Cava Group (CAVA) Q1 2024 Earnings Call Transcript

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Cava Group (CAVA -0.64%)
Q1 2024 Earnings Call
May 28, 2024, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon ladies and gentlemen, and welcome to CAVA’s first quarter 2024 financial results 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] I would now like to turn the conference over to Matt Milanovich, head of investor relations.

Please go ahead.

Matt Milanovich — Head of Investor Relations

Good afternoon, and welcome to CAVA’s first quarter 2024 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 a general update on the company’s progress. You will find reconciliations of any non-GAAP financial measure 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 most recent annual report on Form 10-K and other 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 — Co-Founder and Chief Executive Officer

Thanks, Matt, and welcome, everyone, to the call. In the first quarter of 2024, we once again demonstrated the strength of our category-defining brand and our clear leadership position in Mediterranean. With a proven, highly portable concept, we continue to expand our presence in new and existing markets. At a time when consumers are increasingly discerning in how they spend their income, they are choosing to dine at CAVA.

Our differentiated cuisine, where taste and health unite, and our compelling value proposition are resonating more than ever. And with our powerful unit economic engine continuing to gain momentum, we generated our fourth consecutive quarter of net income and our first ever quarter of positive free cash flow. Our first quarter highlights include a 30.3% increase in CAVA revenue; CAVA’s same restaurant sales growth of 2.3% or 30.7% on a two-year basis; 14 net new restaurants, ending the quarter with 323 restaurants; a 22.8% increase year over year; adjusted EBITDA of $33.3 million, a $16.6 million increase over the first quarter of 2023; net income of 14 million, more than all of 2023; and $4.7 million in free cash flow. After our recent Chicago opening in Q2, we now have a presence in 25 states and the District of Columbia.

And our strong balance sheet and ability to self-fund growth puts us in a position of strength to continue gaining market share. With every new restaurant we build, CAVA is getting stronger. In April, we opened our first restaurant in Chicago in Wicker Park, marking our entry into the upper Midwest. The restaurant is delivering exceptional results and generating significant buzz.

Our team once again showed the power of our category-defining brand and how we are amplifying the passion of existing fans, engaging new consumers and rapidly converting them to customers. Our Chicago launch is a microcosm of what we see across the country. As CAVA grows, so does the passion for our brand, and we are increasingly becoming part of the cultural conversation. We recently had a TikTok creator visit one of our L.A.

locations and asked one of our team members to make him their favorite bowl. Our team member, Grayson, didn’t know the customer was a creator, but recognized it was his first time visiting CAVA, and that he was unsure about what to order. Grayson used the opportunity to hit the love button, a staple of our Mediterranean hospitality, which empowers team members to comp a guest meal. The creator scored his meal at 10 out of 10 on food and experience, and the video went viral.

As of today, the post has more than 35 million views. It’s great content, and he’s a popular creator, but we believe it’s resonating because it tells an authentic story about how much people love our food and how much our team members care about our guests. In a time when people are craving that kind of connection, but also want convenience, our value proposition is meeting the moment. We don’t think of value solely in terms of price or discounting.

We view it as a combination of quality, relevance, convenience, and experience. Consumers are responding to our robust convenient digital channels and our hospitable and experiential physical channels, paired with our differentiated relevant, high-quality Mediterranean cuisine. To deliver on our value proposition and drive sustainable long-term results, we are executing across four key strategic pillars: one, expand our Mediterranean way in communities across the country; two, develop personal relationships with guests even as we scale; three, run great restaurants every location, every shift; and four, operate as a high-performing team. Beginning with our strategy to expand our Mediterranean way in communities across the country, we opened 14 net new CAVA restaurants during Q1, with growth across new and existing markets in California, Florida, Maryland, Oklahoma, Texas, and South Carolina.

Thus far, in the second quarter, we have opened an additional five restaurants. On the culinary front, I am excited to announce that next week, on June 3rd, we will launch our new grilled steak offering across the chain. Our exceptional culinary team, including my co-founders, have been working on this new main item for two years. As part of our disciplined stage gate process, we have been testing steak in our Boston and Dallas markets since early December and are very pleased with the results.

Grilled steak complements our existing mains, fills a perceived gap on our menu, and enhances our already strong dinner occasion, which now makes up approximately 46% of our sales. With our Mediterranean take on this beloved protein, we have created a unique and highly differentiated offering. Our grass-fed, pasture-raised steak is fired on the grill, seasoned with bold, unique flavors like sun-dried tomato, herby oregano, and a touch of Aleppo pepper that comes from our heritage and can’t be found anywhere else. We expect steaks to provide a tailwind to comp sales while delivering consistent penny profit.

The updated guidance Tricia will share shortly incorporates some of the expected impacts from the steak launch. Our second strategic pillar is develop personal relationship with guests even as we scale. Over the past decade, we completed a digital transformation that permeated through our business. With everything from in-house, highly scalable digital order ecosystem, to second make lines for dedicated digital production to digital drive-through pickup lanes, we use technology to create a seamless multi-channel experience.

While we continue to innovate our digital capabilities, we believe we are now in the precipice of another decade of transformation, this time data, transformation. Whether restaurant operations, enterprise insights, or relationships with our guests, we believe modern data technologies have the potential to unlock meaningful positive change in our business. One way to do that is by leveraging data to develop personal relationships with our guests even as we scale. A foundational component of that idea is our Reimagine Loyalty program.

We believe this work can significantly grow our first-party audience; help us create more frequent relevant experiences that drive traffic, mix, and check; and share our Mediterranean warmth and hospitality across platforms and occasions in ways that resonate with guests on a personal level. At the end of 2023, we transitioned all loyalty members to a bankable points model and in the Houston market, began testing new types of rewards and new ways to engage guests. The test, which we recently expanded to the Carolinas, is showing early signs of the program’s ability to drive frequency and increased revenue, and we continue to target a companywide rollout by the end of this year. Our third strategic pillar, run great restaurants, every location, every shift, is focused on making our restaurants more efficient and easier to run.

Our connected kitchen initiative is a multiyear journey focused on using data-driven and generative AI technologies to drive quality and consistency, increase order accuracy, and boost speed of service. We believe these tools, used the right way, can simplify the complexities of restaurant operations and allow our team members to focus on great food, great service, and creating connections with guests. We are on schedule to begin a test pilot of this initiative later this year. Additionally, our labor deployment test continues to progress with 30 restaurants now in pilot.

This initiative is net neutral from a labor dollars and labor hours standpoint. The focus of this test is on reallocating hours to deliver better food, better hospitality, and more efficient speed of service. Early results are promising, and we’re hearing excellent feedback from the team, such as more time to coach and train, more time to interact with guests, and an even more positive work environment. We expect to continue testing throughout 2024 with a companywide rollout in 2025 if results meet our expectations.

Our fourth and final pillar, operate as a high-performing team, includes deepening our culture of accountability, developing enhanced data capabilities to unlock powerful actionable insights, and implementing programs and tools to further engage, retain, and connect our teams. As part of our restaurant health initiative, we have begun testing technology that gathers guest feedback proactively at the restaurant level and in nearly real time. This tool could help us keep our finger on the pulse of the business down to specific locations and support our teams in consistently delivering on an exceptional guest experience. We recently launched the test in 28 restaurants.

Since our earliest days, we have been committed to investing in and developing team members, giving them not just a job but a pathway to a career. A great example of this is Sergio [Inaudible] who I ran into at a grand opening celebration in Chicago where he was supporting our market launch. I first met Sergio when he was a general manager in training at our Jersey City location. And we talked about that if he had the will and worked with us to develop the skill, he could become a general manager.

Now, four years later, he is running one of our Greenville, South Carolina restaurants. Sergio was excited to remind me of our conversation back in Jersey City and let me know that in the coming months, he is working to become certified as one of our Academy general managers. Speaking of Academy GMs, I was able to spend time with them at our annual Academy GM Summit in Dallas a few weeks ago. At this summit, we worked with our leaders on professional development skills, including our seven core competencies, as well as communication and leadership.

Hearing about Sergio’s progress and witnessing the growth, development, and enthusiasm of our Academy leaders are inspiring reminders that CAVA success will always be a byproduct of our team members’ success. Before wrapping up my remarks and turning the call over to Tricia, I want to welcome Jeff Gaul, who has joined our executive leadership team as our chief development officer, a new role in the organization. Jeff has over 25 years of experience across real estate, store design, construction, and facilities with world-class retailers, most recently Nike and Sephora. We are very excited to have Jeff leading our team to bring CAVA to more markets across the country.

I want to finish by thanking our team members for their passion and commitment to delivering on our mission to bring heart, health, and humanity to food every day. Our incredible start to 2024 is a testament to their authenticity, talent, and ability to operate at the highest level. As we define the next large-scale cultural cuisine category, we have a massive white space opportunity ahead of us. The passion for what we are building is clear.

And as is evidenced by the incredible results from this quarter, we are not just scaling a business, we are creating long-term value for our guests, team members, and shareholders. With that, I’ll let Tricia walk you through the financials.

Tricia Tolivar — Chief Financial Officer

Thanks, Brett, and good afternoon, everyone. CAVA revenue in the first quarter of 2024 grew 30.3% year over year to 256.3 million. During the quarter, we opened 14 net new CAVA restaurants or 86 net new CAVA restaurants during or subsequent to the first quarter of 2023, bringing our total CAVA restaurant count 323. We are pleased with our new restaurant openings which are exceeding expectations in both top line and margin performance.

CAVA’s same restaurant sales increased 2.3%, driven by a 3.5% increase from menu price and product mix, partially offset by a decline in traffic of 1.2%. On a two-year stack basis, same restaurant sales increased 30.7%, driven by traffic growth of 17.2%, trending up from approximately 13% in the fourth quarter of 2023. To achieve an optimal comparison of fiscal weeks in the CAVA same restaurant sales population, given consideration to holiday periods, each week of fiscal 2023 was shifted by one week. As a result of this shift, approximately $3.9 million of revenue is not included in CAVA same restaurant sales growth.

Had this shift not been made, CAVA same restaurant sales growth would have been 4.3%. CAVA restaurant level profit in the first quarter was 64.6 million or 25.2% of revenue versus 50 million or 25.4% of revenue in the prior year, representing a 29.3% increase. The slight margin contraction in the quarter was largely the result of planned investments in labor, partially offset by lower food, beverage, and packaging costs, as well as sales leverage. CAVA’s food, beverage, and packaging costs were 28.2% of revenue, lower than the first quarter of 2023 by 50 basis points, due to the impact of higher sales and lower input costs.

We anticipate CAVA’s food, beverage, and packaging costs to increase as a percent of revenue for the rest of the year as a result of our steak launch in June. CAVA labor and related costs were 26%, up 30 basis points from the first quarter of 2023. The increase reflects investments in our team member wages of 8% year over year that we discussed on prior calls, partially offset by leverage from increased sales compared to the prior year. CAVA occupancy and related expenses were 8% of revenue, an improvement of 20 basis points from the first quarter of 2023 due to increased sales leverage.

CAVA other operating expenses were 12.7% of revenue, an increase of 70 basis points from the first quarter of 2023, reflecting further investments in the integrity of our physical spaces. Shifting to overall performance, our general and administrative expenses for the quarter, excluding stock-based compensation, were 28.7 million compared to $27.8 million in Q1 of 2023. This $900,000 increase is primarily driven by investments to support our growth and recurring public company costs, partially offset by higher performance-based incentive compensation in the prior-year quarter. As a percentage of revenue, G&A, excluding stock-based compensation, was 11.1% in the current quarter, a decrease of 260 basis points from the prior-year quarter, driven by lower performance-based incentive compensation in the current year and sales leverage.

Adjusted EBITDA, including the burden of pre-opening costs for the quarter, was 33.3 million, which was 16.6 million higher than Q1 of 2023. The increase in adjusted EBITDA was 2.3% CAVA same restaurant sales growth and the number and strength of the performance of new restaurant openings. We reported $14 million of net income compared with a net loss of 2.1 million in Q1 of 2023, representing an increase of 16.1 million. The power of the model is evident with net income in the first quarter of 2024, exceeding total net income generated in all of fiscal year 2023.

We reported diluted earnings per share of $0.12 in the quarter compared with a diluted loss per share of $1.30 in Q1 of 2023. Shifting to liquidity, at the end of the quarter, we had zero debt outstanding, $329.1 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 38.4 million for the quarter compared with 25.7 million in the prior-year quarter. The increase was primarily driven by our improved operations generating increased profitability across the fleet.

Total company free cash flow was 4.7 million. The first quarter of positive free cash flow in CAVA company history. Now, to look to our outlook for full year 2024, we expect the following: 50 to 54 net new CAVA restaurant openings, CAVA same restaurant sales growth of 4.5% to 6.5%, CAVA restaurant level profit margin between 23.7% and 24.3%, pre-opening costs between 12 million and 13 million, and adjusted EBIDA including the burden of pre-opening costs between 100 million and 105 million. I want to share some additional context related to our revised 2024 outlook.

CAVA same restaurant sales growth of 4.5% to 6.5% implies a mid to high single-digit same restaurant sales for the remainder of the year. Additionally, same restaurant sales guidance includes the current same restaurant sales strength we are seeing, the expected mix impact of the steak rollout, as well as the potential traffic headwind as we anniversary the IPO buzz in the summer of 2023. At this time, nothing is included in our outlook for loyalty, which we expect to roll out prior to the end of the year. CAVA restaurant level profit margin guidance reflects the anticipated impact of the steak rollout in June and potential future restaurant level investments to support our growth.

As previously discussed, we expect steak to be a margin rate headwind, while pricing will drive penny profit neutrality. Adjusted EBITDA guidance includes G&A spend as a percent of revenue on a full year basis to be slightly higher than the first quarter of 2024 due to additional investments to support growth and the timing of certain costs. While our adjusted EBITDA guidance does not include the impact of stock-based compensation, the first quarter actual results included payroll tax impacts from vestings that reflect the strong performance of our stock. This will take place to a lesser extent again in Q2, and we expect the remainder of the year will be at a more normalized run rate.

Our opportunity and the strength of our business is clear. In a difficult time for many in the restaurant space, our unique meta-training cuisine continues to resonate with consumers. And with our proven portable concept and powerful unit economics, we are getting stronger with every new restaurant we open and every new market we enter.