The Stock Of Cava Group Soars 11% After Analysts Begin Bullish Coverage

Shares of Cava Group Inc., the Mediterranean-style fast-casual restaurant chain, surged 11% on Monday following the initiation of coverage by analysts. The company made its debut on public markets in mid-June, receiving a flurry of buy ratings from at least four underwriting banks, including JP Morgan, Stifel, William Blair, and Jefferies.

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Cava raised $317 million in its initial public offering, pricing above the proposed range at $22 per share. The stock immediately rallied upon opening, with 14.4 million shares issued at a valuation of $2.45 billion. The stock was last traded at $43.83.

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Although the company is not yet profitable and has a high cash burn rate, analysts remain optimistic. William Blair analysts highlighted Cava's position as a clear leader in a fast-growing market segment, with a proven appeal across various geographic regions. They emphasized the customizable menu of bowls and pitas with bold Mediterranean flavors that cater to different dietary preferences. Cava's strong performance, reflected in its average unit volumes (AUVs) of around $2.5 million and a 44% five-year revenue compound annual growth rate (CAGR) through 2022, further supported their positive outlook.

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William Blair also mentioned Cava's strategic acquisition of Zoës Kitchen in 2018, which facilitated expansion into new markets and efficient densification in top-tier trade areas. This acquisition positions Cava to triple its number of locations by the end of 2023 compared to 2020.

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Based on the achieved population per restaurant ratio in Virginia, William Blair estimates that there is room for at least 1,200 domestic Cava restaurants. This aligns with management's target of having over 1,000 locations by 2032. Furthermore, the potential introduction of digital drive-thrus is seen as an opportunity to drive further growth and increase average unit volumes. The analysts noted that Cava's strong in-store design, operational procedures, and backend support systems contribute to its efficiency, safety, and consistency.

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Other underwriting banks, including JP Morgan, Stifel, and Jefferies, also initiated coverage with positive ratings and price targets. They highlighted the broad appeal of Mediterranean cuisine, the large end-market size, and Cava's strong financial position with no funded debt and a healthy balance sheet.

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However, not all analysts share the optimistic view. David Trainer, CEO of New Constructs, expressed doubts about Cava's ability to achieve profitability and questioned its high valuation. Despite differing opinions, Cava's stock has shown significant growth since its IPO.

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The Renaissance IPO ETF has gained 32% year-to-date, while the S&P 500 has increased by 15%.

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