cash flow. This is different from Chipotle, which has a sound balance sheet. Since then, conversion of Zoe’s stores to Cava drove store growth. Before the acquisition there were only 70 Cava stores. It seems they don’t have stores outside of the US for now.
The first CAVA restaurant opened in 2011 in Bethesda, Maryland. The Company is headquartered in Washington, D.C. and, as of December 31, 2023, operates 309 fast-casual CAVA restaurants in 24 states and Washington, D.C. The number of CAVA restaurants excludes two locations operating under a licensing arrangement and digital kitchens. The Company’s authentic Mediterranean cuisine unites taste and health, with a menu that features chef-crated and customizable bowls and pitas. Our dips, spreads and dressings are centrally produced and sold in grocery stores. We have two reportable segments: CAVA and Zoes Kitchen. CAVA reflects the financial results of all CAVA restaurants we operate.
Zoes Kitchen reflects the financial results of all Zoes Kitchen locations we previously operated. As of March 2, 2023, we no longer operate any Zoes Kitchen locations. Our CPG operations are included in Other. We have continued to see growth in revenue due to our Net New CAVA Restaurant openings and strong CAVA Same Restaurant Sales Growth. CAVA Restaurant-Level Profit Margin increased to 24.8% in fiscal 2023 from 20.3% in fiscal 2022.
The increase in CAVA Restaurant-Level Profit Margin was primarily driven by lower food, beverage, and packaging as a percentage of revenue, driven by lower input costs and higher incidence of premium menu items driving favorable product mix, as well as sales leverage, partially offset by incremental wage investments made in the fourth quarter of fiscal 2023. Consistent with the CAVA culture of investing in our Team Members, we made additional investments in restaurant labor during the fourth quarter of fiscal 2023. In fiscal 2023, we successfully opened 72 Net New CAVA Restaurants, including 28 converted from Zoes Kitchen locations, and completed our Zoes Kitchen conversion strategy. We achieved these goals in the face of nationwide delays in construction permitting and increased construction costs.
Source: CAVA
In 2023, AUV of Cava stores was $2.6m, up 10% from year prior. Restaurant-level margin was greatly enhanced from 20% to 25% in one year. Number of stores grew 30% from 237 locations to 209 stores. Cava’s digital revenue accounts for 36% of sales. Revenue was $730m and net profit $13m. In 2021 and 2022, the company recorded a net loss. Great strides were made in reducing costs. Revenue grew 30%, but food and packaging grew 18%, labor 19%, occupancy 9%, and other restaurant operating costs 20%. Thus, the relative size of these major costs to revenue went down: food and packaging 32%-> 29%, labor 28%-> 26%, occupancy 9%-> 8%, others 13%-> 12%. There was meaningful improvement in operating expense as well.
Cava’s mission is “to bring heart, health, and humanity to food.” Their about page places great emphasis on the Mediterranean concept and quality of food.
Video Summary
How Cava’s Bet On The Chipotle Model Is Paying Off, CNBC – Sep 27, 2024
• Went public in 2023
• 341 restaurants are valued at $43m each based on market cap divided by store. Chipotle store is valued at $23m each.
• Next large cultural cuisine category – Mediterranean? In the fast casual category, could CAVA become the next Chipotle?
• Convenient mix of 38 base fresh quality ingredients making Mediterranean food accessible.
• 24Q2 revenue grew 35% YoY, opened 18 new locations, 14% comp growth. Chipotle’s comp growth is 11%.
• Competitive advantage: 1) vertically integrated, large scale purchasing directly from producers. Efficiency of scale. 2) haven’t hiked price
3) 2018 acquired competitor Zoes Kitchen for $300m and converted 153 stores into CAVA. Managed to expand to areas where they didn’t have strong presence.
• Co-founder and CEO Brett Schulman is with the company for 14 years.
• Chipotle has popularized the fast casual conveyer belt model. Eating good quality, good quantity food for a reasonable price. Cava is applying the success story of the Mexican food to Mediterranean.
• Sweetgreen isn’t profitable even though it uses the same business model.
• Chipotle has 3.5k, aims 7k stores. Cava has 300, aims 1k stores by 2032.
• Risks: labor cost, supply chain risk coming from a single source model
Video Summary
How Consuming a Competitor Fueled Cava’s Rapid Growth | WSJ The Economics Of – Dec 26, 2023
• Used an uncommon strategy: buying a company 4x its size and converting its locations to Cava. 70 stores added 250 stores on top overnight.
• Fast casual restaurant that is being compared to Chipotle 10 years ago.
• Cava likes the suburbs. Those communities may not have Mediterranean options.
• Utilizes a good real estate, mobility, demographic, psychographic analysis to understand the guest base when opening a location.
• In 2018, Zoe’s Kitchen had 261 locations compared to Cava’s 70, but Zoe’s was burning cash, which also lost identity by having too many menu.
• Cava keeps their menu space clear.
• Converting Zoe’s to Cava enabled quicker and cost-effective expansion. Zoe’s stores was in good estate that Cava saw potential.
• Now it has to build new locations from the ground up.
• Only 1.4% of US restaurants are in the Mediterranean space.
• Whether customers continue to seek Mediterranean is the key question. Would people continue to like the cuisine and incorporate into daily meals?
Video Summary
Cava CEO Brett Schulman on Q2 results, pricing strategies and growth outlook, CNBC – Aug 23, 2024
• 10k team members in Cava
• Mission: Deliver heart, health, humanity
• Brett Schulman, along with other Greek immigrants opened the first store.
• From 2019 to 2023 Cava raised prices 12% when CPI rose 18%, fast food raised price 30% according to department of labor. This made the value proposition greater.
• Did not incrementally raise prices when labor wage was lifted.
• 2 year comp growth is over 30% this quarter. This enabled expansion, increase in wage while not raising price so much.
• Vertically integrated supply chain, with two suppliers making produce and dips. Source 85% of ingredients directly from producers.
• The valuation per store is almost twice of Chipotle. It’s due to the growth expectation.
• Operate in 25 states currently, opened the first store in Chicago.
2. Key elements of recent earnings call & IR materials
From 24Q2 earnings call
• CEO Brett Schulman expresses satisfaction in 2Q results.
• Cava’s value proposition is quality food differentiated by Mediterranean cuisine.
• Did not take incremental price increases in response to AB 1228, which raised restaurant employee minimum wage to $20/h in California.
• They were able to increase price at a slower rate than other restaurants.
• 35% YoY Cava revenue, comp YoY of 14% driven by traffic growth of 9.5%, 4.9% from menu price and product mix.
• Grilled steak was a success. It complemented their protein offering.
• Strategy 1. Store expansion in the US e.g. Project Soul initiative which offers more comfort through better seating etc. in their stores. Social media marketing highlights organic food and authenticity.
• Strategy 2. Loyalty program to increase frequency and loyalty. Expected to start October this year, the program will include a points system and rewards system
• Strategy 3. Enhancing efficiency in restaurant operation. E.g. using AI video tech to analyze how quickly ingredients on the make-line is being depleted and alerts staff.
• Strategy 4. Gather guest feedback and retain talent.
• As of 24Q2 the company had zero debt outstanding, $340 in cash
• Guidance for 2024 comp is 8.5-9.5% growth, implying low double-digit growth for 24H2.
• Restaurant-level profit margin outperformed expectation.
• There is good chance that the company would rake in on deferred tax assets thanks to a net profit.
3. If I had to predict the prospects of the business
Cava – the Mediterranean Chipotle – has apparent strengths. It is following a tested fast casual model based on make-lines and good quality ingredients. The only thing not tested is the cuisine. But if even that’s tested, it would mean it’s a red ocean market. I think Cava did well in limiting the scope of their menu. The Mediterranean restaurants I’ve visited were with complicated menu, often unpronounceable and elusive. Take a look at the menu from the previous Zoe’s Kitchen below. 5 or so menus for each category of starters, soups, salads, bowls, plates, pitas, sandwiches. My group would have a hard time determining what combination of dishes would be appropriate. Cava bypasses all of this hassle. The minimal franchising operation follows Chipotle. They both have decent comp and decent restaurant-level operating margins – Chipotle – 29% and Cava 25%. Their menu is simple and easy to cook. Chipotle says they use 68 organic ingredients that you can pronounce. Cava uses 38 ingredients.
I think Mediterranean cuisine has potential. A lot of people around me love pita and hummus, tzatziki and other Greek herbs. The key point I think is accessibility. I reckon these are not any more local than salsa and nacho cheese dips. It’s just that I’ve had more exposure to the latter. The entry point is the hurdle. If I want to get hummus I picture having to visit a Mediterranean restaurant, probably with a group since it would be efficient to try out different menus because of its price. Cava bypassed all of this. It took away the starters, the roasted cauliflower steaks and left what has widespread appeal that is deliverable in scale. Mediterranean food tastes good. It’s healthy. Apparently, it could be offered at a fast casual-level pricing. That’s the bottom line.
I was impressed with Cava’s CEO. He seemed to know what to do. He was leveraging technology to streamline production and optimize store locations. He was looking into Starbucks Rewards-type loyalty program. I think building a fanatics base is critical for any company that delivers more than plain cost-effective products. Wingstop probably doesn’t need a loyalty program. McDonald’s neither. Michelin Star restaurants don’t need one too. The similarity of fine-dining restaurants and fast casual restaurants is that they offer more than the sum of parts. They deliver some story. They charge dollars for the story. The difference is that fine-dining restaurants typically don’t seek to scale. The need to scale while still asking additional dollars for the story, requires some cult, a religion of sort. The CEO also was sensible in Zoe’s Kitchen acquisition. He seems to know the importance of balancing a good balance sheet and store expansion. He knows that the strength of their stores is sticking with the Mediterranean story, making it accessible and convenient, offering quality food for a reasonable price.
Seems like the company was able to enjoy the social media backlash of Chipotle in mid-2024 when customers were complaining about the Mexican restaurant’s portion per dollar. As a chain that is trying to increase market share, their choice to minimize price hike amid inflationary climate was a wise move, turning unfavorable winds to their favor. This resulted in double-digit comp growth when others, including value meal restaurants such as McDonald’s were reporting negative or low-single-digit comp growth.
Based on the interviews that I have seen, Cava and Wingstop’s CEO seemed most capable, followed by Brian Niccol of Chipotle (who moved to Starbucks) who introduced Autocado and dual-side grilling.
I do wish Cava had a better logo. From the looks it may well be a cloud service company.
The company’s p/e is 703x, however. Valuation per store is twice that of Chipotle. True, the company has good potential, but one must be careful in taking stake in such companies as the slightest miss in earnings or guidance with deteriorate the multiple drastically.
Source: Zoe’s Kitchen
Written from scratch by Meston Ecoa
May contain incorrect data and information