Cava & Sweetgreen – QSR Earnings Reviews – March 02, 2024
As many of you know, these are the two quick service names on my watch list. Here, we’ll explore both quarters and how they impacted my desire to start new positions in either.
Cava (CAVA) Earnings Review
Results:
- Beat revenue estimate by 0.7%.
- Digital revenue was 35.9% of total sales vs. 35.5% Q/Q & 35.5% Y/Y.
- Beat EBITDA estimate by 38%.
- Beat -$2.6 million GAAP EBIT estimate by $5.4 million.
- Beat $0.01 GAAP EPS estimate by $0.05.
Food, beverage and packaging costs were 28.8% of sales vs. 31.9% Y/Y. This was due to lower input costs and strong premium menu item mix. Labor was 27.8% of revenue vs. 27.3% Y/Y due to ramping investments in its talent. Occupancy was 8.3% of revenue vs. 9.3% Y/Y. This leaves us with the strong EBITDA margin expansion Y/Y, which was bolstered by “strong performance for new stores.” Finally, for the full year, Cava generated $97 million in operating cash flow vs. $6 million Y/Y.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Note that 11.4% same store sales growth was via 5.2% price hikes and 6.2% traffic growth. Traffic growth is expected to slow to a low single digit % in 2024 as comps get much tougher.
Balance Sheet:
- $340 million in cash & equivalents.
- $75 million undrawn credit revolver.
- No debt.
- Exponential Y/Y share growth due to the IPO.
Guidance & Valuation:
- Annual EBITDA guidance is 9% ahead of estimates. Its $89 million EBITDA guide implies 20.6% Y/Y growth and moderate margin expansion for 2024.
- For 2024, it expects to open 50 stores (11 already opened in 2024) and 3-5% same store sales growth. The 3-5% same store sales growth guide includes 3% price hikes and 0%-2% traffic growth following historically strong 10%+ traffic growth in 2023.
Finally, for 2024, it expects a 23.0% restaurant-level margin. That guide compares to 24.8% for 2023. The contraction is as previously telegraphed and as expected. Why? Cava stores over-earned a bit in 2023 and into Q4 as well. As we discussed in the deep dive, rapid same store sales growth means better labor leverage, better fixed cost utilization and less waste on a temporary basis (premium item outperformance helped too). It takes time for Cava to add the stores, capacity and talent needed to catch up to spiking same store growth. Catch-up investments have now taken place while Cava also expects a 120 bps headwind from new labor initiatives. New California labor laws discussed later are adding more pressure. Corporate-level operating scale and efficiencies are why its EBITDA margin will expand in 2024 while this margin line doesn’t. Restaurant-level margin focuses exclusively on stores, not the overall company.
Cava trades for 75x 2024 EBITDA. EBITDA is expected to grow by 22% Y/Y.
Call & Release Highlights:
Real Estate:
Cava had a fantastic year with footprint expansion. It rapidly grew store count as it continued converting locations from the Zoe’s acquisition. Those conversions are now complete, with the chain adding 72 locations for the year to reach 309. This will require a lot of new real estate opportunities to continue fueling its guidance of 15%+ annual unit growth. Cava got ahead of this potential bottleneck and built a cushion into its real estate pipeline to diminish the risk of any delays from permits and equipment availability. Because of this, it will have no trouble meeting its unit growth target for 2024. And for 2025? It’s already hard at work scouting out new locations. Great team.
Upgrading Channels:
Cava debuted its revamped loyalty program this quarter. All members are now onboarded into the new app, with more intuitive and easier means to earn points. The program also seamlessly integrates digital and physical ordering environments. Cava is now experimenting with different forms of rewards in a few test markets. These experiments are going well, so they will expand to more markets this quarter and should be rolled out nationally by year’s end. It also plans to accelerate catering growth now that the microservices initiative (discussed in detail in the deep dive) is complete. For in-store, it discussed Project Soul. This is the next iteration of its physical store design with a “more inviting space” for in-person dining. All of these programs are expected to drive same store sales growth and keep traffic churning.
“We noted broad-based same restaurant sales strength across vintages, regions, and both suburban and urban locations.” – CFO Tricia Tolivar
Virginia Factory:
Cava’s construction on its second production facility in Virginia is now complete. The two facilities combined will support up to 750 stores and its CPG expansion efforts. These factories will produce dips and spreads, which removes those tedious tasks from in store work and improves end product consistency.
Final Notes:
- Cava debuted new food safety protocols this quarter and moved to a new 3rd party auditor for food safety with stricter rules too.
- Cava will forgo incremental menu price hikes in California following the passing of new legislation there, which mandates a $20 per hour minimum wage for fast food workers. This will be a 30 bps restaurant-level margin headwind for 2024.
- Cava ended the year with 55 Academy GMs to train and groom its next crop of store leaders. It also filled 75% of its open GM roles internally in 2023. It continues to intentionally foster a culture promoting internal career mobility and fair wages/benefits. Its employee net promoter score (NPS) set new records (per Denison Consulting) as a result.
Take:
Great quarter; great team; great company. Great. Still too expensive for me to want to own this name. The lofty price tag is the sole factor keeping me out of Cava.
Sweetgreen (SG) – Earnings Review
“We ended the year with increasing momentum giving us optimism for the year ahead.” – Co-Founder/CEO Jonathan Neman
Results:
- Beat revenue estimates by 0.7% & beat revenue guidance by 2.7%. Its 26% 2-year revenue CAGR compares to 27.0% Q/Q & 33.0% 2 quarters ago.
- Digital owned revenue was 34% of total vs. 40% Y/Y.
- Sweetgreen had 221 stores at year’s end vs. 186 Y/Y for 18.8% growth. It has opened 4 stores so far this quarter.
- Beat restaurant profit guidance by 15%.
- Beat -$0.27 GAAP EPS estimates by $.03.
- Beat -$4.3M EBITDA estimates by $2.2M & beat guidance by $2.5M. For the full year, it lost $2.8 million in EBITDA vs. -$49.9 million in 2022.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Annual Guidance & Valuation:
Revenue guidance beat by 0.1% while its $10.5 million EBITDA guidance beat by $1.0 million. It will open 25 new stores in 2024 representing 11.8% Y/Y growth. It expects 3%-5% same store sales growth and an 18.75% restaurant level margin vs. 17.5% in 2023. It sees stock comp falling to about $35 million in 2024 and $15 million in 2025 vs. nearly $80 million for 2022.
“After a sluggish October, our momentum increased each month in the quarter… January was impacted by weather throughout much of the country. As weather has normalized, our sales trends have strengthened.” – CFO Mitch Reback
Balance Sheet:
- $257 million in cash & equivalents.
- No debt
- Share count rose by 1.4% Y/Y.
Call & Release Highlights:
Infinite Kitchen:
Infinite Kitchen is Sweetgreen’s automated robotics technology to greatly improve store workflows and reduce manual labor. It now has 2 Infinite Kitchens installed, with plans to add 10-11 in total in 2024 between new openings and retrofits. Ideally, it could go faster as this positive evidence builds. Otherwise, the margin benefit will take years to play out. The 2nd Infinite Kitchen in Huntington Beach added to leadership’s conviction that this tech is highly margin accretive. The quicker, more uniform customer service is also boosting average ticket size by 10%+ while diminishing employee churn.
It thinks Infinite Kitchens cost about $500,000 to implement and yield a 700 bps boost to its restaurant-level margins. That was a brand new disclosure, which analysts had been looking for. Based on a $2.9 million average unit volume (AUV), this leaves us with a payback period of just under 2 years. It has a clear path to a 20% restaurant-level margin without this program, with more upside as these robots are added to stores. The somewhat cumbersome process of adding these to stores is leading to SG slowing new location openings from 35 to 25 in 2024. This plan will avoid some retrofitting costs before the company re-accelerates location growth in 2025. That slowing is already playing out with SG opening just 1 new store in Q4.
Traffic Initiatives:
Sweetgreen’s 1% Y/Y store traffic growth returned to positive territory this quarter. A 5% price hike represented the rest of the same store sales growth.
Its culinary innovation continues to work. Protein plates, which debuted in October, are still exceeding internal expectations for mix shift. These are directly boosting the percentage of its revenue coming from dinner. It plans to lean into advertising spend in 2024 while maintaining G&A leverage.
Footprint:
Sweetgreen successfully entered Milwaukee, Tampa and Rhode Island in 2023. It’s pleased with all three launches and is happy with the performance of these units. That is important considering some batches of its pandemic-era openings have fallen short of targets. In 2024, it will enter Seattle. It’s already opened one of the planned new stores and it is performing “in line with top urban locations.” That’s notable because the location is in a suburb where AUV is generally lower than in dense cities.
Costs for the year:
- Food, beverage and packaging was 28.4% of 2023 sales vs. 29.2% Y/Y.
- Labor and related was 29.3% of 2023 sales vs. 32.2% Y/Y.
- Occupancy was 9.3% of 2023 sales vs. 10.2% Y/Y.
- G&A was 23.2% of 2023 sales vs. 36.7% Y/Y as it controls stock comp and support center costs.
Take:
This is the best quarter Sweetgreen has posted in a long time. It was free from operational blunders and executional drama. That’s exactly what I wanted. It takes more than one quarter to establish a trend and will take more than one quarter for my confidence and trust in the team to build. For now, I will keep it on the watch list with more interest than I had a week ago.
