Mediterranean chain Cava caters to starved market

SWEETGREEN

05/06/2023 17:49

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Anita Ramaswamy
       NEW YORK, June 5 (Reuters Breakingviews) - Cava’s hunger
for cash and investors starved for new equity promises to be a
spicy combination. The Mediterranean chain, whose fare includes
falafel and tzatziki, is aiming for a valuation of up to $2.2
billion, 70% higher than a private assessment in 2021. There’s a
danger that fund managers will let their eyes get too big for
their stomachs.
    The restaurant operator with more than 260 U.S. locations
last raised money just before similarly health-conscious peer
Sweetgreen  SG.N  made its own market debut at a roughly $5
billion valuation. The salad vendor’s shares have tumbled by
more than 80% since then, one of the many disappointments,
including in technology shares, that froze the market. Excluding
shell companies created to seek acquisitions, just three
venture-backed firms valued at more than $1 billion went public
in the United States in 2022 compared to more than 80 the
previous year, according to research outfit Crunchbase. 
    There have been no new listings of that size this year,
meaning Cava’s IPO might help set the tone, especially for
restaurateurs Panera Bread and Fogo de Chão that have been
biding their time. Cava’s ambitious target, of between $17 and
$19 a share, depends on fetching a generous premium to the 1.2
times next year’s revenue where Sweetgreen trades.
    Annualizing Cava’s $200 million top line in the first
quarter and applying Sweetgreen’s multiple would imply Cava is
worth less than the $1.3 billion it was two years ago. At $2.2
billion, as reported by the Wall Street Journal, it would be
nearer 2.8 times. Chipotle Mexican Grill  CMG.N  trades at 5.3
times. Some of Cava’s financial menu items are appetizing. Its
outlets open for at least a year increased sales by 28% last
quarter from a year earlier, compared to just 5% for Sweetgreen
sites open at least 13 fiscal months. Its restaurant-level
profit margin is better, too. 
    The road ahead won’t necessarily be as smooth as Cava’s
hummus, however. It almost has finished converting locations of
Zoe’s Kitchen, a chain it bought for $300 million in 2018, into
its own brand. Unless it can strike another similar deal, new
openings will cost more. Fast-casual restaurants also have a
history of expanding too quickly. For prospective pita-stock
consumers, plenty of good reasons exist to avoid over-ordering.
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    CONTEXT NEWS
    Mediterranean restaurant chain Cava is set to offer shares
for an initial public offering at between $17 and $19 each,
which would value the company at around $2.2 billion at the
higher end of the range, sources told Breakingviews on June 5,
confirming an earlier report in the Wall Street Journal.
    Cava’s prospectus was released on May 19 as a precursor to
the offering and shows that the operator of more than 260
eateries lost $58 million on $564 million of revenue in 2022. 
    The company was last valued by investors at $1.3 billion in
a funding round led by T. Rowe Price Group, Bloomberg reported
in April 2021.

 (Editing by Jeffrey Goldfarb and Sharon Lam)
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