Cava’s CEO is laser focused on taking Mediterranean fast casual food mainstream, even as shares of the restaurant chain move lower.
On Wednesday, following its third-quarter earnings report that beat estimates the evening prior, Cava’s stock dropped nearly 8% to $31.10 after market close.
That’s the lowest close since October 30 when shares traded at $31.08, but still above its record low of $29.98 in early October.
“We’re not focused on the day to day gyrations of the stock,” CEO Brett Schulman told Yahoo Finance. The company is working on “the next decade and beyond.”
Schulman shared the same message when the chain’s IPO debut in June drummed up a flurry of attention on Wall Street. “We’re focused on our long-term growth, we’ve got a tremendous unit economic profit engine,” he told Yahoo Finance then.
The Earnings Rundown
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Net sales: $173.8 million versus 172.29 million expected
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Diluted EPS: $0.06 versus $0.01 expected
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Same-store sales: 14.1% versus 8.39% expected
In its third-quarter earnings report, Cava posted a beat on both the top and bottom line. Same-store sales also bested Wall Street’s expectations, as foot traffic remained strong and customers added more to their meal like premium protein options, pita chips, or drinks.
For the full 2023 fiscal year, same-store sales are projected to grow between 15% to 16%, higher than the 13% to 15% previously expected.
As of Q3, there are 290 locations, with plans to open 70 to 73 net new restaurants this year. That’s also more than the previously expected 65 to 70.
Cava does not plan to increase prices for the rest of the year, but in 2024, it projects to “get back to more historical normalized increases” of 2.5% to 3.5%. Currently, an average entree costs customers $13.50, Schulman said.
When Yahoo Finance asked if Schulman believes Cava has pricing power over consumers, he answered the brand is determined to build a “great value proposition” even with those higher prices in mind.
Wall Street though seemed to hone in on its future outlook.
Tolivar said implied guidance for Q4 sales growth is around 4.7%, factoring in uncertain macroeconomic conditions, after Q4 2022 saw robust sales growth of 15%.
In addition, Cava raised the average wage by 8% at the beginning of Q4. Tolivar said the change will have a 100 to 120 basis points impact to its restaurant-level margins.
Schulman said wage investments have always been “core” to its DNA, adding “We view our team members as assets, not expenses, to really sustainably scale our business as we grow rapidly.”
On a call with investors, CFO Tricia Tolivar said sales in Q1 2023 saw a big year-over-year jump due to Omicron and bad weather’s effect on 2022 Q1. Repeating that growth in 2024 will be difficult.
The slower sales growth and additional labor investments have divided Wall Street.
J.P. Morgan analyst John Ivankoe said in a note that Cava is “still a relatively small business” but is now multi-regional — and on its way to creating a national footprint.
“Everything about this management team and brand’s operating structure (speed, simplicity, flexibility, consistency) supports the likelihood of CAVA becoming a highly visible, important national brand that should dominate the large and flexible “Mediterranean” category,” he wrote.
Citi analyst Jon Tower, who has a neutral rating on shares, broke down the different perspectives in a note titled, “Strong quarter, But Bulls and Bears Remain On Separate Islands.”
While bulls can point to the earnings beat, strong store profits, and higher guidance, bears will focus on the continuing slowdown in traffic and sales growth, as well as a “still-robust” valuation compared to some fast food peers, as reasons to be cautious.
As of Wednesday, Wall Street’s ratings consist of 7 buys, 4 holds and 0 sells on shares of CAVA.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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