Shares of CAVA Group Inc (NYSE:CAVA) failed to celebrate its impressive 21.2% year-over-year (YOY) comparable sales (comps) growth reported in the fourth quarter of 2024.
Instead, investors panicked over its 2-cent earnings per share (EPS) miss and lowered comp sales estimates to 13.4% for 2025.
Despite having comps that blew away build-your-own-bowl (BYOB) retail/wholesale sector peers like Sweetgreen Inc (NYSE:SG), which posted 4% comps, and Chipotle (NYSE:CMG) Chipotle Mexican Grill Inc (NYSE:CMG), which posted 5.4% comps combined,
CAVA shares still managed to sink to a low of $73.31 in the following days. However, after being added to the S&P Midcap 400 index, sentiment may be turning.
CAVA Doesn’t Need a New Strategy
If one were to look solely at CAVA’s stock chart after its Q4 2024 earnings release, one would think the company was struggling and needed a turnaround strategy to recover and mend the negative sentiment. Nothing could be farther from the truth. CAVA is operating at the top of its game, firing on all pistons; in Q4, its revenues rose 28.3% YOY to $227.4 million, beating consensus estimates by nearly $4 million. Their net income tripled to $6.5 million, up from $2 million in the prior year.
Adjusted earnings before interest taxes, depreciation, and amortization (EBITDA) jumped 63% YOY to $25.1 million, up from $15.7 million the previous year. Their restaurant opened just 18.8% YOY, with 15 new stores for 367 total locations. Their restaurant-level margins rose 50 bps to 22.4%. All these achievements failed to impress investors as they focused on the lower comps guidance for 2025 to 13.4%.
While this seems like a big drop for Q4 comps of 21.2%, the reality is that full-year 2024 comps were 13.4%. In essence, this implies no comp sales growth. On top of that, CAVA’s P/E, even at the shrunken price of $85.85, is still an eye-watering 186.41 as of March 28, 2025. So, who’s buying shares? Institutions, ETFs and mutual funds will have to buy more.
S&P 400 Addition Is a Turning Point and Mandate for Index Funds
The announcement that CAVA is entering the S&P 500 Midcap index automatically forces S&P 500 Midcap ETFs and mutual funds to acquire shares. CAVA stock is already included in the Russell 2000 and the Russell 1000 indexes. Based on the S&P 400 Midcap allocations, index funds and ETFs would theoretically have to purchase between 4.5 million to 6.8 million shares of CAVA.
This estimated range is based on a $10.22 billion market cap and 0.41% weighting in the $2.5 trillion S&P Midcap 400 index, which is a market cap-weighted index. The weighting percent is based on CAVA’s market cap divided by the total index market cap.
JPMorgan Upgrades CAVA to Overweight
On March 20, 2025, JPMorgan noted some investment opportunities in the quick-service restaurant (QSR) segment. CAVA Group stood out, causing analysts to upgrade the stock to Overweight from Neutral. JPMorgan analysts John Ivankoe and Rahul Krotthapalli noted that "CAVA has significant US white space for expansion from its already multi-market success, is generating FCF unusually early, and has considerable near-term operational and brand initiatives to drive both sales and profits.”
The team pointed out that technology investments further amplify CAVA’s growth trajectory by optimizing its labor force, streamlining restaurant operations, and offering a different kind of loyalty program. The "awareness gap" is being narrowed with the pace of new store openings compared to peers like Chipotle. They also complimented the new seafood offerings included in the new menu.
Consumers Are Feeling the Pinch
The Conference Board compiled data showing that the consumer expectation index dropped from 9.3 to 72.9, the lowest level since August 2021 and the first time since June 2024 that it fell below the 80 threshold.
The NFIB Small Business Optimism index fell 2.1% to 100.7%, indicating business uncertainty hitting the second-highest level in 50 years. CAVA is swimming upstream, but its latest earnings report didn’t show any signs of consumers being influenced by prices.