By Ciara Linnane
The company has increased sales but is still making losses and costs are likely to rise sharply
Cava Group, the Mediterranean-focused fast-casual restaurant, has filed for an IPO, which is expected in the coming weeks.
However, the company’s losses are overshadowing its revenue growth and it’s burning cash at a high rate, according to a new report. It could actually be the next WeWork Inc. (WE), according to the report from New Constructs, an independent stock analyst firm.
“We understand that investors may be anxious to find the next hot stock after the IPO drought we’ve experienced over the past 18 months, but investors should ignore the hype and avoid Cava stocks at all costs.” , says the report.
New Constructs maintains a list of “zombie” stocks it says are at risk of falling to $0 a share. The research firm uses machine learning and natural language processing to analyze company records and model economic returns, although its research has met with resistance.
Cava did not respond to a request for comment. If the company plans to go public in the coming weeks, it would likely be in a quiet period right now, which for an IPO lasts from when a company’s registration documents are filed with U.S. regulators to 40 days after the stock begins trading .
“We don’t think investors should buy Cava Group stock if the IPO valuation is anywhere near the expected $1.5 billion level,” said David Trainer, CEO of New Constructs, who wrote the report has.
“Cava Group is currently not profitable and its path to profitability is non-existent as the company spends money and doesn’t even need to open stores anymore,” he wrote.
Trainer compared the company to Sweetgreen Inc. (SG), another fast-casual restaurant that went public in November 2021. This stock has been in the zombie “danger zone” ever since, he said.
Sweetgreen’s stock is down 48% over the past 12 months. The company went public at $28 per share and was last trading at $9.50.
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“Don’t leave it alone by bailing out the private equity owners of this overrated and unprofitable fast-casual restaurant,” Trainer wrote, referring to Cava.
Cava filed its S-1 with the Securities and Exchange Commission on May 19 and plans to list on the New York Stock Exchange under the ticker symbol CAVA.
JPMorgan, Jefferies and Citigroup are lead underwriters on a team of eight banks working on the transaction. The company has not yet set any terms.
Its IPO filing records show strong revenue growth, with a compound annual growth rate of 56.2% from fiscal 2016 through fiscal 2022. However, net losses in fiscal 2022 increased to $59 million from $37.4 million in fiscal 2021 .
The company expanded its restaurant network in the first quarter of 2023 from 22 in 2016 to 263 after acquiring competitor Zoë’s Kitchen in a $300 million deal in 2018.
The company started as a full-service restaurant in 2006 called Cava Mezze and later began selling its dips and spreads in grocery stores. In 2011, it launched its fast-casual concept. The company expects 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 that brings together healthy foods and bold, satisfying flavors at scale.”
Trainer said the IPO would provide the company with a much-needed cash injection, which sounds positive. But in reality, he said, without that cash it would be a zombie stock, which he defines as a stock with high cash consumption and limited cash reserves.
The company is going public at an uncertain time as the US faces a potential recession and the global economy is on shaky ground, he said. Savvy investors might be wondering why Cava would want to go public with this in mind.
“The likely answer: The company will only become less profitable over time, so now is better than later,” he wrote.
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This is based on statements in the S-1 that the company expects its operating costs to “increase significantly” in the future.
Following the conversion of some Zoës Kitchen restaurants into cava restaurants, “we anticipate that the investment requirements for the opening of a new restaurant will be significantly higher than we have experienced in recent years,” the prospectus states.
Other issues raised by the coach related to the Cava IPO:
– Cava’s 2022 cash burn was $120 million in free cash flow, and as of April 16, the company had just $23 million in cash and cash equivalents on its balance sheet, according to the prospectus. From April 16, this rate of cash consumption can only be sustained for two months.
– The company operates in a highly competitive environment with a long list of competitors offering healthy, tasty and filling foods. 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 the company will grow as fast as Chipotle in its first decade as a public company while dramatically improving margins.
Exchange-traded fund (IPO) Renaissance IPO is up 19% year to date, while the S&P 500 is up 9.7%.
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– Ciara Linnane
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5/30/23 1213ET
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