Buy or Avoid the Drop in Chipotle & Cava Group's Stock?

Known for generating massive gains for investors, Chipotle CMG and Cava Group CAVA have seen their stocks fall mightily to 52-week lows following their lackluster Q2 results.

This comes as the Zacks Retail-Restaurants Industry is currently in the bottom 21% of over 240 Zacks industries, with Chipotle and Cava starting to feel the broader consumer slowdown in fast casual dining after previously avoiding the downward trend, even as other food chains faltered from slower traffic and weaker sales.

Still, long-term investors often prefer to buy into the weakness in stocks of prominent companies for what is hopefully a sharp rebound at some point, but may be wondering if it's best to avoid the drop in Chipotle and Cava shares for now.

Chipotle & Cava’s Weak Guidance

Adding to the downward pressure on Chipotle and Cava stock is that both lowered their full-year same-store sales guidance following their lackluster Q2 reports.

Chipotle cut its full-year guidance for same-store sales growth to flat, down from previous forecasts of a low-single digit increase. This comes as Chipotle’s store traffic declined 5% during Q2, contributing to a 4% drop in same-store sales.

Meanwhile, Cava revised its full-year same-store sales growth forecast to 3-4%, down from a previous range of 4-6%. Despite seeing a 2% increase in same-store sales during Q2, Cava’s traffic trends were flat for the quarter.

Chipotle’s Long-Term Vision Includes More International Expansion

Taking over the helm of Chipotle last year, CEO Scott Boatwright is focused on aggressive expansion and operational excellence, which his predecessor Brian Niccol helped the company thrive on before departing to lead Starbucks SBUX. Regarding expansion goals, Chipotle aims to reach 7,000 North American locations, currently having more than 3,700 stores and aiming to open 345 new restaurants this year.

Boatwright also sees global expansion as a “big number” opportunity outside of Canada, with Chipotle having locations in the United Kingdom (19 stores), France (6 stores), Germany (2 stores), and Kuwait (1 store). Furthermore, Chipotle is actively looking to expand in the Middle East through a partnership with the Alshaya Group, with new restaurants planned for Kuwait and Dubai. It’s also noteworthy that 80% of Chipotle’s new stores will feature Chipotlanes, mobile-order drive-thrus that have become one of the fastest scaling initiatives in the brand's history.  

Cava’s Domestic Expansion & Automation Initiatives

As for Cava Group, CEO Brett Schulman has remained bullish on the company’s long-term trajectory despite recent uncertainty. Going public in 2023, the Mediterranean fast-casual restaurant has nearly 400 locations in the U.S., targeting 1,000 restaurants by 2032.

Notably, Schulman sees automation as a way to enhance the company’s operations, with Cava investing in tools that streamline operations, including an investment in Hyphen, a platform that develops automated make-lines for restaurant kitchens.

Monitoring Chipotle & Cava’s Growth Trajectories  

Based on Zacks' estimates, Chipotle’s total sales are now expected to be up 7% this year and are projected to rise another 13% in fiscal 2026 to $13.67 billion. On the bottom line, annual earnings are currently slated to increase 8% in FY25 and are projected to rise another 17% in FY26 to $1.42 per share.

Pivoting to Cava, its total sales are projected to increase over 20% in FY25 and FY26, with projections edging toward $1.45 billion. However, it’s worth mentioning that this has slowed from 30% or more annual sales growth in recent years. Moving further past the probability line, Cava’s EPS is expected to be up 36% in FY25 and is projected to increase another 17% next year to $0.67 per share.

Performance & Valuation Comparison

Year to date, Chipotle stock is down nearly 30% with Cava shares falling roughly 40%, vastly underperforming the benchmark S&P 500’s return of +10% and even the Zacks Retail-Restaurant Market’s -3%.

That said, over the last two years, Cava's stock is still sitting on gains of more than +40% to roughly match the broader market, with Chipotle shares up +15% and also beating the Retail-Restaurant Market’s +3% despite underperforming the S&P 500.

Previously trading at more than $3,000 a share before its historic 50-1 stock split in June of 2024, Chipotle stock is currently trading at just over $40 and 35.9X forward earnings. Although at a noticeable premium to the benchmark’s 24.7X forward earnings multiple and the industry average of 19.4X, Chipotle does trade well below Cava at 124.6X, with CAVA trading around $70.

While price-to-sales may be a better indicator of Cava’s true value to investors at this stage of its corporate life, CAVA has a forward P/S ratio of 6.8X, which is also a more noticeable stretch to the industry average of less than 1X, with Chipotle at 4.8X.

Conclusion & Final Thoughts

It may be tempting to buy Chipotle and Cava Group stock near their 52-week lows, but there could still be much better buying opportunities ahead. This is certainly the case for Cava’s stock, which lands a Zacks Rank #4 (Sell) considering its lofty valuation amid weaker demand for fast casual dining.

Chipotle’s stock, on the other hand, has a Zacks Rank #3 (Hold) and may offer better long-term value to investors at current levels, especially considering its international expansion. Of course, Chipotle also has a longer track record and stronger balance sheet to navigate the Retail-Restaurant Industry’s uncertainty.

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This article originally published on Zacks Investment Research (zacks.com).

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