Although Chipotle and Cava share a similar approach to food preparation, the restaurant chains are at very different stages of development.
Chipotle Mexican Grill (CMG 0.30%) is probably best known for its assembly-line preparation of fresh foods. Cava Group (HOW ARE YOU) also built its foundation on the same concept, but with the distinction that Chipotle focuses on Mexican cuisine while Cava specializes in Mediterranean cuisine. The latter, of course, is a much smaller chain, which makes the comparison with Chipotle even more interesting. Which one is the better investment right now?
Chipotle is a great success story
All restaurant chains start small, but not all of them can grow to 3,500 locations like Chipotle. Of course, McDonalds (NYSE: MCD) And Yum! Brands (NYSE: YUM) Taco Bell is a much larger chain than Chipotle, but it has been around much longer than Chipotle. In fact, Chipotle has only been a publicly traded company since 2006, when it went public.
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By any measure, Chipotle stands out in the restaurant industry today. And the chain continues to operate at a high level, with first-quarter sales up 14.1% and same-store sales, which take into account sales at locations open at least a year, up 7%. That’s a testament to a management team that’s firing on all cylinders, operating its current fleet at a high level, reflected in its same-store count, while adding new locations that are boosting overall sales.
There’s a reason Chipotle’s price-to-earnings ratio is close to 60. While that’s below the five-year average of around 70, it’s still quite high in absolute terms. Investors are paying for a fairly large company that they expect to continue to grow strongly.
It’s certainly possible, but growth becomes harder to achieve as you get bigger. It’s a numbers game. Adding a restaurant when you only own one represents a 100% increase in store count. But the third location represents only a 50% increase. The more restaurants you add, the slower the pace of expansion. Still, for more conservative investors looking to invest in growth stocks, Chipotle’s proven track record of success will be very compelling. Just know that you’re paying a hefty premium, considering that McDonald’s P/E is just 22 and its five-year average P/E is 27.
Cava is about potential
By comparison, Cava is a tiny restaurant chain with only about 320 locations. But it opened 14 new locations in the first quarter of 2024. In total, the store base grew by a whopping 22% year-over-year! That’s a number that would be almost unthinkable for Chipotle, which speaks to the opportunity that Cava has.
Cava is coming off a very good run. In 2023, its sales grew by nearly 60% and its same-store sales grew by nearly 18%. These numbers are simply not sustainable and will likely make the 2024 results a little less interesting as the company will be compared to some truly staggering growth numbers. For example, Q1 2024 sales grew by “only” about 30%, while same-store sales grew by just 2.3%. Of course, 30% sales growth is still very strong, but 2.3% same-store sales is respectable for a fast food company, although not nearly as appealing as 18%.
But if Cava can expand its store count and maintain single-digit same-store sales growth, it will remain a very fast-growing restaurant chain. And that, in a nutshell, is the investment thesis. There is one small problem, though. Cava is a very young company, having only gone public in mid-2023. Given its huge price-to-earnings ratio of 225, investors are clearly predicting a lot of success in the years ahead (and are likely looking to Chipotle to gauge its long-term potential). If the company delivers, it could be worth the price and the risk. If not, well, Wall Street is full of failed restaurants.
Bottom line: Cava offers more long-term growth opportunities than Chipotle. But those opportunities are far from certain, making Cava the better fit for investors looking for aggressive growth.
Cava vs Chipotle: Who Wins?
There are some simple answers to this question, but there are also some more complex ones. For example, neither Chipotle nor Cava pays a dividend, so don’t buy either if you’re an income investor. And given the high price-to-earnings ratios, value investors might want to pass on them as well. But if you’re a growth investor, either company might be worth your while.
The difference lies in whether you want to pay a large sum for the potential growth of a company with a short operating history or pay a smaller sum for the potential growth of a company with a solid track record of expanding over time. In other words, most growth investors will likely find Chipotle more interesting, while those looking to go all-in will likely be more attracted to Cava.
