There is no denying it McDonald’s is still the king of the restaurant industry. Its 40,000 stores had combined sales of $119.8 billion last year, generating revenue of $25.5 billion and net income of $8.5 billion for the company. No other name comes close to these numbers.
However, from an investor’s perspective, size is not everything. In fact, size can actually be a disadvantage, as it makes further growth difficult. In some cases, the biggest competitor to a new McDonald’s location might be another McDonald’s restaurant nearby that is already in operation.
If you are looking for a more promising option in the fast food restaurant sector, you should Cava Group (NYSE: CAVA) instead.
What is Cava?
With only 323 restaurants in the first quarter, Cava isn’t quite as big a name as McDonald’s. But in places where Cava has been around for a while, customers love its Mediterranean cuisine. Its pita wraps and bowls are ideal for the fast-casual model while meeting demand for evolving consumer preferences.
While hamburgers dominated the fast-food restaurant landscape for decades, their health drawbacks are now catching up with them. The enriched bread used to make most hamburger buns and heavily processed red meat are falling out of favor. Consumers are increasingly willing to pay even a small premium for fresh, natural ingredients like those found in Cava.
The real attraction, however, is the cuisine itself. Most U.S. consumers are relatively new to it and find that they like it once they try it. The health benefits are just an added market bonus.
In other words, this is the “something special” that consumers have apparently been waiting for from the fast-casual restaurant industry.
Cava has the results to prove it
And Cava’s numbers back up this claim.
Take the first quarter results as an example. During the three-month period ended April 21, Cava increased its revenue 30.3% year over year to $256.3 million, while store sales rose 2.3% (up from 28.3% in the same period last year).
Even better, despite its young age and small size, Cava Group is becoming increasingly profitable. First quarter earnings before interest, taxes, depreciation and amortization (EBITDA) of $33.3 million doubled year-on-year, and net income of $14.0 million completely offset the $2.1 million loss a year earlier. Cava recorded this profitability while opening 14 new restaurants during the quarter.
Overall, the first-quarter numbers confirm existing trends that are expected to continue at least through next year. In May, the company raised its full-year EBITDA forecast from $86 million to $92 million to $100 million to $105 million. Forecasts for store sales growth were also raised. Analysts are also collectively forecasting sales growth of at least 20% this year and next, with earnings per share expected to more than double over the two-year period. All of this points to a huge tailwind.
Data source: StockAnalysis.com. Chart by author.
The kicker: Cava Group is virtually debt-free. Since April, its only significant long-term obligations have been lease obligations, which mainly come from rents it has to pay landlords for its restaurant locations. However, as the figures above show, Cava restaurants tend to be profitable early on.
More importantly for prospective investors, however, Cava enjoys the financial flexibility that comes from not being dependent on bondholders who expect regular interest payments, regardless of whether or not this is in the company’s best interests at the time.
More reward than risk
So is Cava a guaranteed winner? No, there is no such thing, especially in a business as competitive as hospitality. The stock is also very expensive relative to its earnings. Young growth stocks also tend to be volatile and Cava Group is no exception.
Still, the potential return is more than worth the premium for risk-taking investors. Cava has enormous scope to further expand its presence in the coming years, and there are many reasons to believe it will succeed.
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James Brumley does not own any stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
