Valuing Cava Stock

Tim Beyers: It’s unbelievable. They have what I’ll key on is that 18% increase in same-store sales, which is just absolutely bonkers. For those who don’t know what that means, you are essentially taking the sales per square foot at every location, and then you’re looking at the year-over-year difference in how they are performing. Up 18% like that is just astounding. For context here, Mary, for a fairly well-established restaurant, like 5% is awesome, 18% is outrageous. It just means that the existing locations are crushing it. The menu must be doing great. People are coming in and enjoying Cava.

The argument here for Cava is that this is the company that is making Mediterranean eating in the United States a thing. They are the concept that is taking Mediterranean mainstream. Now, whether or not you think that’s real or not, I think that’s up for debate, but the numbers suggest that’s at least part of the conversation.

Mary Long: Well, it’s not just those existing stores. They’re also rolling out new stores. The company opened 11 new restaurants within the quarter, 73 new restaurants within the past year. There’s now 352 Cava restaurants around the US. Tim, I’ve done some back-of-the-napkin math here, and I want your take on it. This company’s got a market cap of about $18.3 billion. Divide that by the total number of restaurants. Each restaurant location by that is valued at about $51 million. If you do that same math for Chipotle, obviously a massive company of stock that’s done really well for investors, each of its 3,437 locations is worth about $24 million. That feels crazy to me. What needs to happen for Cava’s valuation to come back down to earth or is $51 million per location, something that’s justifiable?

Tim Beyers: Well, look, I don’t think you could say that, but at this stage of its life, it is going to be priced at an outrageous premium. Right now, I don’t think you can make a really good numerical valuation argument for Cava. The work that I did on this is that the free cash flow yield, which is for those who don’t know how to calculate that, you take the free cash flow, as you’ve defined it, divide it by enterprise value, which enterprise value is market cap plus debt minus cash. Free cash flow, divided by enterprise value gets you a percentage. The higher the percentage, the cheaper the stock is. The lower the percentage, the more expensive it is.

In the case of Cava, it is 0.2%. In other words, the amount of required growth baked into Cava is outrageous. It’s a lot of assumed free cash flow growth via new restaurant openings, expanding margins. The expectations here are very high. Can they meet those expectations I think there is a case for it, but we could talk about that. I can tell, you asked what needs to happen. We could start with they need to open a lot of restaurants, and those restaurants need to be profitable per square foot pretty quick. They been able to deliver that, will they continue to?

Mary Long: During the earnings call, CEO and co-founder Brett Schulman talked about Mediterranean hospitality as an increasingly powerful differentiator. He talked about our obsession with screens about how we’ve lost 24 hours a month in personal connection. For those asking, how is this relevant to Cava, here’s a quote from Brett. He goes, “At Cava, we believe technology should enhance not replace the human experience, and we’re leveraging it to create warm personal moments across our physical and digital channels and to support our team members in engaging and connecting with our guests. As someone who enjoys going to Cava and appreciates the experience part of a restaurant, that all sounds awesome to me.

As an investor, everybody’s talking about AI and efficiency and technology. How is Cava balancing those two things, technology and experience and does anything about how they’re doing that stick out to you, particularly from the investment standpoint?

Tim Beyers: Well, I think it has a lot to do with the loyalty program. They want more people coming into the restaurants and eating in the restaurants. That’s a big part of the Cava story. Right now, digital ordering and, digital as a channel for revenue for Cava, like you order on the app, you go and you pick it up and you leave. That’s only about 35% of the business. We’re not talking about Wingstop. We’re not talking about Domino’s, which are close to 70%. You order on the app. They try to get you they upsell you through the app. You get some additional things. You go in, you get it, you’re gone. You go eat at home. Cava wants you in the store. But what they want to do is use the digital channel and particularly the loyalty program to get you interested in the menu and engaging with the menu. If they know, for example, you are nuts for the Pita chips, they are experimenting now with new flavors with the Pita chips and you can imagine that they will maybe make an offer or make you one of the privileged few, Mary, you love the Pita chips.

Mary Long: I do.

Tim Beyers: There’s only a few locations in the Denver Metro area that are going to try something entirely new. You are invited because you are a Cava loyalty member and not everybody’s going to get access to this. That’s not the same thing as a coupon. That is not the same thing as giving you bonus points so you can get more free meals. That is trying to engage you, get you to a location, get you trying something that they want to find out whether or not this new thing that they’re trying actually is going to work with some of their most loyal customers. They’re going to use this loyalty program to do something interesting that may go systemwide. We don’t know.

They’re calling this first-party data. They call it a first-party data platform, meaning they’re going to take all the data they can get about what guests do when they show up at a Cava location and build experiences that are customized to every guest that walks through the door. Will that allow them to increase sales per square foot? We don’t know, but that is their hypothesis for it. This is what Schulman roughly means. He’s not talking about, look, we’re going to get a whole bunch of orders through the digital channels. He’s saying, let’s use the digital channel to help us get to know our customer better and do things to engage them differently and more deeply. If he’s right about this if the hypothesis holds, then sure, you could see more visits, more spending per square foot, and maybe some appreciation and loyalty. When you have dollars to spend on going out, maybe you’ll spend a little bit more with Cava than you did previously.

Mary Long: Why does Cava want to get people into the store so much? Because I can see another type of restaurant, I would say, that leans into the Wingstop, the Domino’s approach of, hey, we can shrink down our square footage. We can push this whole thing to digital. What is the value for them in getting more people?

Tim Beyers: Well, I’ll give you only one example of this because Cava does sell some of its own branded product in grocery stores. You go into a store and you’re going to buy some of their sauces. It’s a little bit like this is a terrible analogy, but I’m going to use it anyway, I think it makes sense. You go into Alta Salon. What are the every time I am not even remotely the person that buys product at the barber? But people do, you go to the barber and you walk out not just with a haircut, you walk out with some product. That happens all the time. You go into a Cava store. Will you walk in there and get a meal? Will you also walk out with some sauces and maybe something else? You might.

I don’t know that that’s going to happen all the time, but there are other things you can do to enhance the amount you will spend inside the Cava store because it isn’t just a place where you get cafeteria food and you’re gone. It is a flavor mart, where you can go in and buy not just your meal, but also some things you’ll bring home to try when you’re cooking your own food.

Mary Long: I’m going to take advantage of having you here today and hop us in the way back machine to a couple days ago when Toast, another favorite company of yours that you follow quite closely, reported earnings. This was last week Toast for those that don’t know is a vertically integrated restaurant software and hardware company. They had a pretty great quarter, one could say. They posted a third-quarter profit of $56 million. That’s after having had a loss of $31 million a year before. Not only that, but they raised their EBITA forecast for the year quite significantly. All of this, Tim, a time when other data, not Cava’s data, but other data would suggest that people are eating out less, feeling a bit more sensitive toward how they spend their money. How is Toast able to grow so much despite macro headwinds that, again, aren’t necessarily affecting Cava, which we just talked about, but that are hitting other parts of the restaurant industry?

Tim Beyers: It’s a great question. Two things can be true. I’ve said that so many times and two things can be true here. The Fintech business, which is driven by guests going to and spending dollars with restaurants, that there was a modest sequential decline in gross payment volume. Gross payment volume is the amount of spend at restaurants that are using Toast. It’s a very important metric for them. They make some money. This is the win-win part of the business. When Toast clients make money, guests come in, spend money at Toast restaurants.

They get a piece of that and so more traffic into more Toast restaurants is good for Toast. But on a gross payments volume per location basis, sequentially, that was down slightly. There’s your macro headwind. However, restaurateurs are spending on toast. They want it. They are signaling that they want it and the subscription revenue, which is the steady state piece of toast business, you pay a subscription fee for how much toast you use inside your restaurants. Restaurateurs are they’re taking on more toast product. They’re adding it to more locations and that does not change. That, irrespective of the macro headwinds, if restaurateurs are saying, We need more Toast, we want it in more locations, that is business that is not variable.

That is steady and growing and it is growing up into the right. This has been true for Toast for a really long time that restaurateurs see the value and what they do. They bring it into their restaurants, and so they pay the subscription fee to have it. The fintech fee, which is a bit more variable and is subject to macro. That’s going to bounce around a bit. But the core business, that subscription business is going absolutely gangbusters, Mary, and it just shows no sign of slowing.

Mary Long: Speaking of showing no signs of slowing, you and Tim White have a show on Motley Fool Live called This Week in Tech, and this past Friday, on that show, you said that you think Toast can bring in annualized returns of almost 19% over the next 10 years. I asked you this question earlier about another company, but I’m going to ask it again to you of Toast. What has to happen for that to be?

Tim Beyers: In this case, there are two primary drivers of value for toast. It is the number of locations and the average spend per location, the average that they get, revenue per location for the restaurant clients that they serve. I think it’s fair to estimate that toast is going to grow the average spend per location from about 40,000 per location today. That’s a restaurant customer. Spends about 40,000 per location. On Toast subscription fees annually, and transaction fees, as well, about 40,000. I think they can get that to 55,000.

In other words, raising it at the historic rate of inflation, about 3.3% over 10 years. I think that’s absolutely possible, very reasonable, 127,000 locations today. I think they can triple that. I think they can get to 350,000 locations pretty easily. That’s not quite a triple. It’s a little bit less than that. I think they can do that without too much problem. If I’m right about that, that gets you to that number. It might come a little bit short, depends on how much dilution there is in the stock price, but I think that is very reasonable because, again, the amount of uptake of Toast in locations that are here in the United States, it has been accelerating, not decelerating. In the most recent quarter, added about 7,000 locations. Same quarter a year ago added about 6,000 locations.

I’ll give you one other super quick story here. Tim and I were co working yesterday in downtown Littleton. We went into a small coffee shop. They had a non-toast point of sale system and I just happened to ask, it was called SpotOn, I think. This is interesting. What is this, and do you like it? The person behind the counter unprompted said, “That’s not bad. It works with the backend operations of places like ours, but it’s not as good as toast.” I never mentioned toast. I didn’t say anything about it. I said, toast is a lot better. I like it a lot more. But this thing is OK. That is the thing. Look, it’s completely unscientific, but I love hearing that, and that happens all the time, unprompted. What do you think? I think toast is great. When you have somebody whose experienced, is using the product day to day, and they are an advocate for it, your cost to acquire new revenue goes down substantially, the amount of free cash flow you can generate goes up substantially, and you become a very interesting investment for the long-term.

Mary Long: New locations seems to be the key for not just Cava, but also for toast, two very different businesses that play in similar hungry spaces. Tim Beyers, thanks so much for joining me today. I think we’ve got a thanksgiving meal prepped for us, so we should go eat.

Tim Beyers: We need to eat. Thanks, Mary.

Mary Long: A lot more may soon be coming to movie theaters near you. Up next, Fool contributor Rick Munarriz joins me for a look at what a new renovation budget might mean for movie theater stocks.

MALE_1: Turning an idea into a small business doesn’t happen by accident. You need to be all in. At Constant Contact, we have the digital marketing tools you need to get the word out, close the sale, raise the funds, and gather a community around this thing you’ve built. Let’s do this together. Let’s send this, share this and shout this from the rooftops. Let’s segment this, automate this and AI this for real results fast. Let’s get out of this what we put into this. Let’s build this. Let’s grow this. Let’s win this. Get started today at constantcontact.com.

Mary Long: Rick, earlier this fall, the other NATO, that is the National Association of Theater Owners, announced a $2.2 billion renovation plan that’s set to revamp a bunch of different parts of the theater experience from snacks to seating. There are eight large chains that are really behind this deal. We’re going to talk about three of them later on in the show, but basically, this plan will impact nearly 70% of theaters in North America, and it’s going to roll out over the course of three years. What returns can movie goers, people like you and I expect to get out of this $2.2 billion investment?

Rick Munarriz: The product is technically they’re already getting better over time. Since the pandemic, we’ve seen reserve seating, mobile ordering, all these things that make the experience more friction free and enjoyable, have popped up across the major chains. Enhanced concession stand offerings. That makes sense for the exhibit and also for the customer to have more variety of what they can get. This NATO that we’re talking about here is basically the eighth largest theater chains, so it’s basically practically two thirds of the market. I’m just hoping that the $2.2 billion isn’t just going to reclining seats or flavored popcorn or premium S’mores Milkshakes, or anything like that. It’s going to go to improving projection systems, sound systems.

The announcers also mentioned a bowling, arcades, and other leisure offerings, which I think makes sense to movie theater, but it’s great to have a place where you can go to even when there’s not a movie you want to see out there. The industry, it has come back from the initial pandemic slump, and it’s time to invest in keeping it that way, and I think this is a smart move right now.

Mary Long: This is kicking things back to last summer with the Barbenheimer release. But around that, you had so many people talking about, what it’s experiences that get people to the movies. Exactly what you just mentioned, whether it’s a bowling alley or something else, that’s an experience that’s different than the Barbenheimer variety, but could also certainly serve too, to get people back in in-person in theaters. During COVID, this will come as no surprise to most listeners. Movie theater tickets sales sharply plummeted. In 2019, the average person was buying a little less than four tickets a year. In 2020, that number sank to less than 1.7 tickets per person per year to be exact. It’s up since then, but it’s still far below those pre pandemic levels. Do you think that these renovations that you just mentioned, updating the sound systems, the screen systems, etc. Is that enough to bring people back to the movies?

Rick Munarriz: No one goes to Yankee Stadium or Dodger Stadium because the seats are comfortable or the projections are nice. They led the Major League Baseball in attendance this year because they’re the winners. They went to the World Series, sorry. But content matters is what I’m saying. Same thing with baseball, same thing with entertainment. When Wicked or Moana 2 hit Sears later this month, folks are going to go even if they have to sit in a lightly padded bleacher seat or a bed of nails. Unfortunately, the theater chains themselves can’t control the quality of the films or even the pipeline of how quickly they’re made. Movie theaters also can’t control studios that make these movies wanting to stream their movies sooner even though they have tried to negotiate longer release windows.

I think what they can’t control and what still matters, it’s not necessarily renovation, but innovation. I like what some companies are doing. Like Cinemark is doing with their D-BOX seats. These are motion sensitive seats. That this has historically been a hockey flash in the pan, gimmicky thing. But with D-BOX, they have control, so you can actually control the intensity of the experience you’re experiencing, or shut it off completely because they are really nice padded seats to begin with and more importantly, you can just put a couple of these in each theater screen. You don’t necessarily have that the entire theater have this one platform, which sabotaged previous efforts on that. I do think there will be renovation, but I’m more excited about the innovation that’s going to happen.

Mary Long: We’re going to turn the spotlight onto a couple of different specific movie theater stocks. But before we get there, how loyal are movie goers to a particular theater chain? Is convenience and location the name of the game here? Are most folks going to just go to the theater that has the most convenient time for the movie that they want to see and is closest to them or are really loyal theater goers saying, no, I exclusively go to Cinemark screens, for instance?

Rick Munarriz: I think your first scenario may have been true about five, 10 years ago, but I think things are different now. I know this is going to be controversial, but I think MoviePass was the best thing that ever happened to theater operators. It made theaters disrupt themselves. When MoviePass eventually went belly up and came back in this half-hearted effort that’s probably going to fail again. You had these companies come up and say, let’s do it ourselves. Regal Unlimited, AMC Stubs, A-List.

These are monthly subscription plans where you can see almost as many movies as you want in a month, but basically the price of two individual admissions. Cinemark and Marcus, they have a lightly little more restrictive movie clubs, as they call them. But it’s still got anchoring you to that silver screen outing to a single brand, and I think that’s what people are doing. They’re signing up for these plans, and they’re saying, this is going to make a lot more sense. I think it is a lot more effective than the loyalty rewards programs that they have been in place for ages, the fact that they have these subscriptions where you’re no longer looking at the other theaters. You’re saying, I’m a member of this AMC brand, I’m a member of this Regal Unlimited.

That’s the theater I’m going to go to. I’ll work my schedule around the times that it’s showing the movie and with so many screens, odds are they’re showing the movie you want to see, if it’s a big movie about every 30, 40 minutes. Let’s turn and focus on Cinemark, specifically for a second. Of the companies that we’re going to look at today, this is the largest one by market cap. It’s worth about $3.8 billion. They reported third quarter earnings at the end of October, saw record high revenue for that period, about $922 million. That’s up 5% year over year, and up 12% from the third quarter of 2019. Operating margin nearly 18%, which is a big improvement from the 7% that they saw in that same quarter pre-COVID. What has the key to Cinemark’s seemingly successful turn around been?

I think the key is simple. Again, big movies are now back in the theaters. Back in the pandemic, you mentioned like 2020, no one was going to the theaters. When Tenet came out, I said, well, I’m not going to miss this movie. Even then, I was maybe 12 people at a theater that would have been jam packed. That movie came out a year or two earlier or a year or two later. Studios are now putting out the big movies. You’re seeing this come out, you have a third Avatar movie coming out next year. Obviously, you have a big Lion King sequel and other movies coming out just before the end of this year. All these things are happening right now, and Cinemark has done what some of its competition has. Unlike Regal that basically went through bankruptcy reorganization or AMC that just went lavished on all these other projects. Cinemark has basically been sticking to its netting , make sure it’s operationally more effective, taking advantage of the fact that people are hungry for movies, willing to pay more for concessions, and it’s all paying off on the bottom line and the top line.

Mary Long: Pre-COVID, Cinemark used to have a dividend. They paused that during the pandemic. What would you like to see happen before Cinemark reinstates that dividend?

Rick Munarriz: Dividends, they’re cool again. Now with interest rates heading lower, it’s attractive to have a little yield that may be competitive with a short-term, fixed income that you can get elsewhere. Royal Caribbean, Disney, these are some of the companies that have brought back their dividends this year for the first time since pandemic. Cinemark’s long-term debt right now is basically back down to where it was in 2019, and its profitability is actually higher. I’ve seen enough. I think this is a good time for it to bring back its dividend. If it doesn’t, I think maybe they’re just looking at maybe a potential acquisition or two that maybe their money is better spent that way. I think that they know what they’re doing. When they don’t announce a dividend, it’s because it’s the best use of their money.

Mary Long: A company that plays in this theater space, but also plays in different segments as well is Marcus. They’re a bit unique out of the companies that we’re looking at today because, again, they’re not just a theater company. They also have a hotel portfolio. Does that diversification make Marcus a more compelling investment opportunity than its other publicly traded competitors?

Rick Munarriz: I’m not so sure about that. Again, to me, the movie theaters at Marcus are still 63% of the revenue it was last year, and multiplex incessions is its highest margin segment. If you’re investing in Marcus, the hotels are nice, but you better believe in Tinseltown, if you’re buying in Marcus. It does diversify the business in an interesting manner, but it also opens Marcus up more to the economic cycle. If money’s tight, you’re still going to go see that movie you’ve been dying to see for weeks at the local theater. But you’re probably going to scale back and cancel that weekend getaway. Corporate travel and related lodging is also going to take a hit in a recession. This isn’t monopoly where you need hotels to win the game.

Mary Long: Another thing that separates Marcus apart is that, unlike a lot of its peers, this company owns a lot of the underlying real estate for the majority of its theaters. If this is an advantage, why is Marcus unique among its cohorts in following this path?

Rick Munarriz: It’s probably for the same reason why a lot of us rent instead of owning our own homes and properties and apartments. It’s cheaper in the near term. When you’re a chain looking to expand as quickly and as cheaply as possible, especially in the scalable business, it’s what works. Marcus is essentially a real estate company. The others are in the movie business. One last point on this is that movie theater chains, they need foot traffic, and you’ll often find that these theater chains happen to be in shopping malls or strip malls that are owned by landlords where you have to pay if you want to play movies.

Mary Long: We can’t talk about movie theaters without talking about AMC. This is the biggest theater company by footprint, and yet it posted a net loss of nearly $21 million for the quarter. By comparison, Cinemark and Marcus, which we talked about earlier on were both profitable over the same quarter. What’s going on?

Rick Munarriz: AMC, they have great ideas, but unfortunately lousy execution. AMC Stub A-list, it’s the best of the movie subscription plans. It’s the only brand that could get away with selling its popcorn pre-packaged in retail stores the way it did a couple of quarters ago. It’s the only movie theater in chain that gets lampooned in SNL. However, its share count has been exploding. Cinemark’s share count in the last five years has grown by 32%, Marcus just 2%. For AMC, it’s exploded 24 fold since 2019, and that’s adjusted for the reverse split it did. It’s insane. This doesn’t explain the net loss, but again, it gets divided into so many shares, but there’s an arrogance to the shareholder dilution here that reflects in a lack of cost controls and prioritizing spending initiatives. I’m not sure Nicole Kibbin walking into an empty movie theater is as strong a selling point as AMC thinks it is.

Mary Long: Are you buying any of these companies? Or are there other entertainment plays out there that you like a bit more than Marcus, Cinemark, AMC, or other movie theater plays that we haven’t talked about today?

Rick Munarriz: I don’t own any of the theaters right now. Cinemark is the one that I find the most interesting of the ones we’ve talked about today. It’s making smart moves, and it’s trading at a forwards earnings multiple in the mid-teens, very attractive on that front, and the dividend is going to come back if that matters for you. One related, the most theater adjacent movie stock that I like is IMAX. To me, IMAX is a company. It’s more expensive, trading at higher multiples than Cinemark, but this is a company that cashes in on the one part of the movie business that’s actually working right now. If you’re probably familiar with IMAX, you go into theater, you pay a premium to see an IMAX screening of this movie that’s supersize screen, supersize sound with sometimes additional footage shot for these IMAX screenings from these directors that love IMAX.

Right now, if you’re going to a movie theater, you’re going to be that’s a big action movie, big superhero movie, big horror movie, big animated film for kids. You’re not going to see the Indie film on IMAX. Again, if you’re putting out Indie films, you’re probably not distributing through theaters effectively now because those are the movies that people are willing to wait to watch at home two or three months later. I really like IMAX here.

Mary Long: Rick, we’re recording this in early November. We’re heading into what some might consider peak movie season. Are there any movies on the slate, like the release slate this fall/winter that you are especially excited to go see in theaters?

Rick Munarriz: There’s a lot of big movies coming out. Obviously, Wicked. Just by the end of this month, you’ll have the screen adaptation of the Wicked Musical getting a lot of hype. Moana 2 is also coming out right before Thanksgiving week after Wicked, and that movie is as far as Disney goes, it’s their highest, the most views that they’ve have seen for a trailer that they put out within 24 hours of putting out. There’s a lot of anticipation for that movie. Gladiator 2. In December, you have Mufasa, another Lion King entry. There’s going to be a lot of exciting big movies coming out.

Again, there’s a lot of movies coming out, obvious studios are comfortable and they trust the movie theaters to amplify their voice in the future. I’m excited. There’s a lot of great movies. I’ll be in theater a lot. I live two blocks from an AMC, so I will be there for many of these films I just mentioned.

Mary Long: There we go. Making good use of your loyalty pass. Rick, thanks so much for chatting with me today and for giving us some insight into what the movie theater industry looks like now and could look like in the years to come.

As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I’m Mary Long. Thanks for listening. We’ll see you tomorrow.

Mary Long has no position in any of the stocks mentioned. Rick Munarriz has positions in Royal Caribbean Cruises, Toast, and Walt Disney. Tim Beyers has positions in Chipotle Mexican Grill, Toast, and Walt Disney. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Domino’s Pizza, Toast, and Walt Disney. The Motley Fool recommends Cava Group and Wingstop and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Valuing Cava Stock was originally published by The Motley Fool