Cava stock on a tear as fast-casual players continue to outperform the industry
11/14/2024 22:08
Shares of Cava and Sweetgreen are up triple digits year to date.
Fast-casual chains continue to outpace the wider food industry in growth as value conscious diners demand affordable prices and experiences.
Mediterranean chain Cava (CAVA) beat Wall Street estimates Tuesday afternoon, with same-store sales jumping 18.1%, compared to 12.39% expected. The stock vaulted over $172 per share — an all-time high — on Wednesday, before giving up the gains and closing around $147. Shares of Cava are up 261% in 2024.
"That value proposition [is] really beyond price," CEO Brett Schulman told Yahoo Finance. Schulman pointed to Cava's investment in digital and in-store experiences, people's shifting preferences for healthier food, and the company's efforts to keep the average bowl in the $13 to $15 range as factors in its success.
TD Cowen analyst Andrew Charles wrote in a client note that Cava's price increase, of roughly 15% compared to 2019, "significantly trails" the 25% to 30% hikes by most fast-casual peers. In the quarter, the chain's foot traffic was up 10.3% year over year, while its steak option contributed to order prices increasing by 7.9%.
Fellow fast-casual player and burger chain Shake Shack (SHAK) posted same-store sales growth of 4.4% in its latest quarter, while salad chain Sweetgreen (SG) saw a 6% jump.
As the cost of dining rises, fast food players have been struggling to compete on value. In its latest quarter, McDonald's (MCD) same-store sales grew 0.3% year over year in the US.
Restaurant Brands International's (QSR) US business clocked same-store sales declines across the board, with Burger King down 1.5%, Popeyes down 0.8%, and Firehouse Subs down 3.7%
Yum Brands' (YUM) three brands posted a mixed bag in the US: Taco Bell's same-store sales increased 4%, while KFC business saw its sales drop 7% and Pizza Hut saw a 1% decline.
Charles said Cava "continues to benefit from the consumer preference shift from quick service to fast casual as middle-income consumers increasingly view fast casual as a better value for money."
"CAVA is at a clear tipping point as the leader of fast-casual Mediterranean," William Blair analyst Sharon Zackfia wrote in a note.
In Q3, Shake Shack beat Wall Street's estimates with its same-store sales, led by an increase in foot traffic, up 30 basis points year over year, while the average check jumped 4%.
"We've actually seen growth amongst all cohorts ... we're one of the few brands whose value perception has actually improved over the last year," Shake Shack CEO Rob Lynch told Yahoo Finance.
The fast food giants have been aggressively pushing out promotions to win on price, but Shake Shack is competing by leaning into premium products like the return of the black truffle menu.
Lynch plans to avoid price increases in 2025 as consumers grow fatigued by sticky inflation.
"We don't want to take price unless we have to. ... We're not predicting as much inflation heading into 2025," Lynch said.
Shake Shack shares are up more than 72% year to date.
For Sweetgreen, its same-store sales growth came from a 4% lift from menu prices and 2% increase in traffic and mix.
"We are laser-focused on menu relevancy and reinforcing our culinary and supply chain ethos to build traffic and check over the long term," Sweetgreen CEO Jonathan Neman said on its earnings call.
Shares have shot up 238% year to date, and there's more room to run, per Zackfia. The chain is leaning into its Infinite Kitchen concept, which uses a row of automated dispensers to create the salad bowls. There are currently ten locations, and the pilot has shown improvement in speed and product quality, Neman said.
The company's co-founder Nicolas Jammet struck an upbeat tone on the rollout of the automation technology on Yahoo Finance's Opening Bid podcast (listen in below).
"While Sweetgreen's shares have more than tripled so far this year to an enterprise value of 5.2 times our 2025 sales estimate, we remain bullish on the company’s expanding appeal and game-changing dynamics of the Infinite Kitchen," Zackfia wrote to clients.
However, not everyone is as optimistic after huge run-ups. Citi analyst Jon Tower cited a Neutral, high-risk rating on Sweetgreen and Cava.
For Cava, downside risks include difficulty expanding its footprint, as commercial real estate faces challenges in a higher interest rates environment or a potential downturn in the economy. The chain could also hit a "hiccup with new sales levers" like its steak, and loyalty system.
Sweetgreen's risks include potential "disruptions in sales" in urban markets like New York City, supply chain disruptions that could hit new store openings, and "elevated risk to sales related to a foodborne illness outbreak relative to other brands in the restaurant space given the brand's outsized exposure to produce."
JPMorgan analyst Rahul Krotthapalli pointed to Shake Shack's "premium/specialty burger category [that] inherently risks price point-driven frequency limitation," meaning consumers might come less since it costs more.
He added, "The brand believes to have found success in changing this perspective for its occasional consumer through the popular but risky (as it trains customers to often wait for promos) Hi-Low pricing strategy."
—
Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].