CAVA Group, Inc. (NYSE:CAVA) Q4 2023 Earnings Call Transcript

CAVA Group, Inc. (NYSE:CAVA) Q4 2023 Earnings Call Transcript February 27, 2024

CAVA Group, Inc. beats earnings expectations. Reported EPS is $0.02, expectations were $0.01. CAVA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the CAVA Q4 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, February 27, 2024. I would now like to turn the conference over to Matt Milanovich, SVP of Finance. Please go ahead.

Matt Milanovich: Good morning, and welcome to CAVA’s fourth quarter and full-year 2023 financial results conference call. Before we begin, I want to thank you for joining us today on late notice. Yesterday, a media outlet reached an embargo agreement and released a story about our financial results in error [ph], prompting us to issue our earnings release and host this call ahead of schedule. If you do not already have a copy of the earnings release and related 8-K furnished with the SEC, they’re available on our website at investor.cava.com, which we encourage you to review. 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 a forward-looking statement. 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. In 2023, we demonstrated the power of our category-defining brand and the significant whitespace opportunity ahead of us. We opened 72 net new restaurants during the year, growing our footprint by more than 30%. Traffic in our existing restaurants continued to climb. And following a successful IPO, we generated 3 consecutive quarters of positive net income. As we create the next large-scale cultural cuisine category, our extraordinary potential is clear. We fulfill consumers’ growing desire for bold, unique flavors with no compromise between taste and health. Our Mediterranean concept has broad appeal across genders, generations, and income levels and proven portability from coast to coast in cities and suburbs.

We now have a presence in 24 states in the District of Columbia and continue to target annual unit growth of 15% or more with a long-term goal of 1,000 restaurants by 2032. We’ve built a strong foundation to support that growth, and our powerful unit economic engine continues to drive us forward. Even with continued macroeconomic and geopolitical uncertainty, our value proposition is resonating with consumers. The investments we make in our team members and our guests support that value proposition. We are working on behalf of our team members by investing in attractive wages and benefits, enhanced training, and career development opportunities. We are working on behalf of our guests by mitigating price increases and by not taking outsized pricing to offset unplanned costs related to the impact of new legislation, like AB 1228 in California, which includes aspects of its predecessor bill known as the FAST Act.

We see the impact of these investments come to life every day. I was on a plane the other day, heading home from visiting our team in LA, when one of the flight attendants saw my CAVA sweatshirt, stopped, and let me know effusively how much she and her daughter love and appreciate our food, and most importantly, the value we offer. When it comes to the team, there’s no better example of the return on our investment than the recent promotion of a team member in our Virginia Beach restaurant, Ricky Martin Jr. Ricky joined us as an entry-level role 4 years ago just before the pandemic. He has grown under the training of our academy general manager, Nick Blalock, and was just promoted to guest experience manager. Investing in our teams and our guests enables us to deliver on the Mediterranean way that sets us apart and we believe will continue to drive traffic and support sustainable expansion, while increasing profitability and shareholder value over the long-term.

Our results in the fourth quarter of 2023 were outstanding with a more than 52% increase in CAVA revenue; 11.4% CAVA same-restaurant sales growth, including a 6.2% increase in traffic; 19 net new restaurants, ending the quarter with 309 restaurants, a 30% increase year-over-year; adjusted EBITDA of $15.7 million, a $12.2 million increase over the fourth quarter of 2022; and net income of $2 million. And for the full year, we delivered record results, including a nearly 60% increase in CAVA revenue; 17.9% CAVA same-restaurant sales growth, including a 10.4% increase in traffic; 72 net new restaurants; adjusted EBITDA of $73.8 million, a $61.2 million increase over 2022; and net income of $13.3 million. Our 2023 performance was grounded in the execution of our strategic plan.

I’m going to touch on the highlights of what we accomplished in Q4 and the full year before laying out the evolution of our strategy and what we are setting out to accomplish in 2024. In Q4, we continued our expansion across the country, opening locations in 9 different states, further exhibiting the portability of our brand. We also opened our last remaining Zoes conversion and are operating under a single powerful CAVA brand. As we work to build a best-in-class organization, we rolled out updated food safety protocols in Q4, including the completion of our transition to a new third-party auditor with more frequent and stringent restaurant audits. We also expanded training content and further strengthened our robust accountability procedures through our critical 4-initiative, which codifies our food safety priorities for our team.

To deliver on these standards, as well as efficient operations and an incredible guest experience as we scale, we continue to grow our people development pipeline. We ended 2023 with 55 Academy GMs, including 7 recently promoted to the multiunit leader position, exceeding our target for the year. In addition, we delivered on our 2023 target to internally place 75% of our new restaurant GMs. Our team-building work, both at our restaurants and in our collaboration centers, has created a highly engaged team. According to industry expert Denison Consulting, an Employee Net Promoter Score, or eNPS, above the 50th percentile indicates a high level of engagement. In our most recent team member survey, we ranked in the top quartile, our highest score to date.

Team members also rated us in the top quintile, on average, in the diversity and inclusion category, and we are proud to be named by Newsweek as one of America’s Greatest Workplaces for Diversity. To further the success of our team and our business as we scale, we’ve built additional infrastructure to support our plans for growth. We’re excited to announce that our new manufacturing facility in Verona, Virginia, has commenced operations. A 55,000-square-foot production facility, Verona produces CAVA dips and spreads and along with our existing facility in Laurel, Maryland, can support at least 750 restaurants, as well as the growth of our CPG business. This vertically integrated model takes complexity out of the restaurants and improves costs overall and lets us maintain the quality and integrity of our chef-crafted recipes.

On the culinary front, our best-in-class team continues to innovate, creating newness in our menu and giving guests reasons to try CAVA and come back more often. A prime example of this is our new grilled steak protein. Our Mediterranean take on this beloved main demonstrates the bold, unique flavors that make CAVA special. It is rich but not heavy, and features the brightness of sun-dried tomato, herby oregano, and a touch of red chili for fruity heat. Our Dallas and Boston market tests are progressing well, and we expect to roll steak out company-wide in the second half of 2024. Turning to loyalty, we are in the early stages of launching a new program aimed at developing deeper connections with our passionate customer base, creating more frequent, relevant experiences and further driving traffic, mix, and check.

At the end of 2023, we transitioned all loyalty members to a new construct that lets them earn and bank points. In the Houston market, we started testing new types of rewards to redeem and new ways to engage guests. We are moving to the next stage gate with an expanded test of the Houston pilot in the Carolinas market. Early results are meeting expectations, and we expect to roll out a new rewards program company-wide at the end of this year. Before turning the call over to Tricia, I’d like to touch on our 2024 strategic plan, which reflects our evolving strategy and builds on our accomplishments to date with 4 key pillars. The first pillar, expand our Mediterranean way in communities across the country, encompasses 3 key areas: the first area is growing our footprint and expanding channel access.

This includes new restaurant growth and initiatives like our catering test; the second area is fueling our culinary innovation and communication engine to drive traffic, mix, and check, illustrated by our planned steak launch in the second half of the year; and the last area is expressing our concept essence consistently across brand properties, which includes the rollout of Project Soul, our new, finalized 3.0 design, which creates a more inviting physical space for in-restaurant occasions. Our second pillar is focused on developing personal relationships with guests, even as we scale. This includes creating a cohesive physical and digital journey for guests, driven by a reimagined loyalty program and using our digital ecosystem for one-to-one communication that can deepen connections with guests and create more personalized experiences.

Based on the results we’re seeing to date, we believe this work can further strengthen our value proposition, powerfully express our brand across multiple touchpoints, and create differentiated thoughtful moments that make the CAVA experience stand out. The third pillar, run great restaurants every location, every shift, emphasizes an ongoing focus on enhancing our training and standards to consistently deliver our CAVA hospitality and food safety protocols. We believe that this work, combined with a focus on streamlining and automating prep, as well as leveraging AI technologies to improve forecasting and accuracy through our new connected kitchen initiative, will make our restaurants easier to operate, drive improved operational efficiency and effectiveness, and enhance the guest experience.

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 improve productivity; and implementing programs and tools to further engage, retain, and connect our teams. We will continue to evolve and enhance our talent strategies, expand and deepen our knowledge of the customer, and strengthen our HR systems while fostering a mindset of growth and discipline. I want to thank our team members for their contributions to a record-setting year and for their commitment to bringing heart, health, and humanity to food. We are proud of all we have accomplished in 2023, including our entrance into the public market, but we know that we are just at the beginning of all that is possible for CAVA, and we look forward to the journey ahead.

With that, I’ll let Tricia walk you through the financials.

Tricia Tolivar: Thanks, Brett, and good morning, everyone. CAVA revenue in the fourth quarter of 2023 grew 52.5% year-over-year to $175.5 million. Same restaurant sales increased 11.4%, driven by traffic growth of 6.2%. Fiscal 2023 had a 53rd week, which we excluded from our same restaurant sales calculation. We noted broad-based same restaurant sales strength across vintages, regions, and both suburban and urban locations. We opened 19 net new CAVA restaurants in the fourth quarter, bringing our total CAVA restaurant count to 309. We continue to be pleased with the top-line and margin performance of new restaurant openings. In addition, our proven portability is reflected in our overall AUV above $2.6 million with all geographies $2.3 million or more.

CAVA restaurant-level profit in the fourth quarter was $39.3 million, or 22.4% of revenue versus $23 million, or 20% of revenue in the prior year, representing a 70.7% increase. The margin expansion was largely a result of improved food, beverage, and packaging costs, and sales leverage, including the impact of the 53rd week, partially offset by incremental wage investments. CAVA’s food, beverage, and packaging costs were 28.8% of revenues, lower than the fourth quarter of 2022 by 210 basis points, driven by lower input costs and higher incidence of premium menu items driving favorable product mix. CAVA labor and related costs were 27.8%, up 50 basis points from the fourth quarter of 2022. The increase reflects investments in our team member wages that we discussed on the third quarter earnings call, partially offset by leverage from increased sales compared to the prior year.

CAVA occupancy and related expenses were 8.3% of revenue, an improvement of 100 basis points from the fourth quarter 2022 due to increased sales leverage. CAVA other operating expenses were 12.7% of revenue, an increase of 20 basis points from the fourth quarter of 2022, reflecting investments in the integrity of our physical spaces in support of our increased restaurant volumes. Shifting to overall performance, our general and administrative expenses for the quarter, excluding stock-based compensation, was $21.3 million, compared to $15.3 million in Q4 of 2022. This $6 million increase is primarily driven by investments to support our growth, performance-based incentive compensation, recurring public company costs, and legal accruals. As a percentage of revenue, G&A, excluding stock-based compensation, was 12% in the current quarter, an increase of 30 basis points from the prior-year quarter, driven by the aforementioned items, partially offset by sales leverage.

Adjusted EBITDA, including the burden of preopening costs for the quarter, was $15.7 million, which was $12.2 million higher than Q4 of 2022. The increase in adjusted EBITDA was driven by 11.4% CAVA same restaurant sales growth, improved CAVA restaurant-level profit margin, and the performance of new openings. Keep in mind, Q4 preopening costs included expenses related to the restaurants opened during the quarter, as well as costs related to the 11 units we opened to date in Q1 of 2024. We reported $2 million of net income, compared with a net loss of $18.8 million in Q4 of 2022, representing an increase of $20.8 million. We reported diluted earnings per share of $0.02 in the quarter, compared with a diluted loss per share of $13.72 in Q4 of 2022.

Shifting to liquidity. At the end of the quarter, we had zero debt outstanding, $332.4 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 $97.1 million for the year, compared with $6 million in the prior year. The increase was primarily driven by our improved operations, driving increased profitability across the fleet. I would like to touch on our development pipeline. The pipeline we’ve built is diverse and not dependent on a small number of markets, landlords, or site profiles. Our development team has built increased buffer into our pipeline to ensure we are insulated from potential delays in equipment availability, permitting, and inspections.

At the same time, we are actively building a robust pipeline for 2025, positioning us for continued growth in new and existing markets. Turning to our outlook for full year 2024, we expect the following: 48 to 52 net new CAVA restaurant openings; CAVA same restaurant sales growth of 3% to 5%; CAVA restaurant-level profit margin between 22.7% and 23.3%; preopening costs between $11.5 million and $12.5 million; and adjusted EBITDA, including the burden of preopening costs, between $86 million and $92 million. I want to share some additional thoughts for our 2024 outlook. As you know, we took an approximate 3% in-restaurant menu price increase in January 2024. We continue to invest in creating value for our guests, and we do not have plans at the current time to take further price increases in response to AB 1228, whose predecessor was the California FAST Act.

We expect approximately a 30 basis point reduction in restaurant-level profit margin in the near-term, which is contemplated in our full year guidance, but to also drive value for our guests and shareholders over the long-term. Our 2024 same restaurant sales guidance implies a 2-year stack in the low-20s, which is in line with the back half of 2023. Our same restaurant sales guidance also takes into consideration the Q1 2023 benefit of an unseasonably mild winter and the halo from our IPO that benefited Q2 2023, and to a lesser extent, the third quarter of 2023. Our results in 2023 demonstrate the power of our operating model. This is an important time in our growth trajectory, and our 2024 guidance reflects our investments to deliver on our model as we scale and grow.

We expect restaurant-level profit margin to be between 22.7% and 23.3% or 150 to 210 basis points below 2023. This incorporates the previously discussed 120 basis point increase in wages implemented in the fourth quarter of 2023 as part of our investment in team members, along with additional near-term investments to drive restaurant-level margin expansion over the long-term. We expect similar seasonality of restaurant-level profit margin throughout 2024. And as a reminder that our first quarter includes 16 weeks. Before going to Q&A, I want to acknowledge our restaurant, manufacturing, and collaboration center teams for the outstanding results they delivered in 2023. Through their collective ambition and passion for positivity, they reinforced our proven portability and powerful unit economics.

CAVA continues to get stronger with every new restaurant we open and every new guest we welcome to our table. 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. [Operator instructions] Our first question comes from the line of Brian Harbour at Morgan Stanley. Please go ahead. Your line is open.

Brian Harbour: Yeah. Thank you. Good morning, guys. Maybe as you think about that same-store sales range for this year, obviously, the low-end of that is just kind of your pricing plan. Are you still seeing – do you still expect kind of more premium attached? What do you see as kind of mixed drivers of that this year? And then, how much traffic perhaps would you expect within that range that you’ve talked about?

Tricia Tolivar: Hey, Brian. Good morning. So our 3% to 5% guide really reflects 2 years same-restaurant stack in the low-20s for the full year with higher in the first part of the year than it is in the back part of the year, because of those Q1 impacts from favorable weather that we had talked about previously. The other thing that it considers is the IPO halo in Q2, and to a lesser extent, in Q3. It does reflect the 3% price that you called out. And traffic and mix is the remainder. But the way we’re looking at it is if PPA continues to expand, you’d likely see the same restaurant sales guide, the actual results to be closer to the high-end of the range.

Brian Harbour: Okay. Thank you.

Operator: Thank you. Our next question comes from the line of Jon Tower at Citigroup. Please go ahead. Your line is open.

Jon Tower: Great. Thanks. I appreciate you taking the question. I was curious, Brett, you had mentioned earlier two things that I was hoping you could expand upon. First, you talked about new design for some of the stores and expanding space for in-store occasions. I’m just curious if you could dig into whether or not you feel like new store prototypes will require a bigger footprint in general versus what you’ve got today for the store base. And then the second is if you could maybe provide a little bit more color on where you are in the connected kitchen initiative, how much more you see with respect to investment over the next 12 months, and kind of specifically where you plan on within the store kind of going after?

Brett Schulman: Yeah. Thanks, Jon. Thanks for the question. Regards to the footprint, we don’t see any change in our footprint. It’s really enhancing and warming the aesthetic in our physical space to really accommodate and invite more in-restaurant occasions. 64% of our guests opt to come in engage with us in our physical channel. We have 36% that engage in our digital channels. We have great digital channels. We have 31 pick up by car – digital pickup lanes, as well as all of our pick-up-off-the-shelf opportunities, and we have great physical channels. We don’t think it’s an either/or, we think it’s an and, and so we want to really take advantage of that opportunity to drive additional physical locations, along with those digital occasions.

In regards to the connected kitchen initiative, this is the beginning of a multiyear journey where we see a tremendous opportunity to improve productivity to drive greater operational effectiveness and efficiency by taking a lot of complexity off the team member’s plate. So it’s really taking to another level of sophistication, things like predictive scheduling, predictive prep, predictive cook batching through the use of data and AI models. And any expense or CapEx investment is reflected in our longer-term guidance. But, again, this is a multiyear initiative that we’re excited about and we see the opportunity again to drive greater productivity and make it easier for our team to run our CAVA restaurants and deliver that great Mediterranean hospitality and food.

Jon Tower: Thank you.

Operator: Thank you. Our next question comes from the line of Brian Mullan at Piper Sandler. Please go ahead. Your line is open.

Brian Mullan: Okay. Thank you. Just a question on venue innovation. Brett, you shared in the prepared remarks, you’re going to roll steak out across the system, I think, in the second half of this year, which is exciting. Can you just talk about what you saw in the tests? What caused you to go ahead and take this next step for the full launch and just maybe talk about the benefits to the business from a consumer perspective and then maybe an economic perspective? Thank you.

Brett Schulman: Yeah, we’re excited to be on track to launch this in the second half of the year. What we’re seeing in the tests is the consumer receptivity, as well as the operational effectiveness that we were looking to validate. And so that’s the stage gate we’re in with the multi-market tests in Dallas and Boston, and we’ve seen results have been meeting our expectations in both markets. And if you remember, we used to have grilled meatballs on our menu that we removed back in January, and so a beef item is definitely a perceived gap in our menu that we think is an opportunity to drive incremental occasions and frequency that doesn’t currently exist on the menu. So we’re excited to launch that in the second half of the year.

Tricia Tolivar: And as it relates to the economics, the test is designed to be margin dollar equivalent, and so we’re continuing to evaluate the results of those tests, and we’ll have updates on our next call and how that might impact our guidance. At this point, the guidance does not reflect any impact as a result of the steak test, so we’ll continue to give you updates as we move forward.

Brian Mullan: Okay. Thank you.

Operator: Thank you. Our next question comes from the line of Andy Barish at Jefferies. Please go ahead. Your line is open.

Andy Barish: Hey, guys, good morning. I guess, it’s kind of a connected question, just the southeast and southwest markets are your lower volume markets coming out of the Zoes conversions. Any specific kind of plans in that region of the country? Or does it really tie into kind of the real estate pipeline and just continuing to build out and drive awareness? And I’ll have a follow-up, I guess, shortly.

Tricia Tolivar: Hi, Andy, thanks for the question. The southeast and the southwest are at $2.3 million AUVs and $2.4 million, respectively. And really those AUVs reflect a relatively young fleet of restaurants in those markets, and that’s what’s driving the AUVs. So we don’t see a need to do anything to necessarily impact those markets any differently, but just continue to execute on incredible hospitality and amazing culinary and innovation. And you should see those results continue to increase like the rest of the fleet.