Domino’s Pizza (DPZ 1.00%) stock gained a lot of attention recently after it was added to Berkshire Hathaway‘s portfolio of stock holdings. While investors love to follow Warren Buffett’s moves, it likely wasn’t his stock pick given the relatively small size of the purchase. Instead, it was likely bought by one of Berkshire’s two other investment managers, Ted Weschler or Todd Combs.
While Domino’s is a solid company that has been growing its same-store sales, it is considered a more mature business with over 21,000 locations around the world and less growth potential. It also carries a fair amount of debt and leverage.
If it’s restaurant stocks that have Berkshire’s attention, the conglomerate might want to consider an alternative restaurant stock that may have a lot more future upside than Domino’s over the next 10 to 15 years.
The next great expansion story is Cava Group
One of the best growth stories in the restaurant industry currently is Cava Group (CAVA 4.06%), which operates a growing chain of Mediterranean fast-casual restaurants. The company has similar characteristics to a young Chipotle Mexican Grill (CMG 4.84%), which was the great restaurant growth stock of the past 10 to 15 years.
One of the big similarities is that both companies focus on working with relatively few (but higher quality) ingredients and the meals are prepared in an assembly line process in front of the customer. This allows customers to quickly get meals that are fully customized using only the ingredients they want. This helps increase customer satisfaction, as well as decrease wait times and greatly reduce food waste.
It also leads to strong restaurant-level margins (RLMs), which are the operating margins a restaurant produces before factoring in corporate costs. Last quarter, Cava saw its RLMs improve 50 basis points to 25.6%, which was right in line with those of Chipotle, which had RLMs of 25.5% last quarter. Higher RLMs also often lead to shorter payback periods on construction expenses when new restaurants are opened. This all helps with expansion.
Another similarity to a young Chipotle is that Cava is seeing outsized same-store sales growth. Last quarter, the company’s same-restaurant sales surged 18.1%, which was on top of a 14.4% increase a year ago. Cava was able to grow its guest traffic by an impressive 12.9%, despite a a pretty hefty increase in prices. That shows that the company has strong pricing power.
Like Chipotle and other quick-service restaurants (QSRs), the company has also been able to drive traffic through menu innovation and limited-time offers (LTOs). Its grilled steak introduced earlier this year has been a huge success, while its garlic ranch pita chip LTO has been a nice driver as well. LTOs are a tried and true traffic driver for QSRs, from Chipotle’s brisket option to McDonald’s McRib sandwich.
Cava’s strong same-store sales have also helped lead to very robust average unit volumes (AUVs), which is the average sales each restaurant produces. Its AUVs are currently at $2.8 million, which isn’t that far behind Chipotle’s current $3.2 million AUV. The combination of higher AUVs and RLMs ultimately leads to higher profits.
Image source: Getty Images.
Cava has solid upside potential
Thus far, Cava has been producing great results over the past year. However, what gets investors excited the most is its expansion opportunities. At the end of Q3, it operated just 352 locations, which is less than 10% of the 3,615 locations Chipotle had at the end of the quarter. It is set to open between 56 and 58 new locations in 2024 which will be added to the 309 it operated at the end of 2023. Meanwhile, it is looking for at least 17% unit growth in 2025, and in the past has indicated it will look to grow its locations by around 15% a year.
The company has generated solid free cash flow thus far in 2024, which means that it can expand without having to take on debt. This is important as it allows the company to grow without overextending itself.
If Cava grew its restaurant base by 17% in 2025 and 15% a year thereafter, at the end of 2040, it would have about as many restaurants as Chipotle has today. With RLMs currently on par and AUMs not that far away, it is not hard to imagine that Cava could look like today’s Chipotle in 10 to 15 years.
Thus, while the stock currently looks expensive, with critics pointing out that it trades at nearly $46 million per restaurant, the long-term upside is clearly there. As such, long-term investors can consider adding this great growth stock at current levels or lower.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chipotle Mexican Grill, and Domino’s Pizza. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
