Cava’s IPO combines two things I truly love: financial analysis and chicken with greens and grains. Over a decade ago, when I was a lowly entry-level consultant, I was blessed with an early location of Cava and Sweetgreen within a short walk from my office. Who knew DC in the early 2010s would be a fast casual restaurant hotbed? While both companies have gone through some menu changes as they’ve scaled (RIP Sweetgreen’s spicy sabzi and frozen yogurt), it’s this writer’s view that Cava has only gotten better with scale and time, something very few restaurant concepts can claim.

So now that Cava’s a public company with a successful IPO and $4 billion plus enterprise value, I dove back into its S-1 (IPO registration document) to see what interesting tidbits about the Cava formula I could learn.

First, Cava didn’t start as a fast casual restaurant chain. Oldheads in DC know about Cava Mezze Grill, a sit-down, family-style restaurant in the Maryland and Virginia suburbs of DC with a few locations; I’ve never made it to one because a) restaurants with shared plates are a nightmare and b) I never had a car during the three years I lived in DC.

By 2016, Cava has 22 locations, primarily in the Northeast. Since then, they’ve 10x’ed location count, with the biggest bite being the acquisition of Zoe’s Kitchen, a publicly traded Mediterranean fast casual chain based in the South. Over the last few years, Cava has converted those locations from Zoe’s to Cava, driving unit count to over 250 locations today.

Some quick facts to break down the business:

• Average unit volume (AUV) of $2.4 million, just a fancy way of saying revenue per store. This is below fast casual peers Chipotle ($2.8 million) and Sweetgreen ($2.9 million). Locations in the Northeast and Mid-Atlantic outperform the average, but given the higher rent and labor costs, they likely have to in order to generate the same profits as locations elsewhere.
• Restaurant-level margins of roughly 20% – this metric excludes headquarters costs, but is a helpful metric for understanding what the average new unit that opens might contribute going forward, on an incremental basis.
• A track record of double-digit same store growth. In low inflation times, growth like this would be particularly hard to come by, but in this market, anything below mid single digit growth likely isn’t covering labor, food and other input cost inflation. Importantly, this shows that Cava’s new location growth isn’t cannibalizing existing locations, and they’re both attracting new customers and passing on inflation with price increases. Cava’s aided brand awareness is still below 50% – it’s not a household name yet, although for a company that was a local DC chain a decade ago, this is impressive.
• Targeted net capex per new location of $1.3 million. This is roughly a 37% return on capital ($2.4 million AUV * 20% margin / $1.3 million cost per location). This stat particularly matters for Cava because a) it plans to add over 100 new locations over the next couple years, based on signed commitments with landlords b) it believes it can open another 750 locations before it reaches saturation and c) unlike many restaurant chains, Cava doesn’t have franchisees that will take on capex and operational responsibilities. In addition to the same-store growth, investors are betting that Cava can invest ~$50 million for new locations per year and earn $15-20 million in incremental profit per vintage year. At a typical public company restaurant EBITDA multiple, the growth math becomes quite compelling.
• 35% digital ordering. This is below Sweetgreen (60%) and just below Shake Shack (just under 40%). This is a newer metric, and it’s not just about looking cool for Gen Z. Digital orders, particularly those on the company’s native platform (as opposed to through third-party delivery services like Uber Eats) drive higher customer loyalty, and in the case of Cava, average check that’s over 25% higher versus in-restaurant orders. Said another way – if you’re ordering Cava for pick-up or delivery, you might be ordering for multiple people, and Cava (and investors) wants that higher volume. Mobile orders are such a big contributor for Cava and other fast casual restaurant chains that they’ve established separate assembly lines in many locations to handle that volume, especially during peak times like the lunch rush.
• 55% lunch / 45% dinner. Having a balanced, multi day-part business with customers spread throughout the day helps the restaurants manage their staffing and reduces the footprint, relative to a similarly sized business that was more weighted toward one day part. If all Cava served was the lunch rush, they would need more people and space to serve those customers without annoyingly long wait times, which would impact margins as well as the cost to build a location.

Does all of this justify a $4 billion plus enterprise value for a company that made $13 million Adjusted EBITDA last year? I’m skeptical – for context, Domino’s Pizza has an enterprise value of roughly $17 billion, but also earns over $800 million in EBITDA, operates in a more asset-light format with franchisees, and opened more than 1,000 net locations globally in 2022 (remember, Cava only has 260 total locations!). Domino’s lacks the sizzle of Cava (flat same-store sales growth and high-calorie pizza, versus double-digit same-store sales growth and healthy fast food), but to me, the bigger risk is the “next big thing” effect. Domino’s has been around for a long time, and appeals to a broad swath of people. Cava is appealing to equityholders because it’s on-trend and growing organically, but whether that consumer stays with the brand over the long-term somewhat remains to be seen, and is critical to the new unit growth portion of the thesis.

I know I will be piling on the harissa and roasted red pepper hummus for the foreseeable future. While I hope to have plenty of company (for the stockholders’ sake, not because I like waiting in lines!), any hiccup in performance will now be in the public eye, and could take the wind out of what looks like a high flyer today.

In addition to the risks of running a restaurant chain in a high inflation environment with a relatively weak near-term macroeconomic outlook and scarce restaurant labor, there are a couple of risks unique to Cava that I’m watching. First, there isn’t another obvious large-scale Zoe’s Kitchen opportunity (could they buy Roti and scale their growth in the Midwest?) and it’s not clear how much of a positive impact conversions from Zoe’s to Cava have been on the company’s results. Second, its VC backers (Revolution, Invus, and others) along with management own over two-thirds of the company, and it’s almost certain they will sell down their stake as soon as they are able, which could bring down the stock price.

In short – congratulations to the Cava team on a very successful IPO, but I’m going to save my money for the pitas and skip the stock for now.