CAVA Group, Inc. (NYSE:CAVA) Q3 2023 Earnings Call Transcript

CAVA Group, Inc. (NYSE:CAVA) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the CAVA Q3 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, November 7, 2023. I would now like to turn the conference over to Matt Milanovich. Please go ahead.

Matt Milanovich: Good afternoon, and welcome to CAVA’s Third Quarter 2023 Financial Results Conference Call. Before we begin, if you do not already have a copy, the earnings release and related 8-K furnished with the SEC are available on our website at investor.cava.com. The purpose of this conference call is to give investors further details regarding the company’s financial results as well as provide a general update on the company’s progress. You will find reconciliations of any non-GAAP financial measures discussed on today’s call to the most directly comparable financial measure calculated in accordance with GAAP, to the extent available without unreasonable efforts, in today’s earnings release and supplemental deck, each of which is posted on the company’s website.

Before we begin, let me remind everyone that this call will contain forward-looking statements. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in CAVA’s filings with the SEC. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, CAVA undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

And now, I’ll turn the call over to the company’s Co-Founder and CEO, Brett Schulman.

Brett Schulman: Thanks, Matt, and welcome to the call, everyone. Our results in the third quarter of 2023 clearly demonstrates the continued strength of our business, CAVA’s broad appeal and the proven portability of our innovative Mediterranean concept. In the face of consumer headwinds, we once again delivered strong top line growth and impressive unit economics while successfully opening new restaurants across the country. While we’re taking a measured approach in this environment, we remain confident in our long-term strategy and growth targets. CAVA is creating and defining the next major cultural cuisine category with substantial white space opportunity. We have a powerful unit economic engine, and we’ve invested in building an efficient, scalable operation, putting us in a strong position to gain share and deliver on our extraordinary potential regardless of economic conditions.

In the third quarter of 2023, we delivered a 49.5% increase in CAVA revenue, 14.1% CAVA same-restaurant sales growth, including a 7.6% increase in traffic; 11 net new restaurants, ending the quarter with 290 restaurants, a 35.5% increase year-over-year; adjusted EBITDA of $19.8 million, a $15 million increase over the third quarter of 2022; and net income of $6.8 million. Our strong Q3 results and ability to capitalize on the opportunities ahead are grounded in our three strategic pillars. First, we are solidifying our category-defining Mediterranean brand. We opened 11 net new CAVA restaurants during the quarter with continued expansion across Alabama, Arizona, California, Florida, Georgia, the Carolinas and Texas. In the fourth quarter so far, we’ve opened 12 additional restaurants, putting us on track for 70 to 73 net new CAVA restaurant openings in 2023.

With our last Middle East restaurant conversion completed, we are now operating under a single powerful CAVA brand. This important milestone has energized the team and we’re seeing that in our results. As we share our craveable food and Mediterranean hospitality across the country, we continue to expect annual unit count growth of at least 15%. We’re excited to enter Chicago in 2024 with at least 3 new restaurant openings expected in that market. Like others in the sector, we are seeing changes in real estate market. However, the pipeline we’ve built is diverse and not dependent on a small number of markets or landlords. In addition, our real estate team has been building increased buffer into our pipeline over the past year to ensure we are insulated from potential delays in equipment availability, permitting and inspections.

Our second strategic pillar is developing a modern, best-in-class organization. As we scale, we continue to invest in team members and equip them with the tools and training to deliver strong, consistent results and run great restaurants every shift, every day. We’re committed to being the employer of choice by creating an exceptional culture and, from a compensation perspective, ensuring we’re positioned competitively among leading brands and markets across the country. To support sustainable growth, we’re building a pipeline of qualified, highly engaged leaders with the skills to run great operations and provide fantastic guest experiences. In 2023, our target is to internally place 75% of our new restaurant GMs, and we remain on track to achieve that goal.

Our Academy GM network supports this pipeline and serves as a farm system for future leaders. At the end of Q3, we had 45 Academy GMs, including 7 recently promoted to the multi-unit leader position. We plan to have 50 by the end of the year, enabling localized training in existing markets across the country. In September, we held CAVA Connect, a conference that brings all of our restaurant GMs together for education recognition and celebration. In addition to celebrating our mission and recognizing team members for exhibiting our values and competencies, the conference was rooted in education on our guests, people and standards initiatives, what we call GPS. This initiative focuses the team on 7 foundational metrics and standards for operational execution.

Over 3 days, leaders participated in robust training sessions on team member development, P&L management, food safety standards and the guest experience. Our third strategic pillar is building the infrastructure to successfully scale and grow the business. We’ve made investments to support the growth we know this concept to deliver. These investments, which will create leverage over time, are thoughtful and strategic with an emphasis on operational excellence, efficiency and creating an exceptional experience for our guests. Among these investments is our vertically integrated production model. By producing our own dips and spreads, we’re taking complexity out of our restaurants, improving costs overall and maintaining the quality and integrity of our unique recipes.

Across more than 300 locations, CAVA’s Crazy Feta is as delicious today as it was when guests of our first full-service CAVA Mezze restaurant fell in love with it. Our new facility in Verona, Virginia, which further builds out these capabilities is on pace to commence operations in Q1 2024. The envelope is complete, the management team has been hired and equipment is being delivered and set in place. Verona, along with our current 30,000 square foot facility in Laurel, Maryland will be able to support at least 750 restaurants as well as our CPG business. Shifting to loyalty, CAVA has a diverse, passionate customer base, and we are in the early stages of launching a new loyalty program aimed at developing deeper connections with our guests, creating more frequent, relevant experiences and further driving traffic, mix and check.

In the next couple of weeks, we will transition all loyalty members to a bankable points model, and in December, we will pilot new rewards and engagement tactics in the Houston market. The pilot will inform the rollout of a new loyalty program nationwide expected in late 2024. Our best-in-class culinary team continues to innovate inside a robust stage gate process that validates new offerings and ensures efficient successful launches. We recently brought back 2 limited-time only fan favorites, the Balsamic Date Chicken bowl and our sweetened Spicy Chicken Pita and soon, we’ll be market testing an exciting new main item, steak. Steak is a highly requested item and brings a complementary offering to our existing portfolio of meat. Our Mediterranean take is inspired by flavors from the GMC, including sun-dried tomato coriander and Aleppo pepper, showcasing what makes CAVA special and giving us an opportunity to delight existing guests, attract new ones and reengage those who haven’t visited in the while.

Steak has performed well at each stage gate to date and our operational tests have been successful. The next stage is a market test in Dallas and Boston, which is scheduled to begin next month. And if the positive results continue, we expect to launch steak nationwide later in 2024. Before I turn the call over to Tricia, I’d like to wrap up with Q3 highlights and reiterate the opportunity in front of us. This quarter’s results continue to show the strength of our brand. CAVA’s same-restaurant sales growth was 14.1% driven by 7.6% traffic growth. Our powerful unit economics continue to build with a $2.6 million AUV and 25.1% CAVA restaurant-level profit margin during Q3, resulting in nearly $20 million of adjusted EBITDA and $7 million of net income.

Finally, I want to express my gratitude to our team members for their generosity and commitment to bringing heart health and humanity to food. We’re living in a world that’s more fluid and challenging than ever. Online life has failed to replace the real-life emotional connections that humans crave, and consumers now say they are looking for restaurants that make them feel welcomed, warm and cared for, restaurants like CAVA. It is that exceptional hospitality, combined with our unique cuisine where taste and health unite, that embodies our Mediterranean way. At CAVA, everyone is welcome at our table. With that, I’ll let Tricia walk you through financials.

Tricia Tolivar: Thanks, Brett, and good afternoon, everyone. CAVA revenue in the third quarter of 2023 grew 49.5% year-over-year to $173.8 million. Same-restaurant sales increased 14.1% driven by traffic growth of 7.6%. I would like to take a minute to clarify our same-restaurant sales calculation. Both NROs and conversions entered the same-restaurant sales base when they have been opened as a CAVA restaurant for at least 365 days, clarifying that the strong growth when a location converts from Zoe’s to CAVA is not included in same-restaurant sales. We noted broad-based same-restaurant sales strengths across vintages, regions in both suburban and urban locations. We opened 11 net new CAVA restaurants this quarter, bringing our total CAVA restaurant count to 290.

We are off to a strong start in Q4 with 12 new restaurants already opened, giving us confidence to raise our new unit guidance range to 70 to 73 for the year. New restaurant openings are outperforming the model from the top line and restaurant-level margin standpoint. In addition, we continue to prove our portability with an overall AUV above $2.6 million and all geographies over $2.3 million. CAVA restaurant-level profit in the third quarter was $43.6 million or 25.1% of revenue versus $25.2 million or 21.7% of revenue in the prior year, representing a 72.8% increase. The margin expansion was largely a result of improved food, beverage and packaging costs and sales leverage on labor and occupancy. Our third quarter profitability demonstrates the power of our business model.

Given our current stage of growth and our commitment to continued investments in our restaurants, we do not expect to maintain this level of profit margin in the near term. CAVA’s food, beverage and packaging costs were 29.4% of revenue, lower than third quarter of 2022 by 190 basis points, driven by lower input costs and higher incidence of premium menu items, driving favorable product mix. CAVA labor and related costs were 25.3%, down 70 basis points from the third quarter of 2022. This decrease was driven by leverage from increased sales, partially offset by an increase in average hourly wages and an increased mix of new restaurants. As discussed on our second quarter call, we intend to continue to reinvest in our team members with wage increases and other benefits.

We believe that CAVA is a place where our team members can build a career and not just have a job. At the beginning of Q4, we made incremental wage investments to ensure we are highly competitive in each market, driving Q4’s average wage approximately 8% above Q4 of 2022. We expect this to have a 100 to 120 basis points impact on our restaurant-level margins beginning in Q4 of 2023. In addition, we expanded health care benefits to all part-time hourly team members. These types of investments are critical to support our future growth, and we expect further investments in 2024. CAVA occupancy and related expenses were 7.9% of revenue, an improvement of 50 basis points from the third quarter of 2022 due to increased sales leverage. CAVA other operating expenses were 12.3% of revenue, a decrease of 30 basis points from the third quarter of 2022 due to higher sales.

Shifting to overall performance. Our general and administrative expense for the quarter, excluding stock-based compensation, was $21.3 million compared to $15.4 million in Q3 of 2022. This $5.9 million increase is primarily driven by recurring public company costs, higher performance-based accruals and an increase in cost to support growth. As a percentage of revenue, G&A, excluding stock-based compensation, was 12.1% in the current quarter, an increase of 100 basis points from the prior year quarter due to recurring public company costs and higher performance-based accruals, partially offset by leverage from higher sales. Adjusted EBITDA, including the burden of preopening costs for the quarter, was $19.8 million, which was more than the adjusted EBITDA for all of 2022.

The increase in adjusted EBITDA was driven by 14.1% CAVA same-restaurant sales growth, improved CAVA restaurant-level profit margin and the performance of new openings. Keep in mind, Q3 preopening costs included expenses related to the restaurants opened in Q3 as well as costs related to the 12 units we’ve opened to date in Q4. We reported $6.8 million of net income compared with a net loss of $11.9 million in Q3 of 2022, representing an increase of $18.7 million. We reported diluted earnings per share of $0.06 in the quarter compared with a diluted loss per share of $8.96 in Q3 of 2022. I would like to remind everyone that we expect our share count to be between 117 million and 118 million for Q4 of 2023. Shifting to liquidity. At the end of the quarter, we had 0 debt outstanding, $340.4 million in cash on hand and access to a $75 million undrawn revolver, with an option to increase our liquidity if needed.

We delivered cash flow from operations of $73.1 million for the current year-to-date period compared with $5.2 million in the prior year period. The increase was primarily driven by our improved operations, driving increased profitability across the fleet. Q3 results continue to demonstrate the power of our model and the value we are capable of delivering over the long term. Having said that, and as reflected in our guidance, the restaurant-level margins delivered in Q3 should not be considered CAVA’s new normal given the continued wage investments in Q3 and Q4. Turning to our outlook for full year 2023, which includes a 53rd week, we expect the following: 70 to 73 net new CAVA restaurant openings; CAVA same-restaurant sales growth, excluding the impact of the 53rd week, between 15% and 16%; CAVA restaurant-level profit margins of at least 24%; preopening costs between $14.5 million and $15.5 million; and adjusted EBITDA, including the burden of preopening costs, between $70 million and $73 million.

Before turning to Q&A, I want to provide some high-level thoughts for 2024. First, regarding pricing, we expect to return to our historical price increases of 2.5% to 3% starting in January. While we will provide same-restaurant sales and restaurant-level margin guidance on our next earnings call, we want to share with you some initial color. We are taking into consideration a Q1 2023 benefit of an unseasonably mild winter along with Q1 2022 Omicron lap as well as the IPO halo that benefited Q2 and, to a lesser extent, Q3 of 2023. Additionally, as previously discussed, we expect a more moderated restaurant-level profit margin, reflecting recent labor investments and potential additional investments in 2024. Finally, as previously projected, we will move to an annual unit growth rate of at least 15%, translating to an expected net new unit count of 47 to 50 units in 2024.

Now I will turn the call back over to the operator to open it up for Q&A.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Andy Barish from Jefferies. Please go ahead.

Andrew Barish: Yes. Hey, guys, great results. Just wanted to clarify, I’m doing the math, right, on what you’ve reported year-to-date. It implies the fourth quarter same-store sales are kind of flattish to slightly positive. Am I missing something there? Or can you clarify a little bit on sort of how that rolls up to the 15% to 16% for the year?

Tricia Tolivar: Yes. Hey, Andy, it’s Tricia. Good to hear from you. So the implied guidance is a little positive, up to about 4.7% or so. And what that reflects is the strong comp in the fourth quarter of the prior year at 15% and taking, to a lesser extent, into play the macroeconomic environment and the impact that it may have on the consumer.

Andrew Barish: Okay, got it. Yes, I appreciate some of the early thoughts on ‘24. And as we all look at the calendar turning in the not-too-distant future, are you still thinking that comps can be positive, even lapping some of those really big numbers in the first half of the year?

Tricia Tolivar: Yes. So we tend to look at things on a 2-year stack. And so when we had a 28% comp in the first quarter of last year, there was a benefit of about 10 points related to weather and Omicron, and that is going to make Q1 of 2024 a bit challenging for us. So I wouldn’t expect significant positive comps as we go into Q1. But certainly, our long-term approach and thinking about low to mid-single digits on a same-restaurant sales basis annually seems to make sense to us.

Andrew Barish: Okay, much appreciated. Thanks for the color there.

Operator: Thank you. The next question comes from John Ivankoe from JPMorgan. Please go ahead.

John Ivankoe: Hi, thank you. Obviously, good results. But I was wondering if you thought you’ve actually left maybe some customer money on the table in the third quarter. And I asked this in the context of stores that have very clearly been very busy. In other words, do you think that you’ve really had the throughput in place to properly serve all the customers that have walked into the stores and wanted to purchase CAVA? And secondly, there’s been some feedback around digital pickup times that haven’t been exactly accurate, at least relative to customer expectations. I wonder if that’s been kind of a specific experience, if that’s been a broader experience and if you do have some tightening opportunities, perhaps from an operational execution perspective, to post even better results than what you already have been. Thank you.

Brett Schulman: Hey, John, it’s Brett. Thanks for the questions. First, I want to be clear, we’re building this business for the long term and setting our team members up for success to deliver great guest experiences and working, first and foremost, on fundamentals of operations and hospitality. Certainly, we always believe there are opportunities to optimize our operations and continue to look at it in all facets. As it relates to digital order specifically, we do track digital order accuracy rates as well as our Yext score. So this is how customers are rating us and judging us. And we’ve been over 4 out of a 5-point scale for over the last 52 weeks, and we’ve actually increased that in the last couple of periods, almost 4.5. So we’ve seen writ large our guests be very happy and even increasingly happy with our performance, but that’s not to say that there aren’t opportunities to continue to drive that score higher as well as improve the speed in which we operate over time over the long haul, but we’re certainly mindful of not overheating the engine certainly from an operation standpoint.