CAVA Group, Inc. Form 10-Q Summary
Reporting period: Quarter ended July 9, 2023; results cover twelve weeks and year-to-date twenty-eight weeks. Comparisons are to July 10, 2022. The company operated 279 CAVA restaurants in 24 states and Washington, D.C. and had completed 151 Zoes Kitchen conversions. No Zoes Kitchen locations remained in operation after March 2, 2023.
Business Context and Reporting Period
- CAVA operates Mediterranean fast-casual restaurants and a consumer packaged goods business selling dips, spreads, and dressings through grocery channels.
- The company completed its initial public offering on June 20, 2023, issuing 16.6 million shares at $22.00 per share and receiving net proceeds of $336.1 million.
- All 95.2 million outstanding preferred shares converted into common stock in connection with the IPO. The company had 113.6 million common shares outstanding as of August 11, 2023.
Financial Performance
| Metric | 12 Weeks Ended July 9, 2023 | 12 Weeks Ended July 10, 2022 | 28 Weeks Ended July 9, 2023 | 28 Weeks Ended July 10, 2022 |
|---|---|---|---|---|
| Revenue | $172.9 million | $135.9 million | $376.0 million | $294.9 million |
| Revenue growth | 27.2% | — | 27.5% | — |
| Income (loss) from operations | $5.8 million | $(8.3) million | $3.5 million | $(28.2) million |
| Net income (loss) | $6.5 million | $(8.2) million | $4.4 million | $(28.2) million |
| Net income (loss) margin | 3.8% | (6.1)% | 1.2% | (9.6)% |
| Adjusted EBITDA | $21.6 million | $5.9 million | $38.3 million | $4.3 million |
| Adjusted EBITDA margin | 12.5% | 4.3% | 10.2% | 1.5% |
- CAVA restaurant revenue was $171.1 million in the quarter and $367.9 million year to date, compared with $105.3 million and $217.3 million, respectively, in the prior-year periods.
- CAVA same-restaurant sales growth was 18.2% for the quarter and 23.5% year to date. Quarterly growth consisted of 10.3% guest traffic growth and 7.9% menu pricing and product mix; year-to-date growth consisted of 14.5% traffic growth and 9.0% pricing and mix.
- CAVA average unit volume was $2,599, up $200 from the comparable period.
- CAVA restaurant-level profit increased to $44.6 million, or 26.1% of revenue, in the quarter from $23.3 million, or 22.1%. Year-to-date profit was $94.6 million, or 25.7%, compared with $42.8 million, or 19.7%.
- Digital revenue mix increased to 36.1% in the quarter and 36.3% year to date, compared with 33.9% and 34.6%, respectively.
Cash Flow, Liquidity, Debt, and Capital Expenditures
- Cash and cash equivalents were $352.8 million at July 9, 2023, compared with $39.1 million at December 25, 2022. The increase primarily reflected IPO proceeds.
- Year-to-date operating cash flow was $47.1 million, compared with $(1.4) million in the prior-year period.
- Capital expenditures were $72.5 million, compared with $45.6 million, primarily for restaurant openings and conversions, the Verona, Virginia production facility, and technology improvements.
- Financing activities provided $339.1 million, including $342.6 million of net IPO proceeds before certain offering-cost payments.
- The company had no borrowings outstanding under its $75.0 million revolving commitment, incremental revolving capacity of up to $25.0 million, and $24.0 million of remaining delayed-draw capacity at July 9, 2023. The facility matures March 11, 2027.
- The company borrowed and repaid $6.0 million under the delayed-draw facility during the period and was in compliance with its debt covenants at quarter-end.
- Operating lease liabilities totaled $333.6 million, including $34.1 million classified as current. Legally binding minimum lease payments for executed but not yet commenced leases totaled $45.0 million.
- Management stated that operating cash flow, cash on hand, and available credit capacity should be sufficient for anticipated requirements over the next twelve months.
Material Changes Versus the Prior Comparable Period
- The company shifted from a mixed CAVA/Zoes Kitchen portfolio to a substantially completed CAVA conversion strategy. Zoes Kitchen revenue fell from $28.8 million to zero in the quarter and from $73.6 million to $3.9 million year to date.
- CAVA restaurants increased to 279 from 195, with 16 net new openings in the quarter and 42 year to date. Management expects 23 to 28 additional net new openings during the remainder of fiscal 2023, including the final two Zoes Kitchen conversions.
- Restaurant operating costs declined as a percentage of revenue, helped by lower input costs, favorable product mix, sales leverage, and lower occupancy ratios.
- General and administrative expense increased 43.2% in the quarter and 40.6% year to date, reflecting performance-based accruals, corporate investment, higher equity compensation, and $1.1 million of certain non-recurring IPO costs.
- Impairment and asset disposal costs declined substantially from the prior year, when Zoes Kitchen closures generated significant charges.
- The company moved from operating losses to profitability, although year-to-date net income remained modest relative to revenue and included the benefit of operating leverage and reduced closure-related costs.
Guidance, Outlook, Risks, and Unusual Items
- Management expects 23 to 28 net new CAVA restaurant openings during the remainder of fiscal 2023 and expects to complete the remaining two Zoes Kitchen conversions by fall 2023.
- Following completion of conversions, management expects new restaurant capital requirements to be higher because new builds generally require more capital than conversions.
- Key risks include intense competition, execution of rapid restaurant growth, site selection, food safety and packaging issues, food and commodity inflation, labor availability and wage pressure, supply-chain disruptions, cybersecurity and technology failures, regulatory compliance, lease obligations, and the ability to sustain profitability.
- The company faces a putative class action concerning alleged PFAS and organic fluorine in packaging and related marketing claims. Damages are unspecified, the case remains in an early stage, and management cannot estimate a reasonably possible loss or range of losses.
- An insurer separately seeks a declaration regarding coverage and recoupment of legal costs related to the PFAS litigation. The company may not recover all related damages from insurance.
- A separate demand letter alleges PFAS, synthetic biocides, and deceptive “healthy” and “sustainable” marketing claims; litigation had not been filed as of the report date.
- Adjusted EBITDA is a non-GAAP measure and excludes, among other items, depreciation and amortization, equity compensation, impairment, restructuring, and certain IPO-related costs. It should not be viewed as free cash flow.
- Results may be affected by seasonality and the timing and costs of new restaurant openings.
Important Facts for Investors to Verify
- Whether same-restaurant sales, traffic growth, and restaurant-level margins remain durable as the comparable base expands.
- Whether management achieves the stated 23 to 28 additional openings and completes the final two Zoes Kitchen conversions on schedule and within budget.
- The capital intensity and returns of new-build restaurants versus converted locations, including spending on the Verona production facility.
- The sustainability of positive operating cash flow and profitability after excluding IPO proceeds and non-recurring items.
- Future labor, food, occupancy, and delivery costs and their effect on restaurant-level margins.
- The potential financial, operational, and reputational impact of the PFAS-related litigation, insurance dispute, and threatened advertising claims.
- The effect of equity compensation and the 2023 equity incentive plan on future share dilution.