Cava vs. Dutch Bros Stock, Which Is Best?

Restaurant and coffee chains operate in a highly competitive industry that does not offer many growth levers beyond growing locations.

In spite of the challenges, CAVA Group, Inc. (NYSE:CAVA) and Dutch Bros Inc. (NYSE:BROS) are both gaining significant traction and attracting new shareholders. But if you had to choose among them, which is the better bet, the 

Is CAVA Group Growing?

Fast-casual restaurant operator CAVA Group operates on the build-your-own Mediterranean meal model that Chipotle Mexican Grill, Inc. (NYSE:CMG) made popular. The company had a successful IPO last year, priced at $22 per share. That public offering led to an inflow of capital and the proceeds were largely allocated to finance new restaurants.

In fact, CAVA has highly prioritized opening new locations. Last year, the company opened 72 net new restaurants, growing its footprint by about 30%. Currently, it operates 309 fast-casual restaurants in 24 states and Washington, D.C.

A few years ago, the company acquired its rival, Zoes Kitchen, and swiftly adopted a conversion strategy to brand them as CAVA restaurants. Last year, 28 Zoes Kitchen outlets were converted into CAVA restaurants. Management reported that the strategy concluded in October 2023 with the final conversion restaurant opening.

The aggressive expansion pace thanks to that acquisition does not look sustainable, which is why growth is moderating. In the coming fiscal year, management forecasts around 50 new restaurant openings give or take a couple.

For investors, it’s hard to get a full grip on CAVA’s financials given that it lacks long-term data due to the recency of its IPO.  That in turn makes it challenging to make accurate forecasts.

For now though, it appears that the financials are in a good state. In FY2023, group revenue expanded by 29.2% to $728.70 million and profitability has been reached with net income coming in at $13.28 million last year.

CAVA revenue was $717.06 million, increasing 59.8% compared to the prior year. The brand’s restaurant-level profit margin expanded by 450 basis points to 24.8% as a consequence of lower input costs and the higher occurrence of premium menu items in its product mix.

As good as the financial may appear to be, the company is not expecting this growth rate to continue. Last year, CAVA posted same-restaurant sales growth of 17.9%, but this year, growth is expected to come in between 3% and 5%. Restaurant-level profit margin is also expected to slow down to the range of 22.7%-23.3%.

Is Dutch Bros Rewarding Investors?

Drive-thru coffee shop operator Dutch Bros is one of the success stories coming out of Oregon. Started in 1992 with a double-head espresso machine and a pushcart, the company has grown from its roots into a considerably-sized QSR company.

The company prides itself in its community-driven and people-first culture, which has helped Dutch Bros scale its operations over the years. In 2021, Dutch Bros’ total shop count stood at 538, which increased by 24.7% to 671 in 2022. This figure further expanded by 23.8% to 831 shop count in 2023.

Dutch Bros’ store-count growth is mainly “organic,” meaning that it is driven by company-operated locations rather than franchises. This particular segment also makes up the majority of the company’s revenues. In 2023, company-operated shops made up 89% of its top line and has a higher growth rate.

Considering the period from its 2021 IPO to last year, top line growth has slowed down a bit but remains robust. Between 2021 and 2022, revenue surged by 48.4%, while it grew by 30.7% year-over-year to reach $965.78 million.

The company reported annual GAAP-based profitability last year, breaking a two-year streak of losses. In 2021, Dutch Bros had a net loss of $117.93 million while it managed to bring losses down to $19.25 million in 2022 and posted a net income of $9.95 million in 2023.

In adjusted terms, the trajectory is not exactly a straight line. In 2021, Dutch Bros had an adjusted net income of $51.42 million, which dropped to $25.23 million in 2022 and then surged to $50.18 million in 2023.

In fact, the macroeconomic situation is not that favorable to companies based on consumers’ discretionary spending, especially one operating in an industry dominated by big names like Starbucks Corporation (NASDAQ:SBUX).

Moreover, minimum wage increases in certain states and increased dairy, coffee, fuel, and packaging costs are anticipated to continue detrimentally impacting margins while the company attempts to pass on increasing menu prices.

On the other hand, shop expansions remain at the forefront, with 150-165 total system shop openings expected in 2024. Dutch Bros also expects to post a revenue of over a billion dollars this year, or $1.190-$1.205 billion more precisely. However, its Arizona center expansion spells greater capital expenditure for the company.

Cava vs Dutch Bros Stock, Which Is Best?

In terms of how far along the stock is compared to its IPO, CAVA has outperformed BROS by a considerable margin. CAVA gained more than 60%, while BROS was down by more than 25%. On the valuation front, BROS’ is far more reasonable than CAVA.

CAVA is trading at 264.37x in terms of forward non-GAAP price/earnings, which is astonishing for a company that went public last year and lacks data to back it up. Dutch Bros, on the other hand, is trading at 98.48x, which also sits quite high.

CAVA share price is at risk of a correction based on its overly-stretched valuation and subdued projection so it might be better to wait and see. Nonetheless, Wall Street analysts do see a modest 5% uptick opportunity in the stock.

Contrarily, Dutch Bros offers the potential for a noteworthy surge after correcting on the back of higher input costs. Analysts now see 12.6% upside in the stock.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.