Ever heard of restaurant chain Cava (CAVA 0.46%)? If not, don't sweat it. Most people probably haven't. With only 323 locations up and running the company has yet to become a household name. Ditto for its stock.
As veteran investors can attest, however, good things often come in small packages. That is to say, the right small-cap stock can dish out big-time rewards. Cava Group is arguably one such name.
Here are four top reasons you might want to consider buying Cava stock, before its shares climb any higher.
1. The Mediterranean diet is in demand
Consumers' flavor preferences have always changed with time. Burgers were the foundation that quick-service restaurant chains were built on, but Mexican and Tex-Mex have since entered the picture. Demand for Asian flavors remains popular too. The one constant in the restaurant business? Consumers eventually want something else or something new.
Enter Cava Group.
Although Mediterranean food isn't exactly new to the North American market, it's still off the beaten path. However, it's never been in greater demand than it is right now. Younger consumers are more receptive to new flavors, and they're readily passing their adventurous palates along to their children.
It's not just the quest for something different driving this interest. People are more health-minded than they've ever been as well, particularly as it pertains to what they eat. Mediterranean foods are the core of diets now highly encouraged by healthcare organizations, including the Mayo Clinic, the Cleveland Clinic, and the American Heart Association, just to name a few. These groups are quick to tout how these foods tend to be lower in fat and sugar and, in some cases, can help lower cholesterol or even improve brain health.
In other words, the demand for Mediterranean foods looks like it's here to stay.
2. The company is growing and will continue doing so
This demand is evident in the company's store growth as well as its corresponding revenue growth.
Take the first quarter's top line as an example. Revenue of $256.3 million was up 30% year over year. Opening 14 new restaurants during the period certainly helped drive this sales growth, bu it wasn't the only reason for the improvement. Same-store sales were up 2.3% as well. That's not a lot in absolute terms, but it's a huge showing in light of the incredibly tough comparison from a year earlier. Last quarter's same-store sales were up nearly 31% from the same period two years ago.
This is still just the beginning, though. Cava Group expects to open between 50 and 54 new restaurants in fiscal 2024 while accelerating its same-store sales growth to a pace between 4.5% and 6.5%. Meanwhile, although the company itself isn't offering guidance beyond 2024, analysts believe its top line will rise from $876 million this year to $1.64 billion in 2028.
3. Management thinks about cost-efficiency
Many young companies are so focused on expanding their footprint that they don't even seem to care about turning a profit. And a bunch of them don't, instead opting to spend whatever it takes to achieve their desired revenue or market share growth.
Not Cava Group, though. Its management team understands the value of being -- and remaining -- profitable, even in the midst of a high-growth period.
Take the company's recent decision to start handling more production of its own dips and spreads as an example. Although there's an obvious cost to setting up this 55,000-square-foot facility in Virginia, this solution will serve Cava's growth plans better in the long run. It's should ultimately be cheaper for the company to do its own manufacturing rather than paying a third party to do it. And by managing its own operation, Cava can ensure it gets the exact product it wants.
Obviously, this facility is only one small slice of Cava's operation. However, it underscores the careful attention the company's management team is paying to how it's allocating resources.
4. Cava is already profitable
Last but not least, it's worth noting that Cava Group is already profitable. And not just a little. Nearly 13% of last quarter's revenue was turned into earnings before interest, taxes, depreciation, and amortization (EBITDA), while a little over 5% of its sales was converted into net income. Those may not be the strongest margins by technology stock standards, but for a fast-growing restaurant chain, they're impressive.
Restaurant-level profit margins are holding right above 25%; it's corporate-level spending that's chewing away at the rest. But this corporate-level spending is also apt to remain relatively low compared to the revenue growth stemming from new restaurant openings in the future.
In other words, look for this company's profit margins to widen as time marches on. It's the basis for a bullish argument right now simply because so few other companies of Cava's size and age would be this profitable this soon.
Cava stock is a high-risk, high-reward proposition
It's still not an ideal pick for everyone. Shares are expensive, and the restaurant business can be fickle no matter how marketable your menu is. This adds risk to the equation, or if nothing else, it just adds potential volatility. If you need your portfolio's value to remain relatively steady, look for other options.
If you're a risk-tolerant investor that can stomach such volatility, though, Cava stock is a compelling prospect, even if analysts' consensus price target near $82 is below the stock's present price. You're mostly plugging into the story aspect of this story stock, which is apt to get better going forward.
