Best Stock to Buy Right Now: Cava vs. Chipotle

Invest in Restaurant shares could prove to be a lucrative venture. Imagine if you had shares of McDonald’s or Starbucks These companies are now world leaders in the industry.

However, there are also smaller chains that investors have their eye on, such as Cava Group (CAVA 1.61%) And Chipotle Mexican Grill (CMG 1.29%). Which of these popular restaurant stocks is the better buy right now?

Store openings at a rapid pace

Cava is a fast-casual concept that serves healthy, Mediterranean-inspired pitas and bowls. Customers can choose from a variety of proteins, toppings and sauces in a fully customizable and made-to-order format.

The key to Cava’s story is its store expansion plan. The company opened a net 72 new locations in fiscal 2023, driving a 59.8% increase in revenue, and aims to open 52 more in the current fiscal year. And while there are currently 323 stores across the country, management has big plans for rapid growth.

The goal is to have 1,000 stores in the U.S. by 2032, tripling its footprint. If Cava reaches that scale, its revenues would be astronomical. Each location brings in an average of $2.6 million in annual revenue and has a restaurant-level margin of 25.2 percent.

It is encouraging that Cava is on the path to financial sustainability. The company generated an operating profit of $4.7 million in fiscal 2023, a huge improvement from the loss of $59.8 million in the previous year. And in the last fiscal quarter (Q1 2024, ended April 21), Cava reported an operating profit of almost $9.3 billion. It is on track for a higher bottom line.

Dominating the industry

While growth-oriented investors favor Cava for its expansion potential, it’s hard not to appreciate Chipotle’s continued success in the restaurant sector. There are good reasons to consider buying the Tex-Mex chain.

First of all, the company is also growing at a brisk pace. Revenue grew 18.2% in the most recent quarter (Q2 2024 ended June 30), driven by robust comparable-store sales growth of 11.1%, which is significantly better than Cava. Chipotle is seeing strong customer traffic, which is impressive in this economic environment.

The company plans to open 300 net new stores in 2024. But Chipotle’s leadership team sees potential in one day 7,000 locations in North Americaabout double the current figure. This target does not take into account the company’s potential to expand further in Europe and the Middle East.

Chipotle’s profitability is unmatched in the restaurant industry. The company has a rare ability to offset inflationary pressures through higher menu prices. This explains why Chipotle’s operating margin topped 19.7% in the second quarter, higher than the same period last year. With each location increasing its sales volume over time and the prospect of margin expansion, Chipotle’s profits will soar.

A critical factor

Based on the quality of their respective businesses alone, I would choose Chipotle as the better investment by far. Their name recognition, size, growth potential and profitability are impressive. I honestly can’t imagine Cava ever achieving that level of success.

However, as investors, we also have to consider another important factor in the analysis process. And that is valuation. I think that leads us to the same conclusion.

At the time of writing, Cava shares are trading at a steep price. Price-to-sales ratio ratio of 9.9, while Chipotle’s multiple is 6.8. To be clear, both valuations are expensive, and that’s a major reason I don’t own either company. But the cheaper stock is the safer bet, especially since Chipotle’s underlying business has already proven how successful it can be.