Cava Stock Is Dropping. Is Now the Time to Buy?
Cava Group (NYSE: CAVA) has been one of the most exciting stocks on the market since its initial public offering (IPO) nearly two years ago. It's fast-growing and has a huge opportunity, making it an excellent candidate for growth investors.
However, the market wasn't enthused about its most recent earnings report, and Cava stock is down about 30% over the past month. Let's see what's happening and whether or not this is an opportunity to buy on the dip.
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The new fast-casual superstar
Cava is a fast-casual restaurant chain with a Mediterranean concept. It uses a limited selection of fresh, premium ingredients that are easy to customize, and it charges prices that are higher than standard fast food but within reach of its more affluent clientele. In many ways, it's aiming to be Chipotle Mexican Grill with a different flavor profile.
So far, customers are loving it, and it's growing quickly. Revenue increased 35% year over year in 2024 (adjusted for a 53rd week in 2023), and it opened 58 new locations. Comparable sales (comps) were up 13.4%, and they increased a whopping 21.2% in the fourth quarter. That helped average unit volume to rise from $2.6 million to $2.9 million for the full year.
Cava is also becoming highly profitable. The restaurant-level profit margin rose 0.2 percentage points to 25% in 2024, and net income increased from $13.3 million to $130.3 million, a rapid rise. It has implemented several new efficiency initiatives that are resulting in quicker preparation and higher worker satisfaction, and as it rolls them out throughout its enterprise, Cava's stores are demonstrating improved performance.
Management sees a huge white space opportunity and is steadily expanding across the country. It has 367 stores as of the end of the year and has a presence in 25 states plus Washington, D.C. It recently reached the Midwest with a new store in Chicago, and it's planning to accelerate openings in 2025 to about 64.
Why is Cava stock dropping?
Cava is performing well, and it reported a blowout fourth-quarter report. It has a huge opportunity ahead as it expands, and it's adding customers to its membership program, which breeds loyalty.
So why is Cava stock dropping? It actually started to drop even before the fourth-quarter report. There were several factors working against it, from the market getting nervous before the report to worries about new economic policy. But it sank further after the report. One reason is the outlook. Management is guiding for a huge slowdown in comps, or about 7% growth year over year in 2025. The restaurant-level profit margin is expected to stay flat, and it didn't provide guidance for revenue or net income.
Cava stock carries a high price tag. It trades at 86 times trailing-12-month earnings, and that's after the price drop. It simply can't keep up that valuation if comps growth is slowing down. This valuation still carries a lot of confidence, and there's growth built into that. If performance or outlook disappoints, the stock is going to reflect that.
So let's go back to the million-dollar question: Is now an opportunity to buy Cava stock? It's still expensive at this price, and that implies how much the market likes this stock. If Cava can really expand to double or triple its current store count, it's a no-brainer for high growth, and profitable growth at that.
If you're planning to buy and hold for at least five years, if not longer, now might be a good time to take a position in Cava. But keep in mind that if there are any missteps, the stock could fall further. You might want to use a dollar-cost averaging strategy to start a position today and take advantage of better entry points at different times.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.