Tag Archives: CAVA

ROGER’S MONTHLY ARTICLE IN RESTAURANT FINANCE MONITOR – GOVERNMENT ECONOMIC REPORTS CONFUSING, AT BEST – IPO WINDOW OPENS WITH CAVA, GEN RESTAURANTS COMING SOON, FOGO DE CHAO’ IN LINE AS WELL

Government fiscal/monetary reports have been confusing at best, discouraging at worst. The recently enacted Fiscal Responsibility Act seems to be more like Irresponsibility, eliminating the debt ceiling for two years, until (conveniently) after the ’24 election. It is therefore guaranteed that the $32 trillion of US debt will be at least $36 trillion in two years, and annual interest on the debt will be something like one trillion dollars, about 15% of the US total spending, reducing more productive pursuits. The reportedly stronger jobs numbers (largely accounted for by the PHD designed “birth/death” model) is inconsistent with reported higher unemployment, the stagnant participation rate, a lower household job survey, lackluster business formation, and higher Q1’23 savings rate as a percentage of disposable income. The latter, which peaked in the low 30s at the beginning of Covid-19, has gone from 6.1% in Q3’22 to 9.4% in Q4’22 to 15.3% in Q1’23. Putting all the fancy surveys aside, those of us in retail land know that consumers are cautious. Price/value driven Cracker Barrel, which should be benefiting from strong travel trends, reported sluggish traffic in April and May. Among value oriented retailers: Target, with flat comps in Q1, cut their forecast for Q2 and said shrinkage (theft) will cost $500M more than last year. Macy’s adjusted forecasts downward after a lackluster spring season and (phenomenal) Costco reported US comps up 0.9% in April and down 1.5% in May. To be fair, WalMart was an outlier on the upside, as US comps were up 7.4%, led by a 27% eCommerce increase. Capital markets are anxiously awaiting the Fed’s decision this week as to whether or not to raise rates by 25 basis points. Whether they raise or “rest”, we are closer to the end than the beginning of Fed driven higher interest rates. Our bet is that, despite the Fed’s best intentions, before the stated inflation rate gets anywhere near the 2% objective on a YTY basis, a new stimulus program will be put in place, re-igniting inflation. The use of diluted less valuable dollars, is, after all, the only way the debt can be serviced.

The IPO window seems to be opening.  CAVA Mezze Grill and GEN Restaurants have joined Fogo de Chao’ with S-1 Registration filings, and CAVA may be trading (probably up in price) by the time you read this. The investment community’s admiration of CAVA Chairman, Ron Shaich, is a good start toward a warm reception, and CAVA’s business model is promising as well, Shaich’s reputation is about as good as it gets, since he co-founded (with the late Louie Kane) Au Bon Pain, which purchased St. Louis Bread (with 20 stores) in the mid 1990’s, renamed it Panera and spearheaded the growth to over 2,000 stores today. Panera became be by far the biggest winner in the restaurant space over the two decades of public ownership, helping to justify the apparent CAVA IPO valuation of approximately $2B, which represents an Enterprise Value of just under 30x the “run rate” of Adjusted EBITDA in Q1’23.

Putting a resurgence of restaurant IPOs in context: From mid to late ’21, five IPOs were done, all well received by the marketplace, though some observers (including ourselves) thought they were fully priced. From Krispy Kreme’s IPO in July ’21, to Dutch Bros in September ‘21, to Portillo’s and First Watch in October ‘21 to Sweetgreen in Nov ’21, all increased substantially from their IPO prices. Dutch Bros & Portillo’s & Sweetgreen each surged more than 100% at first but reality has intruded and 18-20 months later the five are now down an average of 11% from their IPO prices. Only Dutch Bros is up, by 21.7%, though down 60% from it’s high. Portillo’s and First Watch are almost exactly the same as they started, though down 60% and 18% from their highs. Sweetgreen takes the prize for volatility, down 80% from its high and 64% from the IPO. Our analyses, at the time of the IPOs, are available at www.rogerliptoncom and have stood the test of time pretty well.

Taking nothing away from (1) CAVA’s attractive unit level model, (2) the well designed strategic growth plan, and (3) the credentials of Chairman Shaich and the operating team led by Brett Schulman, Adjusted EBITDA in calendar ’22 was $12.6M, down from $14.6M in ’21, surging to $16.7M in Q1’22 vs.($1.6) in Q1’22. At this juncture, with due respect as stated above, and the midday crowd at CAVA around the corner from our office, we believe $2 Billion is currently more than adequate. In terms of trading, CAVA will likely rise from the offering, and we would buy some if we could at the IPO price. In terms of a material long term investment, we expect a more opportune time for purchase. Almost invariably it requires some courage to step up, if and when a short term problem presents a buying opportunity, but investors will have learned a great deal more about the realistic opportunities and challenges by that point, so that is usually a better gamble than chasing the latest shiny object.

CAVA Group, Inc COMING PUBLIC WITH FANFARE – IT’S NOT SWEETGREEN (SG) or DUTCH BROS (BROS) AT THEIR ‘21 IPOs, NOR CHIPOTLE FIVE YEARS AGO (CMG) – HERE’S A NEW ANALYTICAL TOOL!

CAVA will start trading soon, apparently the day after tomorrow, and Jim Cramer predicts that it will double at the opening. The investment community’s admiration of CAVA Chairman, Ron Shaich, is a good start toward a warm reception, and CAVA’s business model is promising as well. Shaich’s reputation is about as good as it gets, since he co-founded (with the late Louie Kane) Au Bon Pain, which purchased St. Louis Bread (with 20 stores) in the mid 1990’s, renamed it Panera and spearheaded the growth to over 2,000 stores today. Panera became by far the biggest winner in the restaurant space over the two decades of public ownership, helping to justify the apparent CAVA IPO valuation of just over $2B, which represents an Enterprise Value of about 30x the annualized Q1’23 “run rate” of Adjusted EBITDA.

New restaurant IPOs should be considered within this context: From mid to late ’21, five IPOs were done, all well received by the marketplace, though some observers (including ourselves) thought they were fully priced. From Krispy Kreme’s IPO in July ’21, to Dutch Bros in September ‘21, to Portillo’s and First Watch in October ‘21 to Sweetgreen in Nov ’21, all increased substantially from their IPO prices. Dutch Bros & Portillo’s & Sweetgreen each surged more than 100% at first but reality has intruded and 18-20 months later the five are now down an average of 11% from their IPO prices. Only Dutch Bros is up, by 22%, though down 60% from it’s high. Portillo’s and First Watch are almost exactly the same as they started, though down 60% and 18% from their highs. Sweetgreen takes the prize for volatility, down 80% from its high and 64% from the IPO. Our analyses, at the time of the IPOs, are available on this website, using the SEARCH function on our Home Page, and have stood the test of time pretty well.

AN ACCOUNTING “HEADS UP”

Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, Adjusted for non- continuing or one-time expenses) has become a popular reporting approach. GAAP Accounting is apparently “old school”.

Perhaps we have lost our youthful naivete’, but we suggest that – all kinds of recurring operating expenses that can “dress up” store level operations can easily be allocated toward “G&A” or “Pre-Opening Expenses”. Management knows well that the better the “store level economics” look, the easier it is to raise capital. Investors can’t judge the precision of G&A accounting or Pre-Opening Expenses the way they dissect store operations line by line, and modestly higher G&A or “Pre-Op” can materially help the store level appearance. In essence, show as attractive a store level return as possible, and explain away the long term “investment” in G&A or Pre-Op training.

OUR APPROACH

We continue to have an intense interest in store level economics, even as reported. However, we then deduct the G&A burden as a percent of Revenues, as well as Pre-Op, both of which will be continuing, and growing as a chain expands. The results and especially the comparisons between companies can be dramatic.

For example, Sweetgreen (SG), the biggest disappointment among the last crop of IPOs, has sales of $2.5-3.0M per location and talks about a 15% store level EBITDA margin, but G&A and Pre-Op have been an additional 42% of Revenues and that is why Sweetgreen is still showing negative Adjusted EBITDA.

Less dramatic is Dutch Bros (BROS) which suggest a 40% cash on cash store level return in year two, but G&A and Pre-0p is running almost 25% of Revenues. Dutch Bros, by the way, sells at almost 50x TTM Adjusted EBITDA.

More reasonably valued among the recent IPOs is First Watch (FWRG), which has been beating its targeted 35% cash on cash return in year three and their better controlled G&A and Pre-op combined has been running a little over 12%. FWRG is trading at about 14x TTM Adjusted EBITDA.

Chipotle, a huge winner the last five years. ran a store level EBITDA margin of 23.9%, on $2.7M average sales, in calendar ’22, while G&A, Pre-Op, and Impairment and Closure costs were a total of about 7%. This is why Chipotle has no debt, but last year was able to add over 200 stores/year (7.5%), while buying back almost $1B of stock.

WHAT ABOUT CAVA?

As indicated above, the stock is apparently going to rise materially from the IPO price of about $21/share,  at which the Company is valued at about 30x the $68M run rate of Adjusted EBITDA reported in the first quarter of ’23. The appeal, not necessarily in this order revolves around (1) the stores seem busy and well run and the menu is in tune with more healthful eating trends (2) store level economics, as described, are attractive, with a stated 35% cash on cash return in year two (3) Chairman, Ron Shaich, who built Panera, is very well respected by the investment community.

There are lots of questions we could ask, and will likely do so in the future, as to the sustainability, timing, and economics of growth from thIs point forward. For the moment, we just reflect upon our suggestion above that G&A and Pre-Opening Expenses should be considered when evaluating the prospect for an emerging concept. The G&A/Pre-Op at CAVA, combined, was 17.2% in Q1’23 vs. 15.7% in Q1’22. For calendar ’22 it was 15.7% vs. 14.6% in calendar ’21.

In terms of comparable valuations, we’ve already referenced Chipotle (CMG), with far better economics, selling at about 35x TTM EBITDA. Among the ’21 IPOs described above, we consider First Watch (FWRG), growing a little slower than CAVA’s contemplated rate, with comparable store level economics and better controlled G&A/Pre-Op, to be about the best fundamental “comp”. FWRG is selling at about 14x TTM Adjusted EBITDA.

We are not aware of earnings or EBITDA projections that have been made by the Company or their underwriters, so we use the Q1’23 “run rate” of $68M annualized Adjusted EBITDA. It is worth noting that Adjusted EBITDA in calendar ’22 was only $12.6M, down from $14.6M. The valuation at the IPO price, just above $2B will based on Q1’23, at about 30x. If the stock goes up 50-100% when it starts trading, the valuation will obviously be 45-60x.

You will not be surprised to learn that we will take our time to learn more about the sustaining economics of the CAVA growth plan. Even Panera provided its share of volatility over the years and provided alert investors with better timing opportunities than about to be presented by CAVA.

Roger Lipton

P.S. For comparisons sake, review our writeups on Fogo de Chao’, also in registration, growing units at 10-15% annually, with unit level cash on cash returns well over 40%, and G&A/Pre-Op of 7.4% combined. Valuation at IPO offering yet to be determined