Operations

Cava swings to profit just in time for first earnings report as public company

After its June IPO, the fast-casual chain came out of the gate strong, with 2Q traffic up more than 10%.
Cava restaurant exterior
Cava opened 16 new units during the quarter for a total of 279. | Photo: Shutterstock.

Cava Group Inc.’s very first earnings report as a public company is likely to fuel even more speculation that the fast-casual chain is truly the “next Chipotle” as a Wall Street high performer.

The Washington, D.C.-based Cava swung to a profit for the July 9-ended second quarter, reporting net income of $6.5 million, compared with a net loss of $8.2 million a year earlier. Same-store sale were up 18.2%, of which 10.3% was the result of traffic growth.

Revenues increased by 62.4% to $171.1 million, with the average unit volume reaching $2.6 million, up from $2.4 million a year ago. And restaurant-level profit margins hit 26.1%, a 400-basis-point increase year over year, though CFO Tricia Tolivar warned those margins would likely moderate as the chain continues its growth.

Those are strong numbers that follow the chain’s strong initial public offering in June, nearly doubling its stock price on opening day and achieving a nearly $5 billion valuation.

Now comes the hard part of “running a great business and building a durable brand that consistently delivers results,” said CEO Brett Schulman in his first call with Wall Street analysts.

“Becoming a public company, while a milestone event, was not the destination but the beginning of the next chapter of our journey,” he said. “Cava is creating and defining the next cultural cuisine category, and our results in the second quarter of 2023 demonstrate the broad appeal of our innovative authentic Mediterranean concept and the significant whitespace opportunity in front of us.”

The 279-unit chain opened 16 new restaurants during the quarter, about half of which were converted units from the Zoe’s Kitchen brand Cava acquired in 2018. With the new openings, Cava moved into Missouri and Rhode Island for the first time, as well as expanding in Massachusetts, Texas, Georgia and Colorado. The company expects to open 65 to 70 units this year.

Next year the chain will open for the first time in Chicago, extending brand awareness into the Midwest.

To support that growth, Cava is also investing in building a pipeline of restaurant-level leaders, Schulman said.

This year, the chain hopes to place 75% of general managers from internal hires. To help reach that goal, Cava has developed a network of “Academy GMs,” or top-performing managers who are certified to train and develop others. By the end of the year, Cava plans to have at least one Academy GM in each of the chain’s “gardens,” their term for a group of eight restaurants.

“The Academy GM network not only serves as a farm system for new restaurant GMs and future leaders, but also supports our work to minimize reopening costs by creating training hubs in growth markets,” Schulman said.

Currently Cava has 39 Academy GMs, including seven who were recently promoted to the multi-unit leader position. The chain plans to add another 60 Academy GMs by the end of the year, which will allow for localized training in all existing markets, he said.

Schulman gave the example of one Academy GM who started with Cava at age 17 six years ago and has climbed the ranks from team member to guest experience manager, to GM-in-training and then GM. He was then certified as an Academy GM and recently took a multi-unit role, “proving that, at Cava, you can build a career, not just have a job,” said Schulman.

Cava in the spring refreshed its app, and the brand is in the early phase of relaunching its loyalty program, which they expect to roll out next year after testing. The new program will be geared toward developing deeper connections with guests, he said.

Cava is also testing the addition of steak as a new protein. During the quarter, the chain launched a new spicy falafel and fiery broccoli as a topping option.

Schulman also sees a lot of opportunity with catering, which is being tested with various formats.

The chain currently has 10 units dubbed Digital Kitchens that support centralized catering production and digital-order pickup. Another five restaurants are hybrids, offering standard restaurant dining along with digital pickup and some catering support. The chain is also evaluating catering out of a traditional restaurant to see whether it impacts the existing channels.

And Schulman said the chain is planning to add more units with drive-thru digital pickup lanes. Currently Cava has about 20 in the restaurant fleet, and those units tend to have average unit volumes between 10% and 15% higher than other locations in their markets.

The strong traffic trends in Q2 could have been impacted somewhat by the attention given the brand as it staged its IPO, Tolivar said, but Cava is expecting the positive traffic to continue into the third quarter. For the full year, same-store sales are projected to increase between 13% and 15%.

Tolivar said they were expecting to see a consumer slowdown this year, but diners have remained resilient—though she did note a slight shift from delivery to pickup.

Cava raised menu prices earlier this year, but the chain has no plans to increase prices further in 2023, with the goal of keeping the brand accessible.

Schulman said the company is maintaining a cautious outlook, given consumer pressures ahead, like higher utility bills resulting from the high temperatures across the country, student loan debt repayments coming due and “a hawkish Fed” looking to tamp down any potential inflation reigniting, he said.

 

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