These restaurant stocks possess their own set of unique characteristics.
Investing in restaurant stocks could prove to be a lucrative endeavor. Imagine if you had bought shares of McDonald’s or Starbucks early on. These companies are now global leaders in the industry.
However, there are smaller chains that investors have their sights on, such as Cava Group (CAVA 1.61%) and Chipotle Mexican Grill (CMG 1.29%). Which of these popular restaurant stocks is the better buy right now?
Opening stores at a rapid clip
Cava is a fast-casual concept that serves up healthy Mediterranean-inspired pitas and bowls. Customers can choose from a variety of proteins, toppings, and sauces in a fully customizable and made-to-order format.
Key to Cava’s story is its store expansion playbook. The company opened 72 net new locations in fiscal 2023, propelling a 59.8% revenue gain, with a target to open 52 more in the current fiscal year. And while there are currently 323 stores scattered across the country, management has huge plans for rapid growth.
The goal is to have 1,000 stores in the U.S. by 2032, translating to a threefold increase of the footprint’s size. Should Cava get to that scale, its sales would be astronomically higher. Each location on average brings in $2.6 million in annual sales, while registering a 25.2% restaurant-level margin.
It’s encouraging that Cava is on a path toward financial sustainability. The company generated operating income of $4.7 million in fiscal 2023, a huge improvement compared to the $59.8 million loss in the previous year. And during the latest fiscal quarter (Q1 2024 ended April 21), Cava posted almost $9.3 billion in operating profit. It’s heading in the right direction to a bigger bottom line.
Dominating the industry
Whereas growth-minded investors might gravitate to Cava because of its expansion potential, it’s hard not to appreciate Chipotle’s ongoing success in the restaurant sector. There are key reasons to consider buying the Tex-Mex chain.
For starters, it’s also growing at a brisk pace. Revenue surged 18.2% in the latest quarter (Q2 2024 ended June 30), driven by robust same-store-sales growth of 11.1%, which is significantly better than Cava. Chipotle is seeing strong traffic trends, impressive in this type of economic environment.
The company plans to open 300 net new stores in 2024. But Chipotle’s leadership team sees potential in one day having 7,000 locations in North America, roughly double the current number. This target doesn’t include the company’s potential to further expand in Europe and the Middle East.
Chipotle’s profitability is unmatched in the restaurant industry. The business has a rare ability to offset inflationary pressures with higher menu prices. This helps explain why Chipotle’s Q2 operating margin was a stellar 19.7%, which was higher than in the year-ago period. As each location boosts its sales volume over time, coupled with the prospects of margin expansion, Chipotle’s earnings are set to soar.
One critical factor
Based purely on the quality of their respective businesses, I would choose Chipotle as the better investment by a long shot. Its brand recognition, scale, growth potential, and profitability are impressive. I honestly don’t see Cava matching this type of success ever.
But as investors, we also must consider another critical factor in the analysis process. And that’s the valuation. I believe this brings us to the same conclusion.
As of this writing, shares of Cava trade at a nosebleed price-to-sales ratio of 9.9, while Chipotle’s multiple sits at 6.8. To be clear, both of these valuations are expensive, and that’s a main reason why I don’t own either company. But the cheaper stock is the safer bet, especially since Chipotle’s underlying business has already proven how successful it can be.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Cava Group and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.