The old adage says sell the sizzle, not the steak, but Cava Group (CAVA) wants to sell both.
On Monday, the Mediterranean fast-casual restaurant chain launched its grilled steak dish, which is available at locations across the country.
"Our grilled steak was two years in the making and, like everything on our menu, is rooted in our Mediterranean heritage and made with unique flavors and the highest-quality ingredients,” Ted Xenohristos, co-founder and chief concept officer, said in a statement. "We wanted to create something people can’t get anywhere else, that’s elevated, but also accessible to everyone."
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The Washington company traces its roots to 2006, when three friends started talking over a couple cups of coffee. Cava opened its first fast-casual location in 2011 and acquired Zoes Kitchen in 2018.
The company went public on June 15, 2023, and its stock soared as much as 117% in its market debut before closing at $43.78 a share, up from its opening trade of $42. Cava Group was recently trading above $88.
Cava: Connected-kitchen initiative
"With a proven, highly portable concept, we continue to expand our presence in new and existing markets," Brett Schulman, co-founder and CEO, told analysts during the company's fiscal-first-quarter-earnings call. "At a time when consumers are increasingly discerning in how they spend their income, they are choosing to dine at Cava."
Many consumers have been moving away from restaurant dining as prices climb.
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A survey by the marketing technology company Vericast found that 68% of respondents are trading down from restaurant meals to food from the grocery store to avoid the rising costs. More than 71% of Gen Z and millennials are making that change, the data showed.
While both grocery and restaurant prices continue to rise even as inflation slows, Vericast said that restaurant prices were climbing at a much higher rate than groceries – 5.1% annually versus 1.2%.
"Our differentiated cuisine, where taste and health unite, and our compelling value proposition are resonating more than ever," Schulman said during the May 28 call.
"Grilled steak complements our existing mains, fills a perceived gap on our menu, and enhances our already strong dinner occasion, which now makes up approximately 46% of our sales," he added.
Schulman said Cava is focused on making its restaurants more efficient and easier to run.
"Our connected kitchen initiative is a multiyear journey focused on using data-driven and generative AI technologies to drive quality and consistency, increase order accuracy, and boost speed of service," he said.
The company is on schedule to begin a test of this initiative later this year, Schulman added.
For the first quarter ended April 21 Cava Group reported earnings of 12 cents a share, compared with a loss of $1.30 a share in the year-earlier period. The latest figure beat FactSet's consensus analyst estimate of earnings of 5 cents a share.
Revenue surged 30% to $256.3 million and beat Wall Street forecast of $246 million.
Cava now expects to open 50 to 54 net new restaurants in 2024, up from its February outlook of 48 to 52 net openings.
Analyst says innovation will drive Cava's sales
Several analysts adjusted their targets following the earnings announcement.
Wedbush analyst Nick Setyan maintained his outperform rating for Cava and increased his price target to $90 from $74.
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"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," Setyan wrote in a research note.
"With improved near- and medium-term visibility, we also view current 2024 and 2025 [same-store-sales] growth and Ebitda expectations as conservative," he added.
Argus analyst Christine Dooley raised the firm's price target on Cava Group to $105 from $70, while affirming a buy rating on the shares.
The company's Q1 results topped expectations, and from a technical standpoint the shares have been in a bullish pattern of higher highs and higher lows since October, Dooley said.
The analyst said Cava's continued innovation would drive sales, especially as consumers seek out protein menu options. Dooley also says Cava's plans to open new stores offer investors an opportunity.
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Meanwhile, JP Morgan downgraded Cava Group to neutral from overweight with an unchanged price target of $77.
The firm said the shares at $92.55 sit too far above the price target for it to hold onto an overweight rating.
The firm's incremental recommendation is to hold or reduce positions versus scaling up.
As such, it moves the stock to a "valuation-driven" neutral but remains constructive on the "clean business model." JP Morgan said that it preferred Chipotle (CMG) over Cava at these levels.
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