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Wall Street got its first taste of Cava’s (CAVA) future earnings potential.
In its first quarterly report since its much-hyped IPO, the Mediterranean fast-casual restaurant chain turned profitable, with revenue jumping 62.4% year over year and same-store sales moving higher, up 18.2%, in its Q2 earnings results.
Cava stock (CAVA) popped more than 9% after the market close on Tuesday.
Profitability is a key focus, given the restaurant chain’s strong second quarter margins may not last.
Last quarter, the company posted a net income of $6.5 million. In all of fiscal year 2021, the company posted a net loss of $37.4 million, which widened in 2022 to a net loss of $59 million.
“As it relates to profitability, our new restaurants are exceeding our expectations,” Cava CFO Tricia Tolivar said on the earnings call. “Our second quarter profitability demonstrates the power of our business model, but given our current stage of rapid growth, we do not expect to maintain this level of profit margin in the near term.”
The earnings rundown
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Net sales: $172.9 million, up 27% year over year
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Diluted EPS: $0.21
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Same-store sales: 18.2% increase
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Net income: $6.5 million
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Average Unit Volume: $2.6 million
Following its IPO, Cava stock closed at $43.30, valuing the restaurant chain at roughly $4.8 billion — almost twice what the company priced its valuation the night before at $22 per share (for a total valuation of $2.5 billion).
The IPO was widely seen as a bellwether for other startups eyeing the public market.
“While we anticipated a consumer slowdown this year, the resilience of our guests and likely increased brand awareness from our IPO delivered strong traffic growth in Q2,” Cava CFO Tricia Tolivar said on the earnings call. “We continue to see positive traffic trends into Q3.”
In mid-July, analysts initiated coverage on the stock with high hopes about its long-term potential and some drawing comparisons to rival Chipotle (CMG).
In Q2, Cava saw same-store sales grow 18.2% year over year, topping Chipotle’s 7.4% same-store sales growth in the second quarter. Sales were boosted by a 10% increase in guest traffic and higher menu prices and product mix, up 7.9%.
What else we’re watching: New restaurant openings
Cava said in its S-1 filing that it plans to use the proceeds to open new restaurants and for general corporate purposes.
Already, the fast-casual chain seems to be putting some of that cash to use, adding 16 net new restaurants in the quarter. As of the end of Q2, there are now 279 Cava restaurants.
The chain opened its first fast-casual concept back in 2011. Since it acquired the Mediterranean fast-casual chain Zoes Kitchen for $300 million back in August 2018, it has successfully converted 145 Zoes Kitchen locations into the Cava brand.
Throughout the rest of 2023, it plans to open between 34 to 44 new Cava locations and open another eight converted Zoes (the remainder of the locations). By 2032, the company said it plans to operate 1,000 locations in the US.
What executives said on the earnings call:
Despite the earnings surprise for the quarter, Cava execs highlighted potential weakness for the rest of 2023.
The chain, known for its crazy feta and harissa dipping sauces, is taking a “very cautious approach,” CFO Tolivar said on the call with investors about how the team is thinking about this “uncertain macroeconomic environment” that may come in Q3 and Q4.
Cava expects same-store sales to grow between 13% and 15% for the full fiscal year. It also expects a profit margin of at least 23%.
Economic headwinds from gas prices to student loan repayments resuming may be picking up as the IPO spotlight fades.
“There was “an application of brand awareness that we wouldn’t necessarily expect as we go into the back half of the year, and then even more so is really being mindful of potential headwinds with consumers around gas pricing or other options,” Tolivar said.
“From a macro perspective … we’re mindful of a lot of pressures facing our guests outside of their Cava experience, whether it’s gas prices, … some of the utility bill cost pressures related to extreme heat, … student loan repayment hanging in the wings this fall,” Cava CEO Brett Schulman added. “You have a hawkish Fed that has also signaled that they’re looking to temper growth to ensure they tamp out any potential inflation reigniting.”
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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