Cava Group is going public: 5 things to know about the fast-casual Mediterranean restaurant chain

By Ciara Linnane

Company has impressive revenue growth but remains loss-making

Cava Group, the Mediterranean-focused fast-casual restaurant chain, priced its initial public offering of 14.4 million shares at $22 apiece on Wednesday, up from a prior range, as it gears up for a trading debut set for Thursday.

With 111.4 million shares to be outstanding, Cava will have a valuation of more than $2.4 billion. The company is set to list on the New York Stock Exchange under the ticker symbol CAVA. JPMorgan, Jefferies and Citigroup are lead underwriters in a team of 10 banks working on the deal.

Cava is the first restaurant company to go public since Sweetgreen Inc. (SG) in late 2021.

Bill Smith, co-founder and chief executive of Renaissance Capital, a provider of IPO exchange-traded funds and institutional research, said an office straw poll about Cava's food was mostly positive.

"Someone said 'better than Sweetgreen' and that might sum up the investment case too," Smith wrote in commentary.

"[Cava] has Sweetgreen-like growth, but roughly Chipotle-like (CMG) restaurant operating margins. That's a powerful combo, though company-level profit still has a ways to go, and some of the recent growth has been low-hanging fruit."

In any case, the deal will test investor appetite for restaurants and growth stories, he added.

Here are five things to know about Cava.

It's a national player

Cava believes it's the only national player at scale in the Mediterranean category, with more than twice the number of restaurants as its next largest competitor, according to its filing documents.

The company has grown its network of restaurants to 263 in the first quarter of 2023 from 22 in 2016, after acquiring rival Zoës Kitchen in 2018 in a $300 million deal.

The company was founded in 2006 as a full-service restaurant called Cava Mezze and later started selling its dips and spreads in grocery stores. In 2011, it launched its fast-casual concept. The company is expecting to open 34 to 44 new Cava restaurants in 2023.

It has impressive growth rates

The company does have strong growth rates for revenue, which rose at a 52.2%* compound annual growth rate from fiscal 2016 to fiscal 2022. However, net losses have also grown, widening to $59 million in fiscal 2022 from $37.4 million in fiscal 2021.

The company also disclosed that it's expecting its operating costs to "increase substantially" in the future.

After converting a number of the Zoës Kitchen restaurants into Cava restaurants, "we expect that the capital expenditure requirements to open a new restaurant will be significantly higher than we have experienced in the past few years," the prospectus says.

It's burning through cash

Cava's cash burn was $120 million of free cash flow in 2022, and as of April 16, it had just $23 million in cash and cash equivalents on its balance sheet, according to the prospectus.

It can only sustain that rate of cash burn for two months from April 16, according to David Trainer, chief executive of New Constructs, an independent equity research firm that uses machine learning and natural-language processing to parse corporate filings and model economic earnings, although its research has encountered pushback.

New Constructs maintains a list of "zombie" stocks, which it says are at risk of declining to $0 a share, and it included Cava on that list in a recent report. Sweetgreen, which is also on the list, went public at $28 a share and was last trading at $10.50.

"Cava Group is not currently profitable and its path to profitability is nonexistent as the company spends money it doesn't even have to open more stores," Trainer wrote.

For more, see:Fast-casual restaurant chain Cava Group's IPO documents raise some red flags: analyst

New Constructs estimates that Cava's net operating profit after tax margin is negative 3%. Chipotle, by contrast, is a positive 14%.

"In other words, Cava Group must grow revenue as fast as Chipotle in its first decade as a public company, while also drastically improving margins, or the stock is worth much less than its expected valuation," he wrote.

It has plenty of competitors

Cava is operating in an industry that includes national, regional and locally owned restaurants.

"We also compete with grocery stores, convenience stores, meal subscription services, and delivery kitchens, especially those that target guests who seek high-quality food," it says in its prospectus. "Our CPG (consumer packaged goods) business also faces competition from other producers of dips, spreads, and dressings and other pantry and food items."

New Constructs lists 12 public companies it deems to be direct competitors, many of them well established names with a loyal following: Yum! Brands Inc. (YUM), Starbucks Corp. (SBUX), Chipotle, Darden Restaurants (DRI), Brinker International Inc. (EAT), Bloomin' Brands Inc. (BLMN), El Pollo Loco Holdings Inc. (LOCO), Fiesta Restaurant Group Inc. (FRGI), Cheesecake Factory Inc. (CAKE), Shake Shack Inc. (SHAK), Red Robin Gourmet Burgers Inc. (RRGB) and Sweetgreen.

See also: Sweetgreen's stock tumbles after 'Chipotle Chicken Burrito Bowl' prompts lawsuit from Chipotle

It's an emerging growth company

Cava is an emerging growth company, which means it does not have all of the disclosure requirements a bigger company would have.

It's not required to engage an independent registered public accounting firm to report on its internal controls over financial reporting. It's also not required to submit certain executive-compensation matters, such as "say-on-pay," "say-on-frequency," and "say-on-golden parachutes," to stockholder advisory votes, according to its filing documents.

* An earlier version of this story had a typo in the company's CAGR. It has been corrected

-Ciara Linnane

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06-15-23 0624ET

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