This up-and-coming fast-casual chain has a promising future.
Jeremy Bowman| The Motley Fool
Historically, Starbucks (NASDAQ: SBUX) has been a big winner on the stock market.
The company essentially pioneered the modern-day coffeehouse concept in the 1990's and the format has been copied by a wide range of competitors, including independent coffee shops and large chains.
Howard Schultz's fundamental innovation, bringing espresso drinks to the American market and adapting the experience to American tastes, generated tens of billions of dollar market value for Starbucks and made the brand famous around the world.
However, these days Starbucks appears to be struggling. The stock has underperformed the S&P 500 over the last few years, comparable sales growth has been sluggish and Starbucks' reputation has suffered due to a unionization push that has led to some stores closing.
Investors looking for the kind of growth that Starbucks represented in its earlier years are better off looking elsewhere. And one top restaurant stock to consider is Cava Group (NYSE: CAVA).
The next restaurant star?
Cava has been a publicly traded stock for less than a year, but it's showing the strength of a much more mature restaurant company. The company combines strong comparable sales, an aggressive expansion strategy, improving restaurant-level operating margins and a proven business model.
Cava is a Mediterranean fast-casual chain and resembles Chipotle in a number of ways. Like Chipotle, Cava's menu is focused around rolled-up pita sandwiches that resemble burritos as well as bowls.
The fast-casual chain is also well-represented in the digital channel as digital orders made up 36% of its revenue last year.
Its other results help show Cava's potential. Revenue jumped 60% last year to $717.1 million as it opened 72 locations. The company now operates more than 300 restaurants, benefiting from its acquisition and rebranding of Zoe's Kitchen.
Comparable sales last year surged 18%, and the company recorded average unit volumes of $2.6 million, showing its restaurants bring in high volumes of customers, a bullish sign for the company's future growth.
On the bottom line, Cava's growth story is also taking shape. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $73.6 margin compared to $12.6 million in the quarter. Restaurant-level operating profit nearly expanded 450 basis points to 24.8%.
Why Cava could be a long-term winner
The restaurant industry is competitive but it isn't complicated. Companies with profitable, popular business models like Starbucks and Chipotle tend to do well, and Cava has the makings of another industry star, as it has a lot of room to add restaurants and its brand seems to be resonating with consumers.
It just opened its first restaurant in the Midwest, for example, opening its doors in Chicago.
Cava also has something of a wild card up its sleeve. Ron Shaich, the founder of Panera Bread and Au Bon Pain, early pioneers in the fast-casual industry. Cava didn't find Shaich. He found Cava as he was an early investor in the company, purchasing a stake when it had just a few locations open.
Given his success with Panera and Au Bon Pain, having Shaich on board seems like a significant advantage for a young fast-casual chain.
Finally, Cava also trades at a reasonable valuation for its growth potential as it currently trades at a price-to-sales ratio of 5.5, about even with Chipotle.
Cava clearly has the momentum to deliver strong returns to investors. While success in the restaurant industry doesn't happen overnight, Cava seems well prepared with a popular menu and concept, strength of the digital channel and the guidance of Ron Shaich as Chairman.
The Mediterranean fast-casual chain has all the pieces to be the next great restaurant stock. Long-term investors should be rewarded.
Jeremy Bowman has positions in Chipotle Mexican Grill and Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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