Shares of Mediterranean restaurant chain Cava Group(NYSE: CAVA) were among the best performers on the stock market in 2024. Late in the year, Cava stock was up 251%. And while it slipped near 2024's finish line, it still finished the year up 162%, which is an extraordinary one-year return.
Now 2024 is in the rearview mirror and Cava is looking at 2025 in the windshield. What does this hot stock have in store for its shareholders in the coming year?
I can't predict the future, but I can share Cava's plans and what they could mean when it comes to investing in Cava stock.
Here is what Cava could do in 2025
The calendar year may be over, but investors are still awaiting Cava's final numbers for 2024. It ended the third quarter with 352 restaurant locations, which is relatively small. And it expected to open 13 to 15 additional units during the now-completed fourth quarter. So the company should have ended the year with around 366 restaurants -- investors will find out next month.
In 2025, Cava expects to grow this by an additional 17%, according to CFO Tricia Tolivar. In other words, investors should expect the company to open 60 or more new restaurants in the coming year alone. Management has a multiyear pipeline in place and appears confident about where it's at with its plans for 2025.
Now, the average Cava location generates $2.8 million in annual sales. Many of the company's new locations in 2025 will be in new markets -- called "white space" in the business. Entering a new market means that brand awareness will be low, so investors should temper expectations for first-year sales of new locations.
But then again, Cava is enjoying a historical boost in brand awareness, generally speaking. The company went public in mid-2023, and Tolivar says that brand awareness is up 8 points since then.
This is a significant increase. Consider that Cava enjoys just north of 60% brand awareness in its best markets. Its national brand awareness is consequently much lower. Therefore, an 8 point increase represents a big boost. And this should help Cava's 60 or so new restaurants perform better than they would have otherwise.
Given the contribution of new locations and factoring in a small boost for same-store-sales improvement at existing locations, I believe investors can pencil in $1.1 billion in revenue for Cava in 2025 if things go well.
Cava's management has also said that, while it does expect long-term profit improvement, it expects restaurant-level profit margin to hold steady in 2025 compared to 2024. Considering its operating margin is around 6% right now, shareholders can pencil in $66 million in operating profit in 2025.
What this could mean for investors
I've explained what might happen with Cava's business in 2025. But what about Cava stock? When it comes to investing, three possibilities are always on the table regarding a stock's valuation: It can get more expensive, it can get cheaper, or the valuation could stay the same.
Predicting a valuation is almost impossible so take this with a grain of salt. But a stock often gets cheaper when the business performs poorly. By contrast, Cava's business is truly excelling and 2025 is shaping up nicely. Therefore, let's remove the "get cheaper" option from the table.
That said, few restaurant stocks have ever been as expensive as Cava, which trades at 15 times sales. For comparison, Chipotle Mexican Grill has often been accused of being "too expensive," but Cava stock is roughly twice as expensive as Chipotle stock has ever been in its history.
Being so pricey already, it seems hard to expect the valuation to further increase. Therefore, let's remove the "get more expensive" option as well.
This leaves just option: That Cava's valuation remains unchanged. To put this another way, this assumes that Cava's stock performance will match the growth of its business. With what I penciled in above, the company could be looking at around 20% year-over-year growth in 2025. If the valuation is unchanged, then investors could expect about 20% upside in the coming year for Cava stock as well.
One closing caveat
When it comes to Cava's business, it could of course do even better than some of the numbers I've shared here. It could also perform worse, but I believe there are low odds of that. The company is performing well and momentum is on its side.
Valuations tend to rise across the board in a bull market and likewise drop during a bear market. It's possible that 2025 could yield a bear market, in which case Cava stock would struggle even if its business is doing well.
This is why it's important to always set sights beyond 12 months when buying a stock. A market crash could impact one-year returns. But the market goes up 10% or so annually. Therefore, the longer an investor holds, the less temporary market conditions can have a negative impact on an investment such as Cava.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
