If you enjoy a good fast-casual meal, you might have already sampled the Mediterranean-style offerings at Cava Group (CAVA 1.57%)'s restaurants or the healthy-oriented fare at Sweetgreen (SG 0.91%). You might even have a favorite dish, but which of these hot stocks is the better buy?
Healthy and growing
Cava and Sweetgreen operate similar models. Both are small but growing restaurant chains with the fast-casual model and offer healthy, eco-conscious dishes with fresh ingredients at prices that fall between fast food and fine dining. Cava's spin on the model is a Mediterranean take, while Sweetgreen has a focus on salads.
Both of these are relatively new initial public offerings (IPO), so there's not a lot to go by in terms of track records. Inflation is cutting into some of these numbers, which only give investors a bite-size look at the overall picture. That's why IPO stocks can be risky, and these numbers would probably look a lot different under better conditions.
| Company | Q1 Sales Growth YoY | Q1 Comps Growth YoY | Q1 Restaurant Count | Q1 New Restaurants | Full-year New Restaurants | Full-year Comps Guidance |
|---|---|---|---|---|---|---|
| Cava | 30.3% | 2.3% | 323 | 14 | 52 | 5.5% |
| Sweetgreen | 26% | 5% | 225 | 6 | 25 | 5% |
Data source: Cava and Sweetgreen quarterly reports. Q1 = 2024 first quarter. Comps = comparable sales. YoY = year over year.
Let's take a look at some of their recent growth metrics. You'll see that Cava has more restaurants and opened more restaurants in the first quarter. That's why its revenue is growing faster even though comps growth was slow.
Only one of these chains is profitable
Being young and growing, both Cava and Sweetgreen are still struggling to turn dollars into profits. But while Cava has had some success in reporting positive net income, Sweetgreen hasn't yet hit that milestone. Let's do another comparison.
| Company | Q1 net Income | Net Income Growth YoY | Q1 Restaurant Profit Margin | Restaurant Profit Margin Guidance |
|---|---|---|---|---|
| Cava | $14 million | 800% | 25.2% | 24% |
| Sweetgreen | ($26.1) million | 23% | 18% | 19% |
Data source: Cava and Sweetgreen quarterly reports. Q1 = 2024 first quarter. YoY = year over year.
Even worse for Sweetgreen, it missed Wall Street's expectations for earnings per share (EPS) for the past four quarters, while Cava reported a beat all four times. Sweetgreen is making progress, but Cava is in a far better position right now.
A look at valuation
There's another factor to consider when deciding which of these companies is a better business, and that's valuation. Cava sports a price-to-sales ratio that's much higher than Sweetgreen's. While Cava stock seems like it may be overvalued at this price, it reflects investor sentiment about its stock. Both of these stocks have been benefiting from investor enthusiasm, with Cava up 90% year to date and Sweetgreen up 123%.
CAVA PS Ratio data by YCharts.
Both of these stocks have surged this year but have been experiencing pressure over the past few weeks. There have been some indications that restaurant spending is slowing down, illustrated by weak guidance at Kara Sushi, which reports before most other restaurant chains, and several analyst predictions. With these kinds of valuations and high gains in the first half of the year, it's going to be hard for these stocks to climb higher in the second half.
Longer term, it's anyone's guess. These chains operate similar models and are both small and growing. Cava, though, has figured out how to grow faster and scale profitably. That boosts investor confidence in its ability to expand and create shareholder value.
While now might not be the best time to buy the stock, Cava looks like it has an edge over Sweetgreen. If restaurant stocks continue to slide and Cava stock becomes more attractively priced, it could be a great growth stock to add to your portfolio.
