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Cava Group, the Mediterranean-focused fast-casual restaurant, has filed for an initial public offering, which is expected in the coming weeks.
But the company’s losses overshadow its revenue growth and it’s burning through cash at a high rate, according to a new report. It may in fact be the next WeWork Inc.
WE,
according to the report from New Constructs, an independent equity-research company.
“We understand investors may be anxious to find the next hot stock after the IPO drought we have seen over the past 18 months, but investors should look past the hype and avoid Cava’s stock at all costs,” said the report.
New Constructs maintains a list of “zombie” stocks, which it says are at risk of declining to $0 a share. The research firm uses machine learning and natural language processing to parse corporate filings and model economic earnings, although its research has encountered pushback.
Cava did not respond to a request for comment. If the company is planning to go public in the coming weeks, it would likely now be in a quiet period, which for an IPO lasts from when a company files registration paperwork with U.S. regulators through 40 days after the stock starts trading.
“We do not think investors should buy Cava Group’s
CAVA,
stock if the IPO valuation is anywhere close to the expected $1.5 billion level,” said New Constructs Chief Executive David Trainer, who authored the report.
“Cava Group is not currently profitable and its path to profitability is nonexistent as the company spends money it doesn’t even have to open more stores,” he wrote.
Trainer compared the company to Sweetgreen Inc.
SG,
another fast-casual restaurant that went public in November 2021. That stock has been in the zombie “danger zone” since then, he said.
Sweetgreen’s stock has fallen 48% in the last 12 months. The company went public at $28 a share and was last quoted at $9.50.
See also: Sweetgreen stock tumbles after ‘Chipotle Chicken Burrito Bowl’ prompts lawsuit from Chipotle
“Don’t get left holding the bag by bailing out the private equity owners of this overvalued and unprofitable fast-casual restaurant,” Trainer wrote, referring to Cava.
Cava filed its S-1 with the Securities and Exchange Commission on May 19, with plans to list on the New York Stock Exchange under the ticker CAVA.
JPMorgan, Jefferies and Citigroup are lead underwriters in a team of eight banks working on the deal. The company has not yet set terms.
Its IPO filing documents show strong top-line growth, with a 56.2% compound annual growth rate from fiscal 2016 to fiscal 2022. However, net losses widened to $59 million in fiscal 2022 from $37.4 million in fiscal 2021.
The company has grown its network of restaurants to 263 in the first quarter of 2023 from 22 in 2016, after acquiring rival Zoës Kitchen in 2018 in a $300 million deal.
The company was founded in 2006 as a full-service restaurant called Cava Mezze and later started selling its dips and spreads in grocery stores. In 2011, it launched its fast-casual concept. The company is expecting to open 34 to 44 new Cava restaurants in 2023.
In its prospectus, the company describes Cava as “the category-defining Mediterranean fast-casual restaurant brand, bringing together healthful food and bold, satisfying flavors at scale.”
Trainer said the IPO would give the company a much-needed cash infusion, which sounds like a positive. But in reality, he said, without that money, it would be a zombie stock, which he defines as one with heavy cash burn and limited cash reserves.
The company is going public at an uncertain time, with the U.S. facing a possible recession and the global economy on shaky ground, he said. Astute investors may ask why Cava would want to hit public markets against that background.
“The likely answer: the business will only get more unprofitable as time goes on, so now is better than later,” he wrote.
That’s based on disclosures in the S-1 that the company is expecting its operating costs to “increase substantially” in the future.
After converting a number of the Zoës Kitchen restaurants into Cava restaurants, “we expect that the capital expenditure requirements to open a new restaurant will be significantly higher than we have experienced in the past few years,” says the prospectus.
Other issues Trainer raised regarding the Cava IPO:
• Cava’s cash burn was $120 million of free cash flow in 2022, and as of April 16, it had just $23 million in cash and cash equivalents on its balance sheet, according to the prospectus. It can only sustain that rate of cash burn for two months from April 16.
• The company is operating in a highly competitive environment with a long list of rivals that offer healthy, flavorful and filling food. The list includes Subway, Starbuck’s
SBUX,
Wendy’s
WEN,
Chipotle
CMG,
Panera Bread, Chili’s
EAT,
and Noodles & Co.
NDLS,
among others.
• New Constructs’ reverse discounted cash flow model suggests that the company is priced to grow as fast as Chipotle in its first decade as a public company while drastically improving margins.
The Renaissance IPO exchange-traded fund
IPO,
has gained 19% in the year to date, while the S&P 500
SPX,
has gained 9.7%.
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