Mediterranean fast-casual restaurant chain Cava prices IPO at $22 a share

The rapidly-growing restaurant chain hopes to appeal to a greater swath of health-conscious diners seeking higher-quality ingredients in an industry that has been reshaped by the pandemic. But its own IPO filing notes that it faces “significant competition” from other restaurants, grocery stores and food-delivery services.

Cava said it planned to use proceeds from the offering to open new restaurants, and potentially to repay loans used for construction of a new production facility in Virginia.

The company also granted the offering’s underwriters a 30-day option to purchase up to an additional 2.2 million shares at the offering price. The offering is expected to close on June 20. JPMorgan, Jefferies and Citigroup are lead underwriters of the offering.

Cava announced the offering after raising the proposed price range for its IPO on Monday. At that time, the company said it planned to offer 14.4 million shares priced at $19 to $20 each, up from a previous range of $17 to $19. Cava will have 111.4 million shares outstanding.

Founded in 2006, Cava runs 263 restaurants — a figure that expanded after it bought Zoes Kitchen in 2018. The company is in the process of converting the Zoes locations to Cava restaurants.

The company has rapidly grown sales, but has warned that its expansion hinges on its ability to open “a significant number of new restaurants on a profitable basis,” Cava’s IPO prospectus says. The chain has put up steeper losses and chewed through cash in the process, with higher costs expected up ahead. In April, Cava had only $23 million in cash and cash equivalents.

As MarketWatch noted earlier this week, Cava is the first restaurant company to go public since Sweetgreen Inc.
SG,
+1.68%
in 2021. While markets have rebounded this year, the IPO market has remained wobbly.

Bill Smith, chief executive of Renaissance Capital, wrote that “‘better than Sweetgreen’” might be the investment case for Cava in a nutshell. Earlier in the week, others expressed concern that the pricing of Cava’s IPO made for lofty growth expectations.

A report from New Constructs said that even a price range of $19 to $20 a share made Cava’s valuation “ridiculously high” and said the company was “priced to grow faster than Chipotle.”

That reported also raised questions about Cava’s smaller suppliers for locally-grown ingredients who might have trouble expanding their output as the restaurant grows. It also said the chain “isn’t the first restaurant to offer consumers ‘healthy, flavorful, and filling’ food.”

“Astute investors may question why a fast-casual restaurant would have an IPO in the current economic environment: the U.S faces a possible recession and the global economy looks shaky,” the report said. “The likely answer: the business will only get more unprofitable as time goes on, so now is better than later.”