CAVA's Honeymoon Ends With a 16% Stock Drop

Restaurant stocks have somewhat mirrored artificial intelligence (AI) stocks this earnings season. That is, investors are not taking a one-size-fits-all approach. In the case of AI, investors are looking for companies that show an ability to monetize the technology. In the case of restaurant stocks, investors are rewarding companies that demonstrate their value proposition.

That explains the sell-off in CAVA Group Inc. (NYSE: CAVA) after the company’s second-quarter earnings report. CAVA stock is down over 16% in midday trading following its report after the market closed on August 12.

Overall results were mixed but leaned positive. Revenue came in at $280.62 million, just shy of the $285.65 million estimate, while earnings per share (EPS) of 16 cents topped expectations of 13 cents.

The closely watched same-store sales metric came in at 2.1% in the quarter, lower than the initial estimate of 6.1% growth. However, the company's guidance sent CAVA stock lower.

The company lowered its full-year same-store sales growth outlook from 4-6% to 3-4%, citing flat year-over-year traffic and softer demand from lower-income consumers. While traffic was unchanged compared to last summer, it improved sequentially from the first quarter. Management said higher-income markets remain resilient, but the broader consumer picture is “putting a fog” over the company’s near-term outlook.

It's Never Just 1 Reason

In the immediate aftermath of an earnings report, many analysts try to find “the one thing” that caused a good or bad report. However, there are frequently many reasons for a company’s good or bad results.

For CAVA, part of the slower same-store sales growth came from tougher comps after last summer’s introduction of steak, one of the company's most successful menu launches.

Management noted that this was particularly true in markets where steak performed exceptionally well. While the tougher comp wasn’t the only factor in this quarter’s softer numbers, it was a meaningful headwind alongside broader consumer softness.

A Profitable and Growing Company

The company had some positive news on the growth front. It opened 16 net new restaurants, expanding its footprint to 398 locations across 28 states and the District of Columbia.

The takeaway for investors is that CAVA is still in the early stages of its national buildout. The company has a goal of 1,000 restaurants by 2032. That will mean broader national coverage and growth that won’t depend on raising prices

A Young Stock With the Privilege of Expectations

After a reaction to this quarter’s earnings report, it’s important to note that CAVA has only been publicly traded since 2023. That means analysts and investors are still getting their minds around a proper valuation.

With many young stocks, CAVA stock popped based on enthusiasm for how its Mediterranean-focused menu could fill a key niche in the fast-casual market. CAVA stock more than doubled in its first year, covering June 2023 to June 2024. Then the stock nearly doubled again in the six-month period from June 2024 to December 2024.

That's incredible growth, which also pushed the stock’s valuation to levels that were likely going to be unsustainable. Even after this sell-off, CAVA stock still has a price-to-earnings (P/E) ratio of over 59x. That’s more than double the sector average of around 28x.

It’s safe to say, the company’s honeymoon period is over. However, that doesn’t mean the stock is untouchable.

If You Would Buy the Food, Buy the Dip

The unsettling news from the earnings report is that CAVA Group is saying what many investors have suspected. There is a divide between the company’s higher-end and lower-end consumers. The latter are under pressure, which is clouding the company’s outlook.

However, that’s different from saying that consumers are rejecting the company’s health-conscious menu out of hand. That means the revenue drop may be cyclical. 

CAVA stock may fall further in the short term, but that should create a buyable dip for investors. One reason for that is the expectation that the Federal Reserve will cut interest rates in September.

The CME FedWatch tool now gives that rate cut a 99.9% possibility. That would likely relieve some consumer pressure. Revenue growth and a more reasonable valuation could spark an end-of-year rally.

The CAVA Group analyst forecasts on MarketBeat show that analysts feel the same way. Five analysts have sharply lowered their price targets for CAVA stock, and each target is below the consensus price of $103.56.

Where Should You Invest $1,000 Right Now?

Before you make your next trade, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis.

Our team has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and none of the big name stocks were on the list.

They believe these five stocks are the five best companies for investors to buy now...

See The Five Stocks Here

The article "CAVA’s Honeymoon Ends With a 16% Stock Drop" first appeared on MarketBeat.