That wasn’t on the menu.
Cava Group (CAVA) was edging back up on Aug. 28, one day after the Mediterranean fast-casual restaurant chain’s shares took a 6% nosedive.
Related: Analysts revise Cava stock price targets after earnings
The Washington company had beaten Wall Street’s estimates for second-quarter earnings and revenue and raised its full-year guidance just days earlier.
“In the second quarter, we once again delivered exceptional results, demonstrating the strength of our category-defining brand, our clear leadership position in Mediterranean, our powerful unit economic engine and the return on investments we continue to make in our business and our people,” Brett Schulman, co-founder and chief executive, said during the company’s earnings call.
Schulman told analysts that “consumers have been frustrated and fatigued by higher prices over the past few years.”
“In this post high inflationary environment, traditional full-service chains are struggling to deliver a compelling value proposition while conventional fast food chains have raised prices at a faster rate, driving the perception that they have become too expensive,” he said.
“The wave of price discounting in response to these trends is now being referred to as the value wars,” he added. “We believe that’s a misnomer.”
Schulman said price is the cost of a meal, while value is its worth and is driven by a combination of attributes beyond the headline price, including quality, relevance, convenience, and experience.
“Our value proposition lies in the quality of our food, the relevance of our differentiated Mediterranean cuisine where taste and health unite, the convenience with which our guests can access that cuisine in our multichannel format, and the experience they have when they engage with our brand and our hospitality,” he said.
Analysts react to Cava Group’s latest earnings report.
Cava
Cava CEO: Dining room’s demise ‘greatly exaggerated’
This year, the company launched Project Soul to make restaurants more inviting.
“We believe the demise of the dining room has been greatly exaggerated with 64% of our occasions in restaurants and consumers are seeking great physical experiences,” Schulman said. “Guests are responding well to the new aesthetic, and we are using what we learn in our iterative process to finalize our go-forward design later this year.”
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With automation and technology increasingly infiltrating the front lines of many concepts, he added, “we believe consumers are seeking human connection more than ever.”
However, Cava is not pulling the plug on technology.
Schulman said the company’s Connected Kitchen initiative was focused on using data-driven and generative-AI technologies to simplify restaurant operations.
“We’re currently running a small pilot of AI video technology that monitors how quickly ingredients on the in-restaurant make line are being depleted and alerts the team in real-time for prep and cook batch amounts,” he said. “The system is in the learning phase, and we expect it to go live in pilot restaurants in early fall.”
Cava Group, which went public on June 15, 2023, said Q2 net sales climbed 35% to $233 million, while same-store sales rose 14.4%, beating the consensus analyst estimate of 7.9%.
Year-to-date, Cava’s stock is up 177% year to date and 187% from a year earlier.
The shares soared after the earnings report, and analysts adjusted their price targets for Cava Group, including Wedbush analyst Nick Setyan, who boosted his price target to $120 from $100 and reiterated his outperform rating.
“We view CAVA as one of a handful of publicly traded restaurants positioned to deliver positive annual transaction growth over the longer-term, with realistic long-term revenue and unit growth targets,” he said in a research note to investors. “With improved near- and medium-term visibility, we also view current 2024 and 2025 same-store-sales growth and EBITDA expectations as conservative.”
Setyan said he continued to view the maturation cycle of new units, Cava’s attractive value proposition, growth in advertising, increased brand awareness, menu innovation (like steak), growth in digital, a new loyalty program, and throughput-focused operational initiatives as drivers of same-store-sales growth in the near to medium term.
Cava stock insiders sell shares
JP Morgan analyst John Ivankoe raised the investment firm’s price target on Cava Group to $90 from $77 and affirmed a neutral rating on the shares.
The company’s “multiregional success continues to support eventual national scale,” with Q2 headline same-store sales of 14.4%, underpinned by 9% traffic coming in well above expectations, matched with stronger than modeled new store productivity, Ivankoe said.
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However, JP Morgan is “not chasing stock performance here, and instead would revisit lower.”
Then came the news that Schulman and other company insiders disclosed that they were selling some of their holdings.
SEC filings showed that Schulman sold 210,504 shares, valued at $24.9 million. Ted Xenohristos, co-founder and chief concept officer, sold 98,490 shares for $12.4 million.
Chief Financial Officer Patricia Tolivar sold 5,000 shares for $628,187, while board member James White sold 1,500 shares for $190,770.
Cava’s largest shareholder, Artal International, filed to sell 6 million shares.
Wall Street vet Paul Price: Cava ‘burnt to a crisp’
TheStreet Pro’s Paul Price, a value investor since the 1980s, had reservations about Cava Group and not the good kind. He told readers in a recent column that the company’s stock valuation was “burnt to a crisp.”
“Sure, Cava Group’s latest quarterly report showed better-than-expected sales and earnings,” Price wrote on Aug. 26. “The absolute earnings per share, though, were just 17 cents, and the first half total was 29 cents. Last year’s second half was noticeably weaker than the first half due to seasonality.”
Price suggested that smart holders of Cava stock “should be selling, rather than buying shares while the glow of almost unthinkable momentum is still shining brightly.”
“If you own it, lock in gains,” he said. “If you don’t own it, fight the urge to get on board after the stock’s extraordinary runup. If you choose to hold or buy … do not say you were not warned.”
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